
    As filed with the Securities and Exchange Commission on November 26, 1996
                                                   Registration No. 333-______

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


                       SECURITIES AND EXCHANGE COMMISSION
                              Washington, DC 20549
                          ----------------------------
                                    FORM SB-2
                             Registration Statement
                                      Under
                           The Securities Act of 1933
                       COTTON VALLEY RESOURCES CORPORATION
                 (Name of Small Business Issuer in Its Charter)
<TABLE>
<S>                                           <C>                                           <C>

               Ontario, Canada                                    1381                                      98-0164357
                                                                                             (I.R.S. Employer Identification Number)
(State or Other Jurisdiction of Incorporation (Primary Standard Industrial Classification
              or Organization)                                Code Number)
       8350 North Central Expressway                 8350 North Central Expressway                         Peter Lucas
                Suite M2030                                   Suite M2030                         8350 North Central Expressway
            Dallas, Texas 75206                           Dallas, Texas 75206                              Suite M2030
               (214) 363-1968                                                                          Dallas, Texas 75206
                                               (Address of Principal Place of Business or                 (214) 363-1968
 (Address and Telephone Number of Principal      Intended Principal Place of Business)
             Executive Offices)                                                               (Name, Address and Telephone Number of
                                                                                                        Agent for Service)
                                                     ------------------------------

           Norman R. Miller, Esq.                            Copies to:                            Maurice J. Bates, L.L.C.
         Alexandra Christian, Esq.                                                              8214 Westchester, Suite 500
     Wolin, Fuller, Ridley & Miller LLP                                                              Dallas, Texas 75225
        1717 Main Street, Suite 3100                                                             Telephone: (214) 692-3566
            Dallas, Texas 75201                                                                      Fax: (214) 987-2091
         Telephone: (214) 939-4906 
            Fax: (214) 939-4949
                                                   ------------------------------
</TABLE>

                Approximate Date of Proposed Sale to the Public:
   As soon as practicable after this registration statement becomes effective.

      If any of the securities  being  registered on this form are to be offered
on a delayed or continuous  basis  pursuant to Rule 415 under the Securities Act
of 1933, please check the following box. |X|

      If this form is filed to register  additional  securities  for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list  the  Securities  Act  registration  statement  number  of the  earlier
effective registration statement for the same offering. |_|

      If this form is a  post-effective  amendment filed pursuant to Rule 462(c)
under the Securities Act, please check the following box and list the Securities
Act  registration   statement  number  of  the  earlier  effective  registration
statement for the same offering. |_|

      If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. |_|

                         CALCULATION OF REGISTRATION FEE

<TABLE>
<S>                             <C>               <C>                          <C>                           <C>    


     Title of Each Class of        Dollar Amount         Proposed Maximum            Proposed Maximum            Amount of
  Securities to be Registered    to be Registered   Offering Price per Unit(1)  Aggregate Offering Price(1)   Registration Fee
-------------------------------- ----------------- ---------------------------- ---------------------------- ------------------
Units for public sale(2)           $8,625,000(3)             $6.00(3)                  $8,625,000(3)             $2,614(3)
-------------------------------- ----------------- ---------------------------- ---------------------------- ------------------
8% Cumulative Convertible                -                      -                            -                       -
Preferred Stock, no par value(4)
-------------------------------- ----------------- ---------------------------- ---------------------------- ------------------
Redeemable Common Stock
Purchase Warrants(5)               $4,687,500(6)             $3.00(6)                  $4,687,500(6)             $1,420(6)
-------------------------------- ----------------- ---------------------------- ---------------------------- ------------------
Units subject to Underwriters'
warrants(7)                          $ 900,000                $7.20                      $ 900,000                 $ 273
-------------------------------- ----------------- ---------------------------- ---------------------------- ------------------
Common stock, no par value(8)            -                      -                            -                       -
-------------------------------- ----------------- ---------------------------- ---------------------------- ------------------
Total                               $14,212,500                 -                       $14,212,500                $4,307
================================ ================= ============================ ============================ ==================
</TABLE>



(1)  Estimated solely for the purpose of calculating the registration fee.

(2)  Includes  1,250,000 Units proposed for sale to the public and 187,500 Units
     underlying the Underwriters' over-allotment option.

(3)  Includes the 8% Cumulative  Convertible  Preferred  Stock,  the  Redeemable
     Common Stock  Purchase  Warrants,  and the common stock  underlying  the 8%
     Cumulative   Convertible   Preferred   Stock,   for  which  no   additional
     consideration will be received.

(4)  Includes  1,437,500 shares underlying Units proposed for sale to the public
     and subject to the Underwriters'  over-allotment  option and 125,000 shares
     underlying Units subject to Underwriters' warrants.

(5)  Includes  1,437,500  warrants  underlying  Units  proposed  for sale to the
     public and subject to the Underwriters'  over-allotment  option and 125,000
     warrants underlying Units subject to Underwriters' warrants.

(6)  Pursuant to Rule 457(g), represents additional consideration to be received
     upon  exercise of, and includes  common stock  underlying,  the  Redeemable
     Common Stock Purchase Warrants.


<PAGE>



(7)  Includes 125,000 Units that the Underwriters have the right to acquire upon
     exercise of warrants  issued pursuant to Section 4(2) of the Securities Act
     of 1933, as amended.

(8)  Includes   3,125,000  shares  underlying  the  8%  Cumulative   Convertible
     Preferred  Stock,  for which no separate  fee is required  pursuant to Rule
     457(i);  and  1,562,500  shares  underlying  the  Redeemable  Common  Stock
     Purchase  Warrants,  the fee for which is included under Redeemable  Common
     Stock Purchase Warrants.


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




      The registrant hereby amends this  registration  statement on such date or
dates as may be necessary to delay its effective date until the registrant files
a further amendment  specifically stating that this registration  statement will
thereafter  become  effective in accordance  with Section 8(a) of the Securities
Act of 1933 or until the registration  statement  becomes effective on such date
as the Securities and Exchange Commission,  acting pursuant to Section 8(a), may
determine.






<PAGE>



                              CROSS REFERENCE SHEET
                   (Between Items of SB-2 and the Prospectus)

<TABLE>
<S>        <C>                                                                   <C>

  Item
   No.                                    Caption                                          Location in Prospectus
   1.      Front of Registration Statement and Outside Front Cover of
           Prospectus.........................................................    Outside Front Cover Page
   2.      Inside Front and Outside Back Cover Pages of Prospectus..........      Inside Front and Outside Back Cover
                                                                                  Pages
   3.      Summary Information and Risk Factors.............................      Prospectus Summary; Risk Factors
   4.      Use of Proceeds..................................................      Use of Proceeds
   5.      Determination of Offering Price..................................      Outside Front Cover Page;
                                                                                  Underwriting
   6.      Dilution.........................................................      Dilution
   7.      Selling Security Holders.........................................      Inapplicable
   8.      Plan of Distribution.............................................      Outside Front Cover Page;
                                                                                  Underwriting
   9.      Legal Proceedings................................................      Business and Properties--Legal
                                                                                  Proceedings
   10.     Directors, Executive Officers, Promoters and Control Persons.....      Management
   11.     Security Ownership of Certain Beneficial Owners and
           Management.........................................................    Principal Shareholders
   12.     Description of Securities........................................      Description of Securities; Shares
                                                                                  Eligible for Future Sale
   13.     Interest of Named Experts and Counsel............................      Inapplicable
   14.     Disclosure of SEC Position on Indemnification for Securities Act
           Liabilities........................................................    Inapplicable
   15.     Organization Within Last 5 Years.................................      Prospectus Summary; Business and
                                                                                  Properties
   16.     Description of Business..........................................      Business and Properties
   17.     Managements's Discussion and Analysis or Plan of Operation.......      Management's Discussion and
                                                                                  Analysis or Plan of Operation
   18.     Description of Property..........................................      Business and Properties
   19.     Certain Relationships and Related Transactions...................      Certain Relationships and Related
                                                                                  Transactions
   20.     Market for Common Equity and Related Shareholder Matters.........      Description of Securities
   21.     Executive Compensation...........................................      Management
   22.     Financial Statements.............................................      Financial Statements
   23.     Changes in and Disagreements with Accountants on Accounting            Inapplicable
           and Financial Disclosure...........................................
</TABLE>



<PAGE>



                                [GRAPHIC OMITTED]

Information   contained  herein  is  subject  to  completion  or  amendment.   A
registration  statement  relating  to these  Securities  has been filed with the
Securities  and Exchange  Commission.  These  Securities may not be sold nor may
offers to buy be accepted prior to the time the registration  statement  becomes
effective.  This  prospectus  shall  not  constitute  an  offer  to  sell or the
solicitation of an offer to buy nor shall there be any sale of these  Securities
in any state in which such offer,  solicitation  or sale would be unlawful prior
to registration or qualification under the securities laws of any such state.


                       COTTON VALLEY RESOURCES CORPORATION
                                 1,250,000 Units
                                  Consisting of
1,250,000 Shares of 8% Cumulative Convertible Preferred Stock, Without Par 
         Value, and 1,250,000 Redeemable Common Stock Purchase Warrants

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



      Cotton  Valley  Resources   Corporation   ("Cotton  Valley")  is  offering
1,250,000  units  ("Unit(s)") by this  prospectus at an initial public  offering
price  estimated  to be $6.00 per Unit.  Each Unit  consists  of one share of 8%
Cumulative  Convertible  Preferred Stock ("Preferred  Stock") and one Redeemable
Common Stock Purchase Warrant ("Warrant"). Cotton Valley is applying for listing
of  the  Units,   Preferred   Stock,   Warrants  and  underlying   common  stock
(collectively,  the  "Securities")  on the  American  Stock  Exchange  under the
symbols  ___,  ___,  ___ and ___,  respectively.  The  Preferred  Stock  and the
Warrants will be traded together in Units until the earlier of _________,  1997,
or the third day after Cotton Valley  receives  written  notice that they may be
traded  separately  from National  Securities  Corporation,  the  representative
("Representative") of the underwriters ("Underwriters"). See "Underwriting."
      Each share of  Preferred  Stock is  convertible  into two shares of common
stock at any time and, if not sooner converted by the holder,  will be converted
into two shares of common stock  automatically  no later than December 31, 2002.
Dividends on the Preferred Stock will be  noncumulative  and payable annually at
the rate of 8% per annum, at the election of Cotton Valley, either in cash or in
shares of common stock.  The Preferred Stock will have a liquidation  preference
of $6.00  per  share.  See  "Description  of  Securities--  Preferred  Stock--8%
Cumulative Convertible Preferred Stock."
      Each  Warrant  represents  the right to purchase one share of common stock
for $____ (subject to adjustment) at any time after the Preferred  Stock and the
Warrants become tradable separately until ____________,  1998. After __________,
1997,  Cotton  Valley may redeem the  Warrants at $.01 per Warrant  upon certain
conditions.   See  "Description  of  Securities--Other  Options  and  Warrants--
Canadian Financings."
      Before this  offering,  no United States public market has existed for any
of the  Securities,  and no  assurance  can be given that an active  market will
develop.  Cotton  Valley's  common stock is traded through The Canadian  Dealing
Network under the symbol "CVZC."

PROSPECTIVE  INVESTORS  SHOULD CONSIDER  CAREFULLY THE  INFORMATION  INCLUDED IN
            "RISK FACTORS" BEGINNING ON PAGE __ OF THIS PROSPECTUS.

                   THESE SECURITIES HAVE NOT BEEN APPROVED OR
                        DISAPPROVED BY THE SECURITIES AND
                     EXCHANGE COMMISSION ("SEC") NOR HAS THE
                     SEC OR ANY STATE SECURITIES COMMISSION
                     PASSED UPON THE ACCURACY OR ADEQUACY OF
                                THIS PROSPECTUS.
            ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.



                         Price to Public     Underwriting    Proceeds to Cotton 
                         Price to Public      Discount (1)       Valley (2)
-------------------- ---------------------- ---------------- -----------------

Per Unit                      $                  $                $
-------------------- ---------------------- ---------------- -----------------
Total (3)                     $                  $                $
==================== ====================== ================ =================

(1)  Does  not   include   additional   compensation   to  be  received  by  the
     Representative in the form of (i) a 2.5% nonaccountable  expense allowance,
     (ii)  warrants to  purchase  125,000  Units at 120% of the public  offering
     price exercisable  between the first and fifth anniversaries of the date of
     this prospectus ("Underwriters' Warrants"), and (iii) consulting agreements
     for the Representative to act as financial  consultant to Cotton Valley for
     two years for a fee of $________. In addition,  Cotton Valley has agreed to
     indemnify  the   Underwriters   against  certain   liabilities,   including
     liabilities  under the  Securities  Act of 1933,  as  amended  ("Securities
     Act"). See "Underwriting."

(2)  Before deducting  estimated  offering  expenses of $425,000,  including the
     Representative's 2.5% nonaccountable  expense allowance.  

(3)  Cotton Valley has granted the Underwriters an option, exercisable within 45
     days  after  the  date  of  this  prospectus,  to  purchase  up to  187,500
     additional  Units to cover  over-allotments,  if any.  If the  Underwriters
     exercise this option in full, then the total Price to Public,  Underwriting
     Discount and Proceeds to Cotton Valley will be $ , $ and $ ,  respectively.
     See "Underwriting."


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



      The  Units are being  offered,  subject  to prior  sale,  when,  as and if
delivered  to and accepted by the  Underwriters,  subject to approval of certain
legal  matters by counsel and other  conditions.  The  Underwriters  reserve the
right to withdraw,  cancel or modify this offering  without notice and to reject
any order, in whole or in part.  Delivery of certificates  representing Units is
expected  to  be  made  upon   payment  at   _____________________________,   on
____________, 1997.

                         National Securities Corporation

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


              The date of this prospectus is ______________, 1997.


<PAGE>



      IN CONNECTION  WITH THIS  OFFERING,  THE  UNDERWRITERS  MAY  OVER-ALLOT OR
EFFECT  TRANSACTIONS  THAT  STABILIZE  OR  MAINTAIN  THE  MARKET  PRICE  OF  THE
SECURITIES  AT A LEVEL  ABOVE THAT  WHICH  MIGHT  OTHERWISE  PREVAIL IN THE OPEN
MARKET. STABILIZING TRANSACTIONS MAY BE EFFECTED ON THE AMERICAN STOCK EXCHANGE.
STABILIZING ACTIVITIES, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.

      Certificates  representing  Units will be delivered  against payment on or
about a date that is longer than the third  business day  following  the date of
this prospectus ("T+3").  Prospective  investors should note that the ability to
settle  secondary  market trades of Units on the American Stock Exchange will be
affected by a settlement period longer than T+3.

      The enforcement by investors of civil liabilities under securities laws of
the United  States may be affected  adversely by the fact that Cotton  Valley is
incorporated under the laws of the Province of Ontario, Canada, that some or all
of its officers and directors may be residents of Canada and that some or all of
the  Underwriters  or the experts  named in the  registration  statement  may be
residents of Canada.

               SPECIAL NOTE REGARDING FORWARD-LOOKING INFORMATION

      Certain statements included in this prospectus constitute "forward-looking
statements" within the meaning of the U.S. Private Securities  Litigation Reform
Act of  1995.  Forward-looking  statements  involve  known  and  unknown  risks,
uncertainties  and other factors that may cause Cotton  Valley's actual results,
performance or achievements or industry results to be materially  different from
any future  results,  performance  or  achievements  expressed or implied by the
forward-looking  statements.  Such factors include, among others, the following:
general,  economic and business conditions that will, among other things, impact
demand for oil and gas, industry capacity,  Cotton Valley's ability to implement
its  business  strategy,  changes in or the  failure to comply  with  government
regulations (especially safety and environmental laws and regulations) and other
factors set forth in "Risk Factors."

                             ADDITIONAL INFORMATION

      Cotton Valley has filed with the SEC a registration statement on Form SB-2
under the Securities Act with respect to the Securities. This prospectus,  which
forms  a  part  of the  registration  statement,  does  not  contain  all of the
information set forth in the  registration  statement as permitted by applicable
SEC rules and  regulations.  Statements in this  prospectus  about any contract,
agreement or other document are not necessarily  complete.  With respect to each
such  contract,  agreement or document  filed as an exhibit to the  registration
statement,  reference is made to the exhibit for a more complete  description of
the matter  involved,  and each such  statement  is qualified in its entirety by
this reference.

      The registration  statement may be inspected without charge and copies may
be obtained at  prescribed  rates at the SEC's public  reference  facilities  at
Judiciary Plaza, 450 Fifth Street, N.W., Room 1024, Washington,  DC 20549, or on
the Internet at  http://www.sec.gov.  Copies of the  registration  statement may
also be inspected  without charge at the SEC's regional offices at 7 World Trade
Center, Suite 1300, New York, New York 10048, and 500 West Madison Street, Suite
1400, Chicago, Illinois 60661. In addition, copies of the registration statement
may be obtained by mail, at prescribed  rates,  from the SEC's Public  Reference
Branch at 450 Fifth Street, N.W., Washington, DC 20549.

      Cotton  Valley  files  periodic   reports,   proxy  statements  and  other
information  with the SEC.  The periodic  reports,  proxy  statements  and other
information  will be available  for  inspection  and copying at the SEC's public
reference facility and regional offices referred to above.

      Cotton Valley will furnish to its shareholders  annual reports  containing
audited financial  statements  reported on by independent public accountants for
each fiscal  year and make  available  quarterly  reports  containing  unaudited
financial information for the first three quarters of each fiscal year.

      Cotton Valley  intends to submit an  application to list its Securities on
the  American  Stock  Exchange  ("AMEX").  If  Cotton  Valley's  application  is
accepted, then reports, proxy statements and other information concerning Cotton
Valley will be available for inspection at AMEX's principal office at 86 Trinity
Place, New York, New York 10006-1881.

                                        1

<PAGE>



                                     SUMMARY

      The  following  summary is qualified in its entirety by the more  detailed
information  and  financial  statements  and notes  appearing  elsewhere in this
prospectus.  Unless the context indicates otherwise, (i) all information in this
prospectus  assumes  that the  Underwriters'  over-allotment  option will not be
exercised,   and  (ii)  "Cotton  Valley"  refers  to  Cotton  Valley   Resources
Corporation and all of its subsidiaries.

                                   The Company

      Cotton Valley is a development stage oil and gas exploration,  development
and  production  company,  with no operating  history.  It was  incorporated  in
Ontario,  Canada,  originally as Cotton Valley Energy  Limited,  on February 15,
1995.  Through its wholly owned subsidiary Cotton Valley Energy  Corporation,  a
Nevada  corporation,  Cotton  Valley  owns  (i)  approximately  6,000  acres  of
primarily  non-producing  oil and gas leases in the Cheneyboro  Field of Navarro
County,  Texas, (ii) a 25% working interest in 1,145 acres of oil and gas leases
in the Movico Field of Mobile County,  Alabama, and (iii) an option to acquire a
51.8% working interest in the Sword Unit, offshore Santa Barbara, California. At
June 30, 1996,  Cotton  Valley's  proved oil  reserves  were  approximately  4.8
million Bbl, and its proved gas reserves were approximately 13.5 million Mcf.

      Cotton Valley intends to  reincorporate in Canada's Yukon Territory by the
end of 1996.  Under Yukon Territory law, Cotton Valley's board of directors need
not be comprised of a majority of Canadian residents as currently required under
Ontario law.

      Cotton  Valley's  principal  executive  offices  are located at 8350 North
Central Expressway,  Suite M2030,  Dallas,  Texas 75206. Its telephone number is
(214) 363-1968.

                                Business Strategy

      Cotton Valley  intends to drill up to 10 wells on its Texas acreage within
24 months after this offering. Five of these wells are expected to be horizontal
wells. Cotton Valley intends to drill two vertical wells on its Alabama property
within 12 months after this  offering.  No assurance can be given that any wells
will be drilled or  completed  or produce oil or gas in  commercial  quantities.
Cotton  Valley plans in the future to exercise its option in the Sword Unit,  to
retain an 11.8% working  interest and to sell the remainder.  See  "Management's
Discussion  and Analysis or Plan of  Operation--12-Month  Operating  Plan",  and
"Business  and  Properties--Cheneyboro  Field--Horizontal  Drilling",  "--Movico
Field" and "--Sword Unit."

      Cotton Valley's  business strategy is to continue to increase reserves and
commence and increase production and cash flows by concentrating on:

          o    Acquiring   properties,   or  companies  with  properties,   with
               development and exploration opportunities and/or significant cost
               reduction potential;

          o    Developing   existing   reserves  through  low-risk   development
               drilling or recompletion  programs  capitalizing on reserves left
               in existing wells by major oil companies;

          o    Exploring for new reserves utilizing state-of-the-art  technology
               to reduce exploration risk;

          o    Concentrating on focused  geographic  areas to achieve  operating
               and technical efficiencies; and

          o    Maintaining financial flexibility to take advantage of additional
               development and acquisition opportunities as they develop.

                                        2

<PAGE>



                                  The Offering

<TABLE>
<S>                                                   <C>

Securities offered by Cotton Valley ...........       1,250,000 Units, each Unit consisting of one share of Preferred
                                                      Stock and one Warrant.  See "Description of Securities."
Description of Preferred Stock ................       Each share of Preferred Stock is convertible into two shares of
                                                      common stock at any time, accrues noncumulative dividends
                                                      at 8% per annum payable annually in cash or shares of
                                                      common stock, at Cotton Valley's election, and has a $6.00
                                                      liquidation preference.  See "Description of Securities--
                                                      Preferred Stock--8% Cumulative Convertible Preferred Stock."
Description of Warrants .......................       Each Warrant entitles the holder to purchase one share of
                                                      common stock for $____ per share until ___________, 1998.
                                                      The Warrants are not immediately exercisable.  Cotton Valley
                                                      may redeem the Warrants at $0.01 per Warrant under certain
                                                      conditions.  See "Description of Securities--Warrants."
Units to be outstanding after this offering ...       1,250,000 (1)
Preferred Stock to be outstanding after this
offering ......................................       1,250,000 shares (1)
Warrants to be outstanding after this offering        1,250,000 Warrants (1)
Common stock to be outstanding after this
offering ......................................       9,204,318 shares (2)
Use of Proceeds ...............................       For development drilling, to acquire acreage, to reduce debt
                                                      and for working capital.  See "Use of Proceeds."
AMEX Symbols(3):
   Units ......................................       ______
   Preferred Stock ............................       ______
   Warrants ...................................       ______
   Common stock ...............................       ______
---------------------
</TABLE>

(1)  Excludes   Securities   underlying   the   Underwriters'    Warrants.   See
     "Underwriting."

(2)  Excludes  3,750,000  shares issuable upon conversion of the Preferred Stock
     or exercise of the Warrants'  underlying  Units offered by this prospectus,
     375,000  shares  underlying  the  Underwriters'  Warrants,  930,000  shares
     subject to employee  stock options and 1,935,220  shares subject to options
     and      warrants      issued     in     Canadian      financings.      See
     "Underwriting--Underwriters'      Warrants"     and     "Description     of
     Securities--Other Options and Warrants."

(3)  Cotton  Valley  has  applied  (or  intends  to apply)  for  listing  of the
     Securities on the AMEX.  Such listing,  if approved,  does not imply that a
     meaningful, sustained market for the Securities will develop.



                                  Risk Factors

      The Units offered by this  prospectus are  speculative  and involve a high
degree of risk.  They should not be purchased by investors  who cannot afford to
lose their entire investment. See "Risk Factors."



                                        3

<PAGE>



                             Summary Financial Data


                                                          From February 15, 1995
                                      For the year ended      (inception)
Statement of operations data:            June 30,1996       to June 30, 1995
                                      ------------------   ---------------------
Net loss ..........................     $  428,360           $   49,917
Net loss per common share .........     $     0.05           $     0.01
Weighted average shares outstanding      9,186,000            8,438,000
  


                                      June 30, 1996
Balance sheet data:              Actual          As Adjusted (1)
                                --------         -------------   
Total assets ........        $11,979,330         $17,488,281
Long-term obligations            757,758             171,727
Working capital .....            286,381           6,025,332
Shareholders' equity         $ 8,964,883         $15,289,883
         ----------------------------

(1)  Adjusted to reflect the Units offered by this prospectus.





                      Summary Oil and Gas Reserve Data (1)


                             Alabama        Texas        Total
                             -------       -------    ---------
Proved producing
    Oil (Bbl) ..........            0       93,327       93,327
    Gas (Mcf) ..........            0      279,979      279,979
Proved undeveloped
    Oil (Bbl) ..........      481,843    4,200,812    4,682,655
    Gas (Mcf) ..........      573,440   12,602,434   13,175,874
----------------

(1)  Estimated. See "Business and Properties--Oil and Gas Reserves."




                                        4

<PAGE>



                                  RISK FACTORS

     INVESTING  IN  THE  UNITS  INVOLVES  A HIGH  DEGREE  OF  RISK.  PROSPECTIVE
INVESTORS  SHOULD  CONSIDER  CAREFULLY THE FOLLOWING  FACTORS IN ADDITION TO THE
OTHER INFORMATION SET FORTH IN THIS PROSPECTUS.

Development Stage Company

      Cotton  Valley  was  incorporated  in  February  1995  and is still in its
development  stage.  Cotton Valley's  operations are subject to all of the risks
inherent in establishing a new business  enterprise.  Cotton Valley's  potential
for success must be considered in light of the problems, expenses, difficulties,
complications  and  delays  frequently  encountered  in  connection  with  a new
business.  No assurance can be given that Cotton Valley will be successful.  See
"Business and Properties."

History of Losses

      Cotton Valley  incurred  operating  losses of $428,360 for the fiscal year
ended June 30, 1996,  and $49,917 from  inception to June 30, 1995. No assurance
can  be  given  that  Cotton  Valley  will  be  profitable  in the  future.  See
"Management's Discussion and Analysis or Plan of Operation."

Going Concern Risk

      Cotton  Valley's  financial  statements for the fiscal year ended June 30,
1996,  and the period  from  inception  to June 30,  1995,  were  audited by its
independent  certified public accountants,  whose report includes an explanatory
paragraph  stating that the financial  statements  have been  prepared  assuming
Cotton  Valley  will  continue as a going  concern  and that  Cotton  Valley has
incurred  significant  operating  losses  to  date  and  has a  working  capital
deficiency  that  raises  substantial  doubt  about its ability to continue as a
going concern. See "Independent Auditor's Report" and "Financial Statements."

No Substantial Producing Properties

      Almost all of Cotton  Valley's  proved  reserves are  classified as proved
undeveloped,  meaning no production  currently exists. No assurance can be given
that  any  wells  will  be  drilled  or  completed  or  produce  oil  or  gas in
commercially profitable quantities. See "Business and Properties."

Capital Expenditures for Undeveloped Properties

      Recovery of Cotton  Valley's  proved  undeveloped  reserves  will  require
significant capital expenditures and successful drilling operations.  Management
estimates that aggregate  capital  expenditures of  approximately  $13.5 million
will be  required  to develop  these  reserves,  of which $3.5  million and $5.0
million are expected to be incurred during the remainder of the year ending June
30, 1997, and during the year ending June 30, 1998, respectively.  Cotton Valley
intends to finance  development  with the proceeds  from this  offering and cash
from  operations.  No assurance can be given that Cotton  Valley's  estimates of
capital  expenditures  will prove accurate,  that its financing  sources will be
sufficient to fund its planned development  activities fully or that development
activities  will be either  successful  or in  accordance  with Cotton  Valley's
schedule.  Additionally,  any significant  decrease in oil and gas prices or any
significant  increase in the costs of development  could result in a significant
reduction  in the number of wells  drilled.  See  "Management's  Discussion  and
Analysis or Plan of Operation."

Limited Capital; Need for Significant Additional Financing

      Cotton  Valley  anticipates  that the net proceeds of this  offering  will
satisfy  its  operating  cash  requirements  for at least 12 months  after  this
offering is consummated.  However,  no assurance can be given that Cotton Valley
will not require additional financing sooner than currently anticipated.

                                        5

<PAGE>



      The net proceeds of this  offering will not be sufficient to develop fully
the  properties.  Development of the properties  may require  capital  resources
substantially  greater  than the net  proceeds  of this  offering  or  resources
otherwise  currently  available to Cotton  Valley.  Cotton Valley has no current
arrangements  with respect to or sources of additional  financing.  No assurance
can be given that  additional  financing  will be available to Cotton  Valley on
acceptable terms or at all. The inability to obtain  additional  financing would
have a material  adverse effect on Cotton  Valley,  including  requiring  Cotton
Valley to curtail  significantly or farm-out development of the properties.  Any
additional financing may involve substantial dilution to the interests of Cotton
Valley's shareholders at that time. See "Management's Discussion and Analysis or
Plan of Operation."

Operating Hazards and Other Uncertainties

      The   acquisition,    development,   exploration   for   and   production,
transportation  and storage of,  crude oil,  gas liquids and gas involves a high
degree of risk,  which even a combination of  experience,  knowledge and careful
evaluation may not be able to overcome.  Cotton Valley's  operations are subject
to all of the risks normally  incident to drilling oil and gas wells,  operating
and developing oil and gas  properties,  transporting,  processing,  and storing
gas,  including  encountering  unexpected  formations  or  pressures,  premature
reservoir   declines,   blow-outs,   equipment  failures  and  other  accidents,
craterings, sour gas releases,  uncontrollable flows of oil, gas or well fluids,
adverse weather  conditions,  pollution,  other  environmental  risks, fires and
spills.  Oil  production  requires high levels of investment  and has particular
economic  risks,  such as retaining  well failure,  fires,  explosions,  gaseous
leaks,  spills  and  migration  of  harmful  substances,  any of which can cause
personal injury, damage to property,  equipment and the environment and severely
interrupt   operations.   Cotton  Valley  is  also  subject  to   deliverability
uncertainties  related  to  the  proximity  of  its  reserves  to  pipeline  and
processing  facilities  and the  inability  to secure  space on  pipelines  that
deliver oil and gas to commercial  markets.  Although  Cotton  Valley  maintains
insurance  in  accordance  with  customary  industry  practice,  it is not fully
insured  against all of these risks,  nor are all such risks  insurable.  Losses
resulting  from the  occurrence  of these  risks  could have a material  adverse
impact on Cotton Valley. See "Business and Properties."

Competition

      The oil and gas  business is highly  competitive  and has few  barriers to
entry.  Cotton  Valley will be competing  with other oil and gas  companies  and
investment partnerships for desirable prospects, contracts with third parties to
develop oil and gas  properties  and  purchase  equipment  necessary to complete
wells.  Many of Cotton  Valley's  competitors  are larger than Cotton Valley and
have substantially  greater access to capital and technical  resources than does
Cotton Valley and may therefore have a significant  competitive advantage.  Many
of Cotton Valley's  competitors are capable of making a greater  investment in a
given area than is Cotton Valley,  although large and small  companies alike are
subject  to  the   economics   of  cost   effectiveness.   See   "Business   and
Properties--Competition."

Volatility of Oil and Gas Prices

      Oil and gas prices  fluctuated  from $33.00 per Bbl of oil in January 1991
to $13.52 per Bbl in December  1993 and $1.10 per Mcf of gas in February 1992 to
$3.72 per Mcf in February  1996. At the end of October 1996,  prices were $23.35
per Bbl and $2.73 per Mcf.  Prices for oil and gas  probably  will  continue  to
fluctuate, depending upon a number of conditions over which Cotton Valley has no
control.  These conditions include, but are not limited to, actions taken by the
Organization of Petroleum Exporting  Countries,  turmoil in the Middle East, the
price of alternative  fuels,  weather and general economic  conditions.  A major
decline in oil or gas prices  could  have a  material  adverse  effect on Cotton
Valley's  operations,  financial  condition,  proved  reserves  and the costs of
developing its oil and gas reserves.

      In addition,  Cotton  Valley  assesses  the  carrying  value of its assets
annually in accordance with generally accepted  accounting  principles under the
full cost method.  If oil and gas prices  decline,  the carrying value of Cotton
Valley's assets could be subject to downward revision.

                                        6

<PAGE>



Uncertainty of Reserve Estimates

      The reserve  estimates  included in this  prospectus  could be  materially
different from the quantities and values ultimately  realized.  Reserve data set
forth  in  this  prospectus  are  only  estimates.  In  general,   estimates  of
economically  recoverable  oil and gas  reserves  and future net cash flows from
them are based  upon a number  of  variable  factors  and  assumptions,  such as
historical  production from the properties,  the assumed effects of governmental
regulation and future operating costs, all of which may vary  considerably  from
actual  results.  All  such  estimates  are  to  some  degree  speculative,  and
classifications   of  reserves  are  only  attempts  to  define  the  degree  of
speculation  involved.   For  those  reasons,   estimates  of  the  economically
recoverable  oil  and gas  reserves  attributable  to any  particular  group  of
properties,  classification  of such  reserves  based  on risk of  recovery  and
estimates  of future net  revenues  expected  from them,  prepared by  different
engineers or by the same engineers at different times,  may vary  substantially.
Cotton Valley's actual production, revenues, taxes and development and operating
expenditures  with respect to its reserves  will vary from such  estimates,  and
such  variances  could be  material.  Numerous  uncertainties  are  inherent  in
estimating  proved  reserves,  including  many factors  beyond  Cotton  Valley's
control.

      Estimates  with  respect  to proved  reserves  that may be  developed  and
produced in the future are often  based upon  volumetric  calculations  and upon
analogy to similar  types of reserves  rather than  actual  production  history.
Estimates based on these methods are generally less reliable than those based on
actual production history. Subsequent evaluation of the same reserves based upon
production  history  will result in  variation,  which may be  material,  in the
estimated reserves.

      Estimated  discounted future net cash flows from estimated proved reserves
are based on prices and costs as of the date of the  estimate  unless  prices or
costs are contractually  determined at that date. Actual future prices and costs
may be  materially  higher or lower.  Actual  future net cash flows also will be
affected  by factors  such as actual  production,  supply and demand for oil and
gas,  curtailments  or increases in  consumption by gas  purchasers,  changes in
governmental  regulation  or taxation and the impact of inflation on costs.  See
"Business and Properties--Oil and Gas Reserves."

Need to Replace Reserves

      Cotton Valley's future oil and gas reserves and production,  and therefore
its cash flows,  are highly dependent upon Cotton Valley's success in exploiting
its current  reserve base and  acquiring  or  discovering  additional  reserves.
Without the addition of reserves through exploration, acquisition or development
activities,  Cotton  Valley's  reserves and production will decline over time as
reserves are exploited.  The business of exploring for,  developing or acquiring
reserves  is capital  intensive.  To the extent cash flows from  operations  are
insufficient  and external  sources of capital  become  limited or  unavailable,
Cotton Valley's  ability to make the necessary  capital  investments to maintain
and expand its oil and gas reserves will be impaired.  In addition, no assurance
can be given  that  Cotton  Valley  will be able to find and  develop or acquire
additional reserves to replace production at acceptable costs.

Environmental Risks

      All phases of the oil and gas  business  present  environmental  risks and
hazards and are  subject to  environmental  regulation  pursuant to a variety of
international  conventions and United States and Canadian  federal,  provincial,
state and municipal laws and  regulations.  Environmental  legislation  provides
for, among other things,  restrictions and  prohibitions on spills,  releases or
emissions of various  substances  produced in association  with Cotton  Valley's
past and current  operations.  The  legislation  also requires that  refineries,
wells and facility sites be operated, maintained, abandoned and reclaimed to the
satisfaction  of  applicable  regulatory   authorities.   Compliance  with  such
legislation can require significant  expenditures and a breach may result in the
imposition of fines and  penalties.  Environmental  legislation is evolving in a
manner expected to result in stricter  standards and  enforcement,  larger fines
and liability  and  potentially  increased  capital  expenditures  and operating
costs.  Although  Cotton  Valley  believes  that it is currently in  substantial
compliance with all existing material  environmental  regulations,  no assurance
can be given that future  environmental  costs will not have a material  adverse
effect on Cotton Valley's financial condition or results of operations.

                                        7

<PAGE>



Use of Proceeds

      As of the  date  of  this  prospectus,  management  has  not  specifically
determined the use of a portion of the estimated net proceeds.  Management  will
decide how to apply this portion of the net proceeds in its  discretion  without
shareholder  input.  Accordingly,  investors in this offering will be entrusting
this portion of their funds to management  without any  determination  as to its
use. See "Use of Proceeds."

Dependence on Key Personnel

      Cotton  Valley  depends  to a large  extent  on the  services  of  Messrs.
Soltero,  Hogue and  Burden.  The loss of the  services of any one of them could
have a material adverse effect on Cotton Valley's operations.  Cotton Valley has
not entered into any employment  contracts  with any of its executive  officers,
nor has it obtained key personnel life  insurance.  Cotton Valley  believes that
its  success is also  dependent  on its ability to continue to employ and retain
skilled technical personnel. See "Management."

Absence of Public Market and Possible Volatility of Securities

      Prior to this  offering,  no  public  market  for any of  Cotton  Valley's
Securities has existed in the United  States.  No assurance can be given that an
active  public  market will  develop or be  sustained  after the  offering.  The
initial public  offering price of the Units has been  determined by negotiations
between  Cotton Valley and the  Underwriters.  See  "Underwriting."  The trading
price of the  Securities  could be subject to wide  fluctuations  in response to
quarter-to-  quarter variations in operating results,  announcements of drilling
results by Cotton  Valley and other events or factors.  In  addition,  the stock
market has from time to time experienced  extreme price and volume  fluctuations
which have  particularly  affected the market price for many companies and which
often have been unrelated to the operating performance of these companies. These
broad  market  fluctuations  may  adversely  affect  the  market  price  of  the
Securities.

Immediate Substantial Dilution

      This offering involves immediate  substantial dilution to investors in the
net tangible book value per share of common stock  underlying each Unit from the
public offering price. See "Dilution."

Securities Eligible for Future Sale

      Upon completion of this offering, 1,250,000 Units, consisting of 1,250,000
shares of Preferred Stock and 1,250,000 Warrants, and 9,204,318 shares of common
stock  will  be  outstanding.  The  Units  will be  eligible  for  sale  without
restriction  immediately after completion of the offering.  The 9,204,318 shares
of common  stock are  registered  on Form 20-F and  currently  eligible for sale
without  restriction.  The sale of significant  quantities of these shares could
have an  adverse  effect  on the  market  price of Cotton  Valley's  Securities.
Furthermore, the 9,204,318 shares of common stock are eligible for sale (subject
to a pooling  agreement and control  block  issues)  under  Canadian and Ontario
rules.  Cotton Valley's  common stock trades over the Canadian  over-the-counter
system known as The  Canadian  Dealing  Network.  See  "Securities  Eligible for
Future Sale."

Risk of Redemption of Warrants

      Cotton  Valley may redeem the  Warrants  for $0.01 per Warrant at any time
after  ___________,  19__,  on  30  days  prior  written  notice  under  certain
circumstances.  Notice of redemption  could force the holders to exercise  their
Warrants and pay the exercise  price at a time when it might be  disadvantageous
or difficult  for the holder to do so, sell the  Warrants at the current  market
price  when they  might  otherwise  wish to hold the  Warrants,  or  accept  the
redemption  price,  which is  likely  to be less  than the  market  price of the
Warrants  at the  time of  redemption.  See  "Description  of  Securities--Other
Options and Warrants--Canadian Financings."

                                        8

<PAGE>



Underwriters' Warrants; Risk of Further Dilution

      Cotton  Valley  has  agreed  to  sell  to the  Underwriters,  for  nominal
consideration,  warrants to purchase  125,000 Units at an exercise price of 120%
of the price at which the Units are  initially  offered  to the  public.  Cotton
Valley has granted the Underwriters  certain registration rights with respect to
the  Securities  issuable  upon  exercise  of the  Underwriters'  Warrants.  The
Underwriters'  Warrants and any profits realized by the Underwriters on the sale
of the  Securities  underlying  the  Underwriters'  Warrants could be considered
additional  underwriting  compensation.   For  the  term  of  the  Underwriters'
Warrants, the holders are given, at nominal cost, the opportunity to profit from
the difference, if any, between the exercise price of the Underwriters' Warrants
and the value of or market price, if any, for the  Securities,  with a resulting
dilution in the interest of existing  shareholders.  The Underwriters'  Warrants
may be exercised at a time when, in all likelihood,  Cotton Valley would be able
to obtain any needed  capital by a new  placement  of  Securities  on terms more
favorable  than  those  provided  for  or by  the  Underwriters'  Warrants.  See
"Underwriting."

Regulation

      Cotton Valley's business is subject to federal, state and local regulation
relating to the development, production and transmission of oil and gas, as well
as environmental  and safety matters.  No assurance can be given that current or
future regulation will not adversely affect Cotton Valley's exploration for, and
production  and  transmission  of, oil and gas or its  financial  condition  and
results of operations. See "Business and Properties--Regulation."

No Dividends

      Cotton  Valley's  board of  directors  presently  intends to retain all of
Cotton  Valley's  earnings for the  expansion  of its  business.  Cotton  Valley
therefore  does  not  anticipate  the  distribution  of  cash  dividends  in the
foreseeable future. Any future decision of Cotton Valley's board of directors to
pay cash  dividends  will  depend,  among other  factors,  upon Cotton  Valley's
earnings, financial position and cash requirements. See "Dividend Policy."

Availability of Preferred Stock

      Cotton  Valley's  board  of  directors  is  authorized,   without  further
shareholder  action,  to issue  preferred  stock in one or more  series  and may
designate the dividend  rate,  voting rights and other rights,  preferences  and
restrictions  of each series.  No preferred  stock  currently is outstanding and
Cotton  Valley  has no plans to issue any  preferred  stock  other  than in this
offering.  Any future  preferred stock issuances could have the effect of, among
other things,  restricting common stock dividends,  diluting common stock voting
power,  impairing common stock  liquidation  rights and delaying or preventing a
change in control of Cotton Valley without  further action by the  shareholders.
See "Description of Securities--Preferred Stock."

Exchange Rate Fluctuations

      Cotton  Valley is exposed to foreign  exchange  risks since it has granted
stock options,  warrants and agent's  options  denominated in Canadian  currency
while the majority of its  expenditures  will be in United States  dollars.  Any
significant reduction in the value of the Canadian dollar may decrease the value
of funds in United  States  dollars  Cotton  Valley  receives  upon  exercise of
warrants and options.

Income Tax Considerations

     The  purchase  of  Securities  by  United  States  residents  may  have tax
consequences in both the United States and Canada.  Prospective investors should
consult  their  own tax  advisors  regarding  the  particular  tax  consequences
applicable to them. See "Certain Income Tax Considerations."

                                        9

<PAGE>



                                 USE OF PROCEEDS

      The net  proceeds  to  Cotton  Valley  from  the sale of  1,250,000  Units
pursuant to this  prospectus at an assumed  public  offering  price of $6.00 per
Unit are estimated to be  approximately  $6,325,000  after  deducting  estimated
underwriting  discounts and offering  expenses  ($7,303,750 if the Underwriters'
over-allotment option is exercised in full).

      Cotton Valley intends to use  approximately  $5.0 million of the estimated
net proceeds of this offering for development  drilling on its Texas and Alabama
properties.  Seven wells are scheduled to be drilled within 12 months after this
offering.  No assurance can be given that any wells will be drilled or completed
or produce oil or gas in commercial quantities.  Cotton Valley may use a portion
of the $5.0  million to  acquire  additional  acreage in these  fields if Cotton
Valley  determines this is advisable to facilitate its drilling  program.  As of
the  date of this  prospectus,  management  has no  specific  plans  to  acquire
additional acreage. See  "Business--Properties--Cheneyboro  Field" and "--Movico
Field."

      Approximately $816,000 of the estimated net proceeds will be used to repay
debt that Cotton  Valley  incurred to acquire its Texas and Alabama  properties.
The  original  principal  amount  of  the  debt  on  the  Texas  properties  was
$1,086,050,  of which  approximately  $586,000 was outstanding as of October 31,
1996.  This debt  bears  interest  at 12.0% and  matures on July 17,  1997.  The
remaining $230,000 does not bear interest and is payable upon transfer of title.
See  "Management's  Discussion  and Analysis or Plan of Operation" and note 3 of
Notes to Consolidated Financial Statements.

      The remaining  $509,000 of the estimated net proceeds will be allocated to
working  capital.  Management  intends to use this  portion of the  proceeds for
general  corporate  purposes  and to acquire  interests  in  unrelated  drilling
prospects if appropriate opportunities arise. As of the date of this prospectus,
management has not  specifically  determined any of these uses or identified any
unrelated  drilling  prospects for  acquisition.  Management  will decide how to
apply this portion of the net  proceeds in its  discretion  without  shareholder
input.  Accordingly,  investors in this offering will be entrusting this portion
of their funds to management without any determination as to its use. Management
does not  currently  intend to use proceeds  from this  offering to exercise its
option on the Sword Unit.

      Cotton  Valley  intends to invest the net  proceeds  of this  offering  in
short-term,  investment grade  obligations or bank certificates of deposit until
they are used.

                                 CAPITALIZATION

      The  following  table  sets  forth  Cotton  Valley's  total   consolidated
capitalization  as of June 30, 1996,  and as adjusted to give effect to the sale
of 1,250,000  Units at $6.00 per Unit in this  offering and  application  of the
estimated net proceeds as described in this  prospectus.  See "Use of Proceeds."
The  table  should  be read  in  conjunction  with  the  consolidated  financial
statements and notes and the other financial  information  included elsewhere in
this prospectus.

                                       10

<PAGE>


<TABLE>
<S>                                                            <C>                   <C>


                                                                        June 30, 1996
                                                                Actual                As Adjusted
                                                              ----------             -------------
Total debt, including current maturities:
    Accounts payable on oil and gas interests(1)                $ 230,000                  $ -
    Notes payable on oil and gas interests(2)                   $ 586,049                  $ -
    Advances from related parties(3)                            $ 171,709               $ 171,709
                                                                ---------                --------
                                                                $ 987,758               $ 171,709
                                                                 --------                --------
Shareholders' equity:
    Preferred stock without par value, unlimited
        shares authorized, none outstanding, 1,250,000
        as adjusted                                                $ -                 $ 6,325,000
    Common stock without par value, unlimited
        shares authorized, 9,191,596 shares outstanding
        and shares outstanding, as adjusted(4)                  $9,443,160             $ 9,443,160
    Accumulated deficit                                          (478,277)              (478,277)
                                                                ---------               --------

Total shareholders' equity                                      $8,964,883             $15,289,883
                                                                 ---------              ----------
    Total capitalization                                        $9,952,641             $15,461,592
                                                                ==========             ===========
</TABLE>

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


(1)  See note 3 of Notes to Consolidated Financial Statements.

(2)  See note 4 of Notes to Consolidated Financial Statements.

(3)  See "Certain Relationships and Related Transactions" and note 6 of Notes to
     Financial Statements.

(4)  Excludes  (i)  930,000  shares  subject to  employee  stock  options,  (ii)
     1,926,886  shares  subject  to  options  and  warrants  issued in  Canadian
     financings  and  (iii)  375,000  shares  of  common  stock  underlying  the
     Underwriters'  Warrants. See "Description of Securities--Other  Options and
     Warrants,"  "Underwriting--Underwriters'  Warrants"  and note 5 of Notes to
     Financial Statements.

                                    DILUTION

      As of  June  30,  1996,  Cotton  Valley's  net  tangible  book  value  was
$8,964,883  or $0.98 per share of common  stock.  Net tangible book value is the
aggregate amount of Cotton Valley's tangible assets less its total  liabilities.
Net tangible book value per share  represents  Cotton  Valley's  total  tangible
assets  less its total  liabilities,  divided  by the number of shares of common
stock  outstanding.   After  giving  effect  to  the  sale  of  1,250,000  Units
(consisting of 1,250,000 shares of Preferred Stock and 1,250,000 Warrants) at an
offering  price per Unit of $6.00,  or $6.00  per share of  Preferred  Stock (no
value assigned to Warrants, which are not immediately exercisable),  application
of the estimated net sale proceeds (after deducting  underwriting  discounts and
other  offering  expenses) and assuming  conversion of the Preferred  Stock into
2,500,000 shares of common stock,  Cotton Valley's net tangible book value as of
the date of this prospectus  would increase from $8,964,883 to $15,289,883,  and
the net tangible book value per share would  increase from $0.98 to $1.31.  This
represents  an immediate  increase in net tangible book value of $0.33 per share
to  current  shareholders,  and  immediate  dilution  of $1.69  per share to new
investors or 56%, as illustrated in the following table:

<TABLE>
<S>                                                                            <C>        <C>
Public offering price per share of common stock                                            $3.00
     Net tangible book value per share before this offering................     $0.98
     Increase per share attributable to new investors......................     $0.33
                                                                                -----
Adjusted net tangible book value per share after this offering.............                $1.31
                                                                                           -----
Dilution per share to new investors........................................                $1.69
Percentage dilution........................................................                  56%
</TABLE>

                                 DIVIDEND POLICY

      Cotton  Valley has never paid cash  dividends on its common stock and does
not plan to pay cash dividends in the foreseeable future. Whether dividends will
be paid in the future  will be in the  discretion  of Cotton  Valley's  board of
directors  and will  depend on  various  factors,  including  its  earnings  and
financial condition and such other factors as

                                       11

<PAGE>



Cotton Valley's board of directors considers  relevant.  Cotton Valley currently
intends to retain earnings to develop and expand Cotton Valley's  business.  See
"Management's Discussion and Analysis or Plan of Operation."

            MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

First Quarter Fiscal 1997 and First Quarter Fiscal 1996

      During the quarter ended September 30, 1996,  Cotton Valley incurred a net
loss of $205,885.  From  February 15, 1995  (inception),  to September 30, 1996,
Cotton Valley accumulated a deficit of $684,163.

      The loss of $205,885 for the first  quarter of 1996  compares to a loss of
$25,759  during  the first  quarter  of 1995.  The  increase  is due to  greater
business activity during the first quarter of fiscal 1997.

      Rehabilitation  work on two wells in the  Cheneyboro  Field in the  fourth
quarter  of 1996  resulted  in oil and gas  sales of  $19,484  during  the first
quarter of 1997.

Fiscal Year 1996 and Fiscal Period 1995

      From  February  15, 1995  (inception),  to June 30,  1996,  Cotton  Valley
accumulated  a deficit  of  $478,277  after an income tax  benefit of  $260,000.
During this period,  Cotton Valley  acquired its  properties,  merged with Arjon
Enterprises, Inc., issued debentures and notes and sold stock for cash.

      Legal,  audit and accounting fees were $190,053,  which  represents 26% of
the net loss before tax through June 30, 1996.

      Management  fees of  $82,840  and  salaries  of  $163,309,  for a total of
$246,149, represent 33% of the net loss before tax through June 30, 1996. Cotton
Valley paid management fees of $10,000 per month from  incorporation to July 31,
1995,  and  $20,000  per month from  August 1, 1995 to March 31,  1996,  for the
full-time  services of two of its  officers.  Effective  April 1, 1996,  each of
these  officers  received a salary of $10,000 per month.  A third officer earned
$10,000 per month from August 1, 1995. A fourth officer earned $10,000 per month
from May 1, 1996.

      Management  fees and salaries  totaling $194,  951 from inception  through
June 30, 1996,  were  capitalized  into oil and gas  properties and are thus not
included in the accumulated  deficit as of that date.  These costs represent the
estimated  portion of the compensation  directly  attributable to acquisition of
the properties in the Cheneyboro Field and related development activities.

      Cotton  Valley  acquired  its  interest  in the  Cheneyboro  Field from 18
different  property  owners in March 1995 in exchange  for  3,252,533  shares of
common stock, 406,567 Class A Warrants,  and $1,086,050,  of which approximately
$500,000  has been paid.  See  "Description  of  Securities--Other  Options  and
Warrants--Canadian Financings."

      Cotton Valley  purchased an option to acquire a 51.8% working  interest in
the Sword Unit,  offshore Santa Barbara,  California,  through an interest in an
Option  Agreement held by PetroGreen  Company to purchase all of Conoco,  Inc.'s
interest in the Sword Unit (the "Option Agreement"). All leases and the unit are
held under a current  MMS  Suspension  of  Operations  Order with no  short-term
drilling  obligations.  The  Option  Agreement  remains  effective  through  the
California  Offshore  Oil and Gas  Energy  Resources  ("COOGER")  regional  data
collection study or until 30 days after the Minerals  Management  Service of the
Department of Interior ("MMS") Directed  Suspension of Operations is terminated.
COOGER is a joint venture involving federal, state and local agencies and all of
the Pacific outer  continental shelf and California State Tidelands lease owners
organized to study the environmental  implications and methods of producing from
the area.  In connection  with its  participation  in the COOGER study,  MMS has
stated that its Directed  Suspension of Operations would not be terminated until
after  the  COOGER  study is  completed.  Completion  of the  COOGER  study  was
scheduled for the fourth quarter of 1997, but it appears to be approximately one
year behind.  Cotton Valley is responsible for paying Conoco's share of the cost
of the COOGER study, which portion is expected to be approximately $60,000.

                                       12

<PAGE>



      Cotton Valley  intends to exercise its option,  to retain an 11.8% working
interest in the Sword Unit and to sell the remainder of its interest to industry
participants.  No assurance  can be given,  however,  that Cotton Valley will be
successful  in selling all or any part of the remainder of its interest on terms
and  conditions  satisfactory  to Cotton  Valley.  Upon  purchase  of the Conoco
interest  in the  Sword  Unit,  the  original  option  owner is  entitled  to an
overriding  royalty  interest  of 31/3%  proportionally  reduced as to  Conoco's
interest,  on all the  leasehold  interests  being  acquired.  The  net  revenue
interest remaining to Cotton Valley will be 80% of its working interest.  Cotton
Valley cannot exercise its option under the Option  Agreement unless it, and its
syndicate of co-owners, are acceptable to the MMS.

12-Month Operating Plan

      As of September 30, 1996,  Cotton Valley had a working capital  deficiency
of  $220,958.  Management  estimates  that  aggregate  capital  expenditures  of
approximately  $13.5 million will be required to develop its reserves,  of which
$3.5 million and $5.0 million are expected to be incurred  during the  remainder
of the year ending  June 30,  1997,  and during the year  ending June 30,  1998,
respectively.  Cotton Valley  intends to finance  development  with the proceeds
from this offering and cash from operations.

      Cotton Valley intends to drill and complete five horizontal  wells with an
average depth of 9,500 feet laterally in the  Cheneyboro  Field within 12 months
after  this  offering.   The  estimated  cost  of  each  well  is  approximately
$1,000,000.  Depending  upon the  results,  Cotton  Valley  plans  to drill  and
complete ten more horizontal wells in two groups of five. Assuming  commercially
profitable  production,  cash  generated  from the first  five  wells  should be
sufficient to fund the drilling and completion of subsequent wells.

      Cotton  Valley  intends  to  drill  two  vertical  wells  to  a  depth  of
approximately  17,000  feet in the  Movico  Field  within 12 months  after  this
offering.

      Cotton  Valley  intends to exercise its option on the offshore  California
property,  retain  an 11.8%  working  interest  and sell  the  remainder  of its
interest to industry  participants.  Management  does not expect to exercise the
option  until  at  least  12  months  after  this  offering.  See  "Management's
Discussion and Analysis or Plan of Operation--Fiscal Year 1996 and Fiscal Period
1995."

Liquidity and Capital Resources

      Cotton Valley currently anticipates that the net proceeds of this offering
will be sufficient to satisfy its operating  cash  requirements  for at least 12
months following the  consummation of this offering.  No assurance can be given,
however,  that Cotton Valley will not require  additional  financing sooner than
currently anticipated.

      The net proceeds of this offering and the anticipated  sale of an interest
in the offshore  California property will not be sufficient to develop fully the
properties.  If the cash flow  generated  from the first five wells is less than
expected,  the development of properties may require capital  resources  greater
than  the net  proceeds  of  this  offering  or  resources  otherwise  currently
available  to Cotton  Valley.  Cotton  Valley has no current  arrangements  with
respect to, or sources of, additional financing.  No assurance can be given that
any additional  financing will be available to Cotton Valley on acceptable terms
or at all. The inability to obtain  additional  financing  would have a material
adverse effect on Cotton Valley,  including  requiring  Cotton Valley to curtail
significantly  its deployment of the  properties.  Any additional  financing may
involve  substantial  dilution to the interests of Cotton Valley's then existing
shareholders.

Estimated Reserves

      The carrying value of Cotton  Valley's oil and gas properties is supported
almost entirely by proved  undeveloped  reserves.  Cotton Valley emphasizes that
reserve  estimates  of  new  discoveries  or  undeveloped  properties  are  more
imprecise  than those of producing oil and gas  properties.  Accordingly,  these
estimates  are  expected  to change  materially  as future  information  becomes
available.

                                       13

<PAGE>



                                   THE COMPANY

      Cotton Valley is a development stage, independent oil and gas exploration,
production and development  company.  It was  incorporated  in Ontario,  Canada,
originally as Cotton Valley Energy Limited,  on February 15, 1995. Cotton Valley
was formed,  and its present name adopted,  on June 14, 1996, as a result of the
merger of Cotton Valley Energy Limited and Arjon Enterprises, Inc., both Ontario
corporations.  Arjon Enterprises, Inc. was a Canadian public company formed more
than 50 years  ago to  operate a gold  mine.  At the time of the  merger,  Arjon
Enterprises,  Inc. had not engaged in business for more than 25 years, it had no
material  liabilities,  and its only asset was a Cotton  Valley  Energy  Limited
debenture in the amount of $146,300. The shareholders of Arjon Enterprises, Inc.
received   686,551   shares  of  Cotton  Valley  common  stock  in  the  merger,
representing  7.5% of Cotton  Valley's then  outstanding  common  stock.  Cotton
Valley accounted for the merger as a purchase.  See "Certain  Relationships  and
Related Transactions."

      Cotton  Valley has three  wholly  owned  subsidiaries,  CV Energy,  Cotton
Valley Operating Company ("CV Operating"),  a Texas corporation,  and CV Trading
Company  ("CV  Trading"),  a  Nevada  corporation,  all of which  were  recently
incorporated.  CV Energy holds non-producing oil and gas properties in Texas and
agreements and options to acquire oil and gas  properties in Texas,  Alabama and
offshore  California.  Cotton Valley  acquired all of the shares of CV Energy on
June 30, 1995,  in a  one-for-one  share and warrant  exchange.  Because  Cotton
Valley had had no substantive activity before this transaction,  the acquisition
was  accounted for as a  recapitalization  of Cotton Valley with CV Energy's net
assets.  CV  Trading  was  formed to engage in gas  trading  and  transportation
projects.  CV  Operating  was  formed to operate  oil and gas wells.  Neither CV
Operating nor CV Trading has commenced operations at this time.

      Cotton Valley intends to  reincorporate in Canada's Yukon Territory by the
end of 1996.  Under Yukon Territory law, Cotton Valley's board of directors need
not be comprised of a majority of Canadian residents as currently required under
Ontario law.

                             BUSINESS AND PROPERTIES

Business Strategy

      Cotton Valley's  business strategy is to continue to increase reserves and
commence and increase production and cash flows by concentrating on:

          o    Acquiring   properties,   or  companies  with  properties,   with
               development and exploration opportunities and/or significant cost
               reduction potential,  none of which has been identified as of the
               date of this prospectus;

          o    Developing  existing  reserves  through  low-risk   developmental
               drilling or recompletion  programs  capitalizing on reserves left
               behind pipe in existing well bores by major oil companies;

          o    Exploring for new reserves utilizing state-of-the-art technology,
               including horizontal drilling, to reduce exploration risk;

          o    Concentrating on focused  geographic  areas to achieve  operating
               and technical efficiencies; and

          o    Maintaining   financial   flexibility   to  take   advantage   of
               development and acquisition opportunities as they develop.

Properties

      Cheneyboro Field

      Cotton Valley owns or has options to acquire approximately 6,000 net acres
of producing  and  non-producing  oil and gas leases (with options and rights of
first refusal to acquire  additional  leases) in the Cheneyboro Field of Navarro
County, Texas. Cotton Valley has entered into an Area of Mutual Interest ("AMI")
Agreement with a number of unaffiliated  parties  covering  approximately 33,000

                                       14

<PAGE>



acres in and around the Cheneyboro Field. Cotton Valley has the right to acquire
up to a 75%  working  interest  in any new  lease  acquired  by any of the other
parties to the AMI Agreement.

      The Cheneyboro Field is located 17 miles southeast of Corsicana, Texas, in
Navarro  County.  This  field  is  productive  in the  Cotton  Valley  Limestone
formation  (also  called  the  "Cotton  Valley  Lime")  at a  vertical  depth of
approximately  9,500 feet.  Field  development  continued  following the initial
discovery in 1978 into the early 1980s, eventually encompassing an area 12 miles
long and 5 miles wide (approximately  30,000 acres).  Between 1978 and 1987, the
Cheneyboro Field produced  approximately 3.0 million Bbl of oil from 69 vertical
wells, representing an average of approximately 45,000 Bbl per well. Some of the
vertical wells have produced over 100,000 Bbl,  indicating better drainage where
the wells  penetrated  the fracture  system.  In 1987,  the Tarrant County Water
Authority expropriated approximately 20,000 acres of this field. Producing wells
were plugged and abandoned to permit construction of the Richland/Chambers Creek
Reservoir, a water supply project for Tarrant County and the City of Fort Worth,
Texas.

     The Cotton Valley Lime  reservoir at Cheneyboro  is highly  fractured.  The
primary objective reservoir rock is an oolitic carbonate  grainstone of Jurassic
age that was  deposited on a Paleozoic  shelf break.  Subsequent  pullout of the
deeper Louann Salt caused  extensive  fracturing.  The salt  withdrawal left the
residual field structure as simple regional dip.  Hydrocarbon trapping occurs as
a  result  of  the  high  degree  of  fracture   density  bounded  by  areas  of
non-permeability. Core and log analyses indicate the presence of 2.5 to 4.5% oil
saturated matrix porosity in the field. Vertical wells in this reservoir produce
42(degree) API oil.

      Cotton Valley  believes that horizontal  drilling  techniques will lead to
initial rates and recovery  efficiencies  several times those experienced in the
original  vertical  well  completions.  Since the majority of the field is under
water, directional drilling from the shoreline is anticipated.  Based on analogy
to  horizontal  drilling  in  fractured  limestone  reservoirs  in other  areas,
increased  productive capacity and ultimate reserves are anticipated relative to
historical, vertical per well averages.

      When the  field  was  first  developed,  several  shallower  zones  tested
hydrocarbons at commercial rates. Due to the  expropriation of the field,  these
zones were not developed.  The Cretaceous Rodessa,  Glen Rose, Pettit and Travis
Peak intervals may also prove productive in the field area.

      Gas from  these  wells  is  expected  to be  connected  to one of  several
pipelines in the area.

      Horizontal  Drilling.  Horizontal  drilling  begins  with  drilling in the
normal manner (vertically) to a point above the objective  formation.  From that
point,  the hole is directionally  deviated until the bit is drilling  generally
horizontally in the producing zone. Directional drilling technology has advanced
to the point that the drill-bit can be kept in one  geological  horizon for many
hundreds of feet away from the vertical well bore. It is no longer  necessary to
strike a localized  fracture zone  accurately with a vertical well.  Instead,  a
well can be drilled horizontally through an area where fractured zones are known
to exist with a greater chance of encountering the vertical fractures.  A single
horizontal well can encounter several localized fracture zones.

      Horizontal  drilling was first  developed  over 20 years ago, and has been
used  successfully  in oil and gas fields as  diverse  as those  located in West
Virginia, the North Sea, Saskatchewan,  Argentina,  Prudhoe Bay and South Texas,
to extract oil and gas where  vertical  drilling is impossible or  uneconomical.
Horizontal  drilling has also  increased  production  of oil and gas from fields
with thin pay zones,  low permeability  sands,  vertical  fractured  reservoirs,
discontinuous formations and reservoirs with gas and water coning problems. High
angle directional drilling has been performed  extensively onshore in California
to reach bottom holes in congested  cities or harbors  where  vertical  drilling
would not be feasible. Horizontal drilling has been used extensively offshore to
drill many wells from one platform.

      Movico Field

      Cotton  Valley  owns a 25%  interest  in 1,145 acres of oil and gas leases
(with an AMI covering an  additional  6,000 acres of leases) in the Movico Field
of Mobile County, Alabama.

                                       15

<PAGE>



      Movico Field was  discovered  in 1982 when The Superior Oil A.M. Hill Unit
39 #3 was completed at 16,909 feet.  This well is  productive  from two zones in
the  Smackover for a total of 4,488 Bbl per day of sweet crude and 3,200 Mcf per
day of gas.  During its first 12 months,  this well  produced  over 485,000 Bbl.
Commercial  production from October 1983 through December 1992 was 1,584,514 Bbl
of oil and 1,500 Mcf of gas,  and the well is still  producing.  Subsurface  and
geophysical  data suggest that the fault block that the discovery  well occupies
has  been  largely  unexploited  and  that two to four  locations  remain  to be
drilled.  Seismic data indicates that the productive  wells are located  downdip
and that  200-300  feet of structure  can be gained to the  discovery  well by a
properly located offset well.

      Movico Field is located on a salt anticline on the west side of the Mobile
Graben (Jackson-Mobile fault system). The structure at the Smackover level traps
on an upthrown fault closure  against  Haynesville,  evaporates on regional west
dip and is bounded by a large down to the east  regional  fault that trends in a
north-south  direction.  This large fault and  regional  dip are  documented  by
subsurface,  seismic and gravity data. Subsurface mapping demonstrates the fault
to have a displacement of more than 2,400 feet. The seismic data show this fault
on each of the dip lines and each dip line also shows strong west dip.  Regional
gravity data also delineate this fault and the eastern boundary of the field.

      Regionally,  the Smackover is a dolomitic  limestone  facies and at Movico
Field  has   porosities  and   permeabilities   that  average  16%  and  55  md,
respectively.  Porosities as high as 25% and over 200 md permeability  have been
found in a well  located 700 feet downdip of the  proposed  location.  All wells
surrounding the proposed  location have reservoir grade porosity ranging from 42
feet to over 70 feet thick.

      More  production can occur in the Smackover  formation  where the porosity
intervals found in the offsetting  wells increase in quality and thickness updip
on the crest of the  structure.  Reservoir  porosity  within  the  Smackover  is
generally best developed and enhanced on the crest of structures  that have been
formed by swelling salt pillows. In Smackover fields that surround Movico Field,
namely Hatter's Pond (203,000 Mcf + 49 million Bbl), Chunchula (207,000 Mcf + 52
million Bbl), Chatom (135,000 Mcf + 15 million Bbl) and Jay Field (491,000 Mcf +
380 million Bbl), porosity and permeability reach maximum development at or near
their structural  crests and typically  decrease on the flanks. At Movico Field,
management expects the best developed reservoir rock to occur 200-300 feet updip
to the offsetting wells based on results in the neighboring fields.  Development
of this  porosity  could  create a  Smackover  net pay section of over 100 feet.
Thick pay sections of over 80 feet occur in Chunchula,  Hatter's Pond and Chatom
Fields.

      The primary force of hydrocarbon  flow at Movico Field is water. The water
drive systems in the Smackover are slow-acting and are usually  recognized after
several years of production.  Water drive systems usually maintain near original
bottom hole pressures and show an increasing  proportion of water and consistent
gas/oil  ratios.  The  Movico  Smackover   reservoirs  act  differently  due  to
variations in porosity and  permeability.  Migrating fluids follow pathways that
are often indirect and tortuous,  slowing down the migration  process.  Porosity
logs,  micrologs and conventional  cores from wells within  Smackover  producing
fields always show differences in Smackover  reservoir porosity and quality with
some correlative zones of porosity and other inconsistent zones.

      In the case of a  newly-discovered  Smackover  oil  reservoir,  an initial
period of relatively high production occurs due to original  reservoir  pressure
and some gas coming out of solution.  After several months, the flush production
begins a sloping decline as reservoir  pressure around the well decreases.  This
decline in pressure is caused because fluids cannot be replaced near the well as
quickly  as they  are  extracted  (as a  result  of the  tortuous  pathways)  by
migrating oil and water that lie at an increasing  distance from the well. After
several years,  production will decline to a rate equal to the slow encroachment
of the water drive.  Reservoir  pressure and  production  will  stabilize as the
water drive takes effect.  The well will then produce at a fairly  constant rate
for 5-15  years.  Bottom  hole  pressures  at the well bore  (not in the  entire
reservoir)  will drop to 20%-50% of their original  pressure and then level off.
The proportion of water will increase and the gas/oil ratio will remain slightly
above or below its  initial  ratio.  Reservoir  pressure at Movico was 8,900 per
square inch initially and currently is calculated at 8,000 per square inch.

     Reservoir  performance  of this  kind can  only be  understood  after  long
periods of  production.  The  sloping  decline  in  production  and bottom  hole
pressure  can be mistaken  for a solution  gas or  depletion  drive in the early
stages of production.  Reserve estimates  commonly are made early in the life of
the well before decline curves flatten out. As

                                       16

<PAGE>



a result,  reserves may be underestimated  initially and revised frequently over
time as the wells produce more and last longer than predicted.

      Porosity in the Movico Field averages 16% with an average water saturation
of 28% in the Unit 39 #3 well.  Better  reservoir  rock is found at Movico Field
than at Hatter's  Pond,  and the rock in the Unit 39 #3 is capable of  producing
substantially  more fluid than a typical well at Hatter's Pond Field.  This data
also allows a more accurate  estimation of recoverable  reserves at Movico based
on volumetrics.

      Cotton Valley plans to drill the first well from the surface location used
for the Superior Oil Hill Unit #9 well.  This well was plugged  after  producing
166,209 Bbl of oil from a bottom hole location very near the oil/water  contact.
The location will be approximately  4,500 feet north of the Hill Unit 39 #3 well
that has produced  more than 1.6 million Bbl of oil and is still  producing.  By
using the existing  location and the nearby  pipeline  used for the plugged Hill
Unit #9 well, cost is expected to be substantially reduced and the pipeline will
feed the entire well production into the Movico  processing  plant 3,500 feet to
the north. Proximity to the existing pipeline and the processing plant minimizes
downtime loss and expense for constructing  surface production  facilities.  The
plant can process 15,000 BOPD and 20 MMCFGPD. It currently handles less than 400
BOPD.

      Cotton Valley's second drilling target is the Norphlet Formation at 17,000
feet,  which lies directly below the Smackover  Formation.  The highest Norphlet
penetration is in the Superior Unit 16 well (8,500 feet south) that  encountered
the sands  approximately 200 feet downdip of the crest. A mudlog show of oil was
recorded  in this  well from the  Norphlet  sands  but  production  has not been
established from this interval in the field. Several  Smackover-Norphlet  fields
in Alabama and Mississippi  have Norphlet pay located at the highest  structural
crest of the field. In addition, Norphlet discoveries have been made years after
the initial Smackover  discovery and full development of the field. Womack Hill,
Nancy and  Goodwater  are fields that have deeper pay in the  Norphlet  but were
discovered  years later as deeper  drilling on the  crestal  structure  occurred
within these Smackover  Fields.  Many Norphlet field wells recover 1 million Bbl
per well.  Norphlet  production  is found at Hatter's  Pond Field and  Chunchula
Field located south and southwest of Movico Field. Cotton Valley estimates that,
based  upon such  production,  potential  reserves  for the  Norphlet  under its
acreage are 3.2 million Bbl of oil and 3,200 Mcf of gas.

      Sword Unit

      The Sword  Unit is located 10 miles off Point  Conception,  Santa  Barbara
County,  California,  800 to 1,800 feet underwater, at the juncture of the Santa
Barbara  Channel and the offshore Santa Maria Basin.  It is on a large anticline
covering  approximately  7,800 acres of area and lies  immediately  south of the
Point Arguello oil field operated by Texaco and Chevron.

      Two successful  wells have been drilled and tested on the  structure.  The
discovery  well,  the P-0322 #1, was drilled to a depth of 9,343 feet and tested
in 1983.  The P-0320 #2, which was drilled to determine  the size of field,  was
drilled to a depth of 8,478 feet and tested in 1985.  Both of these wells tested
Monterey zones at high rates.  A 3-D seismic  survey has been shot,  delineating
the structure in great detail.  The Upper Miocene fractured  Monterey pay is 800
feet thick at the crest and 1,200 feet thick on the flanks and is encountered at
approximately  7,000  feet.  Proved  recoverable  reserves in the Sword Unit are
estimated to be 314 million Bbl of oil and 397,000 Mcf of gas.

      The Sword Unit lies almost wholly within the Sword Field,  which  consists
of all or portions of each of four adjacent federal leases.

      The Santa  Barbara  Channel  and the  offshore  Santa  Maria Basin are the
seaward portions of geologically well-known onshore basins with over 90 years of
production  history.  These  offshore  areas  were first  explored  in the Santa
Barbara Channel along the nearshore  3-mile strip  controlled by the state.  New
field discoveries in Pliocene and Miocene age reservoir sands led to exploration
into the federally  controlled  waters of the outer  continental  shelf ("OCS").
Eight OCS lease  sales  conducted  between  1966 and 1984 have  resulted  in the
discovery of an estimated two billion Bbl of oil and three  trillion  cubic feet
of gas. Of these totals,  some 600 million Bbl of oil and 600 billion cubic feet
of gas have been produced and sold. OCS production is approximately  200,000 Bbl
of oil and 200 million cf of gas per day.

                                       17

<PAGE>



      Most of the early  offshore  production  was from  Pliocene age  sandstone
reservoirs. The more recent developments,  and those of the future, are from the
highly  fractured zones of the Miocene age Monterey  Formation.  The Monterey is
productive in both the Santa Barbara Channel and the offshore Santa Maria Basin.
It is the  principal  producing  horizon in the Point  Arguello and Hondo (Santa
Ynez Unit) fields. Because the Monterey is capable of relatively high productive
rates,  the Hondo  field,  which has been on  production  since late  1981,  has
already surpassed 100 million Bbl.

      California's  active tectonic  history over the last few million years has
formed the large linear  anticlinal  features which trap the oil and gas. Marine
seismic surveys have been used to locate and define these  structures  offshore.
Recent seismic surveying utilizing modern 3-D seismic  technology,  coupled with
exploratory  well data,  has greatly  improved  knowledge of the size of planned
reserves in development and in fields for which development is planned.

      Currently,  17  platforms  are  producing  from  nine  fields in the Santa
Barbara  Channel and  offshore  Santa  Maria  Basin OCS. At least 10  additional
fields  may be  brought  into  production  during  this  decade.  The  number of
platforms needed to develop these fields will be less than required in the past.
Implementation of extended high-angle to horizontal drilling methods will result
not only in the  reduction of  platforms,  but also in the total number of wells
drilled. Use of these new drilling methods and seismic technologies will enhance
environmental  protection and improve development  economics.  At present,  four
major Sword area  facilities  are producing  significant  volumes of oil and gas
from seven  platforms,  making this area one of the more significant oil and gas
producing  provinces in the United  States.  The Sword Unit leases and all other
non-producing  leases in the area are presently the subject of the COOGER Study.
At its conclusion in 1997, the leases will revert from the present Suspension of
Operations Order to Suspension of Production ("SOP") status. Under an SOP, lease
operators  will  be  required  to  drill  additional  delineation  wells  on the
discovered  fields.  When this last drilling phase is completed,  preparation of
permit applications for the development phase will begin.

      The northeast-southwest trend of the Sword structure lies at a right angle
to the general trend of the other structural features in the Arguello-Conception
area.  Sword Field is on a large regional  feature known as the Amberjack Ridge.
The Monterey  formation is draped across this cretaceous  feature and is thicker
on its flanks than on its crest. This draping, in conjunction with the extremely
strong  tectonic  activity of the  California  area,  have  resulted in the very
brittle Monterey formation being highly fractured.

      Because the Sword anticline is structurally  less complicated than many of
the nearby  features,  it can be mapped with  greater  confidence.  The existing
conventional  and 3-D seismic data sets provide an excellent base for definitive
mapping.

      Most offshore California Monterey wells average 1,500-2,000 Bbl of oil per
day of  sustained  production  for many  years.  This is unusual  for  fractured
reservoirs,  which often have high initial rates that decline very rapidly. Some
Monterey  wells at the offshore  Hondo and South Ellwood fields have produced as
much as nine  million Bbl of oil in less than ten years and are still  producing
substantial daily volumes.

      Title  to  Properties.   Cotton  Valley  follows  industry  practice  when
acquiring undeveloped properties on minimal title investigation. A title opinion
is obtained  before  drilling  begins on the  properties.  Title  opinions cover
approximately  36%  of  Cotton  Valley's  Texas   properties.   Cotton  Valley's
properties  are  subject to  royalty  interests,  liens  incident  to  operating
agreements,  liens for  current  taxes  and other  burdens  that  Cotton  Valley
believes do not materially interfere with their use or value.

Oil and Gas Reserves

      Cotton Valley's reserves consist primarily of proved undeveloped  reserves
located   in  Texas   and   Alabama.   Reserve   estimates   were   made   using
industry-accepted  methodology  including  extrapolation of performance  trends,
volumetrics,   material  balance  and  statistical   analysis  of  analogs.  The
evaluator's  professional  judgment and experience  were used to select the most
appropriate  method and to determine  the  reasonableness  of the  results.  The
estimates  were  made  in  accordance  with  oil  and  gas  reserve  definitions
promulgated by the SEC.

      The following table  summarizes  Cotton Valley's  estimated net proved oil
and gas reserves as of June 30, 1996:

                                       18

<PAGE>



                                Reserves by State

<TABLE>
<S>                                       <C>                     <C>                      <C>

               Item                        Texas(1)                Alabama(2)                 Total
               ----                        --------                ----------                 -----
Reserves
    Proved producing
       Oil (Bbl)                               93,327                  0                         93,327
       Gas (Mcf)                              279,979                  0                        279,979
    Proved undeveloped
       Oil (Bbl)                            4,200,812                 481,843                 4,682,655
       Gas (Mcf)                           12,602,434                 573,440                13,175,874
</TABLE>

<TABLE>
<S>                                       <C>                     <C>                      <C>

Estimated future net revenues before income taxes
    Proved producing                      $ 1,618,891                  $ 0                 $ 1,618,891
    Proved undeveloped                    $88,924,623              $9,119,922              $98,044,615
                                          -----------              ----------              -----------
       Total                              $90,543,514              $9,119,922              $99,663,506
                                          ===========              ==========              ===========
</TABLE>

<TABLE>
<S>                                       <C>                     <C>                      <C>

Estimated future net revenues before income taxes discounted at 10%
    Proved producing                      $ 1,129,799                  $0                  $ 1,129,799
    Proved non-producing                  $60,149,064              $5,982,903              $66,131,967
                                          -----------              ----------              -----------
       Total                              $61,278,863              $5,982,903              $67,261,766
                                          ===========              ==========              ===========
</TABLE>
      ---------------------

(1)  Prices  based on $21.21 per Bbl of oil and $2.09 per Mcf of gas. 

(2)  Prices based on $21.46 per Bbl of oil and $2.66 per Mcf of gas.


      The reserve data set forth in this prospectus are only estimates. Numerous
uncertainties  are inherent in estimating oil and gas reserves and their values,
including many factors beyond the control of the producer.  Reserve  engineering
is a subjective process of estimating  underground  accumulations of oil and gas
that cannot be measured in an exact manner. The accuracy of any reserve estimate
is a function of the quality of available data and of engineering and geological
interpretation and judgment. As a result, estimates of different engineers often
vary. In addition,  estimates of reserves are subject to revision by the results
of later drilling, testing and production.  Accordingly, reserve estimates often
differ  from  the   quantities  of  oil  and  gas  ultimately   recovered.   The
meaningfulness  of  estimates  is  highly  dependent  upon the  accuracy  of the
assumptions upon which they are based.

      In general,  oil and gas  production  declines as reserves  are  depleted.
Except to the extent that Cotton Valley  acquires proven reserves or succeeds in
exploring and  developing  its own reserves,  or both,  Cotton  Valley's  proven
reserves will decline as they are produced.  Cotton  Valley's future oil and gas
production  is,  therefore,  highly  dependent upon its ability to in acquire or
develop additional reserves.
                                       19
<PAGE>
Acreage

      The  following  table  provides  information   regarding  Cotton  Valley's
undeveloped  leasehold  acreage as of June 30,  1996.  Acreage  in which  Cotton
Valley's  interest  is  limited  to  royalty,  overriding  royalty  and  similar
interests is excluded.


                       Developed Acreage       Undeveloped Acreage
                      Gross           Net      Gross           Net
                      -----           ---      -----          -----
Cheneyboro Field       820            820      4,660          4,180
Movico Field            0              0       1,145            286


Competition

      Competition  in the oil and gas  industry  is  intense  generally.  Cotton
Valley  believes  that  price is the  determinative  factor in  competition  for
drilling  prospects,  equipment  and labor.  Major and  independent  oil and gas
companies and  syndicates  actively bid for desirable oil and gas properties and
equipment  and labor  required  to  operate  and  develop  them.  Many of Cotton
Valley's   competitors  have  substantially   greater  financial  resources  and
exploration and development  budgets than those of Cotton Valley.  Cotton Valley
expects difficulty in competing for future drilling prospects.

Markets

      General.  Oil and gas operating  revenues are highly dependent upon prices
and demand for oil and  production.  Numerous  factors  beyond  Cotton  Valley's
control  can  impact  the  prices of its oil and gas.  Decreases  in oil and gas
prices  would  have an  adverse  effect  on  Cotton  Valley's  proved  reserves,
revenues, profitability and cash flow.

      Cotton  Valley  has not  engaged  in any crude oil and gas price  swaps or
other hedging transactions to reduce its exposure to price fluctuations. It may,
however,  engage  in such  transactions  from time to time as  management  deems
advisable.

      Gas Sales.  Cotton Valley has not produced or sold any significant  volume
of gas. It has arranged to sell gas produced in the Cheneyboro  Field through an
existing gathering system and pipeline. Management believes that gas produced in
the Movico Field can be sold through an existing pipeline.

      Oil  Sales.  Cotton  Valley  expects  to  sell  its oil  production  under
short-term arrangements at prices no less than the purchaser's posted prices for
the respective areas less standard  deductions.  Numerous buyers are expected to
be available for Cotton Valley's oil.

Regulation

      Oil and gas  exploration,  production  and related  operations are heavily
regulated by federal and state  authorities.  Failure to comply with  applicable
law can result in substantial penalties. The cost of regulatory authorities will
increase  Cotton  Valley's cost of doing business and affect its  profitability.
Regulation  of oil and gas  activities  has changed  many  times.  Consequently,
Cotton  Valley is unable to predict the future cost or impact of complying  with
such laws.  Texas and Alabama require  drilling  permits and bonds and operating
reports  and  impose  other  burdens  relating  to oil and gas  exploration  and
production. Both states also require conservation measures, including pooling of
oil and gas properties,  establishing  maximum production rates from oil and gas
wells, and spacing,  plugging and abandoning wells. These laws limit the rate at
which oil and gas can be produced from Cotton Valley's properties.

      The transportation and sale of gas in interstate  commerce is regulated by
United States law and the Federal Energy Regulatory Commission.

Environmental

      Cotton Valley's operations will be subject to extensive federal, state and
local environmental  regulation.  Permits are required for various operations to
be undertaken  by Cotton  Valley,  and these permits are subject to  revocation,
modification   and   renewal  by  issuing   authorities.   Increasingly   strict
requirements  may be imposed by  environmental  laws and  enforcement  policies.
Cotton Valley does not anticipate  material capital  expenditures to comply with
environmental laws.

Operating Hazards and Uninsured Risks

      The   acquisition,   development,   exploration   for,   and   production,
transportation  and storage of,  crude oil,  gas liquids and gas involves a high
degree of risk,  which even a combination of  experience,  knowledge and careful
evaluation may not be able to overcome.  Cotton Valley's  operations are subject
to all of the risks normally incident to drilling gas and

                                      20
<PAGE>



oil  wells,  operating  and  developing  gas and oil  properties,  transporting,
processing,  and storing gas, including  encountering  unexpected  formations or
pressures, premature reservoir declines, blow-outs, equipment failures and other
accidents,  craterings,  sour gas releases,  uncontrollable flows of oil, gas or
well fluids, adverse weather conditions,  pollution,  other environmental risks,
fires and spills.  Oil  production  requires high levels of  investment  and has
particular  economic risks, such as retaining well failure,  fires,  explosions,
gaseous  leaks,  spills and  migration of harmful  substances,  any of which can
cause personal injury,  damage to property,  equipment and the environment,  and
result in the  interruption  of  operations.  Cotton  Valley is also  subject to
deliverability  uncertainties  related  to  the  proximity  of its  reserves  to
pipeline  and  processing  facilities  and the  inability  to  secure  space  on
pipelines that deliver oil and gas to commercial markets. Although Cotton Valley
maintains  insurance in accordance with customary industry  practice,  it is not
fully  insured  against all of these  risks,  nor are all such risks  insurable.
Losses  resulting  from the  occurrence  of these  risks  could  have a material
adverse impact on Cotton Valley. See "Business and Properties."

Facilities

      Cotton  Valley leases  approximately  1,900 square feet of office space at
8350 North Central Expressway,  Suite M2030,  Dallas,  Texas 75206, at an annual
base rental of approximately  $44,500.  Management believes that Cotton Valley's
offices will satisfy its needs for the foreseeable future.

Employees

      As of August 31, 1996, Cotton Valley had six employees. Four employees are
officers,  one is administrative and one works in the field.  Cotton Valley uses
contract services in its oil and gas field  operations.  Cotton Valley also uses
consultants to evaluate company projects,  reserves and other oil and gas assets
for potential acquisitions.

Legal Proceedings

      As of the date of this  prospectus,  Cotton  Valley  is not a party to any
legal proceedings.



                                       21

<PAGE>



                                   MANAGEMENT

Directors and Executive Officers

      Cotton Valley's directors and executive officers are:


Name                     Age   Position
----                     ---   --------
Eugene A. Soltero         53   Chairman of the Board and Chief Executive Officer
James E. Hogue            60   Director, President and Chief Operating Officer
Peter Lucas               42   Senior Vice President and Chief Financial Officer
C. Ron Burden             53   Senior Vice President of Exploration
Wayne T. Egan(1)          32   Director
Michael Kamis             44   Director
Richard J. Lachcik(2)     38   Director

--------------------
(1)  Member, Audit Committee
(2)  Member, Compensation Committee


      Eugene A. Soltero has served  Cotton Valley as a director  since  February
1995. He was President from February 1995 to July 1996 and has been Chairman and
Chief  Executive  Officer  since  January  1996.  He has been Chairman and Chief
Executive  Officer of CV  Trading  since May 1995.  From March 1994 to  February
1995,  Mr.  Soltero  was  President  and Chief  Executive  Officer  of  Cimarron
Resources,  Inc., an  independent  gas production  company.  From August 1991 to
March 1994, he was Chairman of the Board,  President and Chief Executive Officer
of Aztec Energy Corporation,  a publicly-held independent oil and gas production
company.  In  June  1994,  Aztec  Energy  Corporation  entered  into  bankruptcy
proceedings.  Mr.  Soltero has served as Chief  Operating  Officer  and/or Chief
Executive  Officer for private and public oil and gas companies for more than 20
years, including directing the formation and growth of start-up companies. Early
in his career,  he was trained at Sinclair Oil  Corporation in  exploration  and
production  management,  served as Manager of Planning  for Texas  International
Petroleum  Corporation,  and Petroleum  Economist for DeGolyer and  MacNaughton,
petroleum exploration and production consultants. Mr. Soltero is a member of the
Society of Petroleum Engineers,  a member and former director of the Independent
Petroleum Association of America and the Texas Independent Producers and Royalty
Owners.  He has  also  served,  on two  separate  terms,  as a  director  of the
Independent Petroleum Refiners Association of America. He is a master's graduate
of the  Massachusetts  Institute of Technology in business (where he was awarded
the  Sinclair   Fellowship  in  Petroleum   Economics)  with  an   undergraduate
engineering   degree  from  The  Cooper  Union.  Mr.  Soltero  is  a  registered
professional engineer in the State of Texas.

      James E. Hogue became President, Chief Operating Officer and a director of
Cotton  Valley in July 1996 and he served as Chairman of CV Energy from February
1995 to January 1996 and  Chairman of CV Trading from May 1995 to January  1996.
He became  President of CV Energy and CV Operating  in January  1996.  Mr. Hogue
also has been director,  President and major shareholder of Third Coast Capital,
Inc., a venture capital company, since 1988. Since 1991, Mr. Hogue has served as
President of Martex Oil and Gas, Inc. In 1983, Mr. Hogue formed Mayco Petroleum,
Inc.,  for which he served as  President  until 1988.  Early in his career,  Mr.
Hogue  served as a driller for  Leatherwood  Company and as a core  engineer for
Sargent  Diamond Bit, Inc.  Subsequently,  Mr. Hogue became  President and major
shareholder of a diamond bit manufacturing company. In the late 1970s, Mr. Hogue
served for four years as President of Union Crude Oil  Company,  an  exploration
and  drilling  company,  and for two  years  as Vice  President  of  Independent
Producers Marketing Company, a crude oil supply and transportation  company. Mr.
Hogue has  participated in drilling or furnishing  services for over 3,000 wells
in Texas, Oklahoma, New Mexico, Louisiana and Colorado.

      Peter Lucas became Senior Vice  President and Chief  Financial  Officer of
Cotton Valley and all of its  subsidiaries in August 1995. From May 1992 to July
1995, Mr. Lucas served as Chief  Financial  Officer to Canmax,  Inc., a publicly
traded company that developed software for oil and gas retailers. Mr. Lucas is a
member of the Canadian  Institute of Chartered  Accountants.  Mr. Lucas received
his tax and accounting training at Coopers & Lybrand, which he left in

                                       22

<PAGE>



1984 to form his own tax  practice.  Six years later,  Mr.  Lucas'  practice was
merged into Coopers & Lybrand,  with whom he was a partner  until April 1992. He
holds a bachelor of commerce degree from the University of Alberta.

      C. Ronald Burden joined Cotton Valley in April 1996.  From July 1994 until
he joined Cotton Valley,  Mr. Burden served as Petroleum  Geologist for Texakoma
Oil and Gas in Dallas,  Texas. He was an independent oil and gas consultant from
September  1993 to July 1994.  From November 1990 to September  1993, Mr. Burden
was  Exploration  Manager for Enron Oil and Gas Corp.  at Tyler,  Texas.  He has
spent the past 25 years developing and managing oil and gas exploration projects
in West Texas,  Alaska,  offshore  Texas,  offshore  Louisiana,  South Texas and
particularly specializing in recent years in the East Texas Basin. Mr. Burden is
a member of the American  Association of Petroleum Geologists and the East Texas
Geological  Society.  He is a graduate of Texas Tech  University with a master's
degree in Petroleum Geology.

      Wayne T.  Egan is a  partner  with  Weir & Foulds  in the  securities  law
section  for more than the past five  years.  He holds an  L.L.B.  from  Queen's
University and a Bachelor of Commerce from the  University of Toronto,  and is a
member of the Canadian Bar Association.  Weir & Foulds serves as Cotton Valley's
corporate counsel. See "Legal Matters."

      Michael Kamis has served Cotton Valley as a director  since November 1996.
Mr.  Kamis has a Bachelor of Science  degree in Petroleum  Engineering  from the
University of Wyoming. He has held increasingly responsible positions throughout
the world with oil and gas producers and service companies. Currently, Mr. Kamis
is  president  of Apex  Energy  Consultants,  Inc.  which  provides  reserve and
economic evaluations to the petroleum industry and financial institutions.

      Richard J. Lachcik has  practiced  law with the Toronto law firm of Weir &
Foulds  since  1988.  He  currently  serves  as the  partner  in  charge  of the
securities law section.  Mr. Lachcik is a graduate of Queen's University with an
L.L.B.,  holds a B.A.  from the  University  of Toronto,  and is a member of the
Ontario Bar.  Weir & Foulds serves as Cotton  Valley's  corporate  counsel.  See
"Legal Matters."

Audit Committee

      Cotton  Valley's board of directors has  established an Audit Committee to
be  comprised  entirely of  independent  directors.  The  functions of the Audit
Committee are to make  recommendations  to the board of directors  regarding the
engagement  of  Cotton  Valley's  independent  accountants  and to  review  with
management and the independent accountants Cotton Valley's financial statements,
basic  accounting  and  financial  policies  and  practices,   audit  scope  and
competency of accounting personnel. Members of the Audit Committee are appointed
annually by the board of directors  and serve at the  discretion of the board of
directors until their  successors are appointed or their earlier  resignation or
removal.

Compensation Committee

      Cotton   Valley's  board  of  directors  has  established  a  Compensation
Committee to be comprised  entirely of independent  directors.  The functions of
the Compensation Committee are to review and recommend to the board of directors
the  compensation,  stock  options and  employment  benefits of all  officers of
Cotton Valley,  to administer Cotton Valley's employee stock option plan, to fix
the terms of other employee  benefit  arrangements and to make awards under such
arrangements.  Members of the Compensation  Committee are appointed  annually by
the board of  directors  and serve at the  discretion  of the board of directors
until their successors are appointed or their earlier resignation or removal.

Director Compensation

      Directors who are not Cotton Valley employees  receive $500 per meeting of
the board and $500 per  committee  meeting  not held on the same date as a board
meeting.  Directors  are  permitted  to accept  stock in lieu of cash.  Employee
directors receive no extra compensation for service on the board.

                                       23

<PAGE>



Executive Compensation

      The  following  table  sets forth the  compensation  paid or to be paid to
Cotton  Valley's  executive  officers,  directly  or  indirectly,  for  services
rendered in all  capacities  for the period from inception to June 30, 1995, and
fiscal 1996:


                           SUMMARY COMPENSATION TABLE
<TABLE>
<S>                                          <C>            <C>                <C>
                                                                   Annual Compensation(1)
      Name and Principal Position             Year            Salary            Other Annual
                                                                                Compensation
      ---------------------------             ----           --------           ------------
Eugene A. Soltero, Chairman of the            1996           $115,000               $0
   Board and Chief Executive Officer          1995            $25,000               $0

James E. Hogue, President and Chief           1996           $115,000               $0
   Operating Officer                          1995            $25,000               $0

Peter Lucas, Senior Vice President            1996           $101,500               $0
   and Chief Financial Officer                1995                 $0               $0

C. Ronald Burden, Senior Vice                 1996            $22,000               $0
   President of Exploration                   1995                 $0               $0
</TABLE>
--------------------------
(1)  Certain of Cotton Valley's  executive officers receive personal benefits in
     addition to salary.  The aggregate amounts of these benefits,  however,  do
     not exceed the lesser of $50,000 or 10% of the total annual salary reported
     for the executives.

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

      The following table sets forth  information  regarding  options granted to
executive  officers under Cotton  Valley's  employee stock option plan in fiscal
1996:


                        Option Grants in Last Fiscal Year
                               (Individual Grants)
<TABLE>
<S>                  <C>                       <C>                            <C>             <C>      
                             Number of               Percent of Total
                      Securities(1) Underlying      Options Granted to         Exercise or      Expiration
Name                     Options Granted        Employees in Fiscal Year       Base Price         Date
----                  ------------------------  ------------------------       -----------     ------------
Eugene A. Soltero             200,000                      25.0%                  $1.83        July 1, 2000
James E. Hogue                200,000                      25.0%                  $1.83        July 1, 2000
Peter Lucas                   200,000                      25.0%                  $1.83        July 1, 2000
C. Ronald Burden              200,000                      25.0%                  $1.83        July 1, 2000
</TABLE>
----------------------
(1)  Shares of common stock


      The  following  table  sets  forth  information  regarding  the  value  of
unexercised  options held by executive  officers as of June 30, 1996. No options
were exercised during fiscal 1996.

                                       24

<PAGE>




                 Aggregated Option Exercises in Last Fiscal Year
                        and Fiscal Year-End Option Values
<TABLE>
<S>                    <C>                                      <C>
                        Number of Securities(1) Underlying       Value of Unexercised In-the-Money
                           Unexercised Options at FY-End                 Options at FY-End
Name                         Exercisable/Unexercisable               Exercisable/Unexercisable
----                         -------------------------               -------------------------
Eugene A. Soltero                    200,000/0                                 $0/$0
James E. Hogue                       200,000/0                                 $0/$0
Peter Lucas                          200,000/0                                 $0/$0
C. Ronald Burden                     200,000/0                                 $0/$0
</TABLE>

                 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

      In February  1995,  Cotton  Valley  issued a total of 1,840,001  shares to
Eugene A.  Soltero and James E. Hogue for  pre-incorporation  services to Cotton
Valley.  In December 1995,  Cotton Valley issued an additional  80,000 shares of
common stock each to Eugene A. Soltero and James E. Hogue for  pre-incorporation
services.  In December 1995, Cotton Valley issued 150,000 shares of common stock
each to Peter  Lucas and Ron Burden for  post-incorporation  services  to Cotton
Valley.

      During the year  ended  June 30,  1996,  Cotton  Valley  granted to senior
employees options that enable the employees to purchase 800,000 common shares of
Cotton Valley for $1.83 per share until July 1, 2000.

      During  the  years  ended  June 30,  1996 and  1995,  Cotton  Valley  paid
management  fees to two  corporations  controlled  by senior  officers of Cotton
Valley,  aggregating  $160,000 and $50,000,  respectively.  In addition,  Cotton
Valley has received  advances from these two companies  which total  $171,709 at
June 30, 1996.  The advances are unsecured and without  interest and are payable
after June 30, 1997.

      The foregoing transactions were on no less favorable terms than could have
been obtained from unaffiliated third parties.  Any future transactions  between
Cotton Valley and its affiliates will be approved by a majority of disinterested
directors  and will be on terms no less  favorable  to Cotton  Valley than those
which could be obtained from unrelated third parties.

                             PRINCIPAL SHAREHOLDERS

      The following table sets forth certain  information  regarding  beneficial
ownership  of Cotton  Valley's  common  stock as of  October  31,  1996,  and as
adjusted to reflect the sale of Units in this  offering,  by (i) each person who
"beneficially" owns more than 5% of all outstanding shares of common stock, (ii)
each Cotton Valley director and executive  officer,  and (iii) all directors and
executive officers of Cotton Valley as a group.  Except as otherwise  indicated,
all persons  listed below have (i) sole voting power and  investment  power with
respect to their common  stock except to the extent that  authority is shared by
spouses under applicable law, and (ii) record and beneficial  ownership of their
shares.  Percentages  in the table "After This  Offering"  assume  conversion of
Preferred Stock but not exercise of Warrants.



                                       25

<PAGE>




                                                              Percentage of 
                                                        Outstanding Common Stock
                                  Amount and Nature of                After This
Name                              Beneficial Ownership    Currently     Offering
----                                -------------       -----------   ---------
Eugene A. Soltero (1) ..............   2,970,199             31.3%        24.8%
James E. Hogue (1) .................   2,985,199             31.5%        24.9%
Peter Lucas ........................     350,000              3.7%         2.9%
C. Ronald Burden ...................     390,000              4.1%         3.3%
Wayne T. Egan ......................      50,000              0.5%         0.4%
Michael Kamis ......................         --                --           --
Richard J. Lachcik .................      50,000              0.5%         0.4%
All directors and executive officers
   as a group (seven persons) ......   6,795,398             66.2%        53.2%

Royal Trust Corporation ............   1,500,000             15.5%        12.3%
                  ---------------------------


(1)  The address of Messrs.  Soltero and Hogue is 8350 North Central Expressway,
     Suite M2030, Dallas, Texas 75206.

(2)  Includes 200,000 shares of common stock subject to an employee stock option
     and the  following  shares,  beneficial  ownership of which is  disclaimed:
     610,000  shares  of  common  stock  owned  by the  Soltero  Family  Limited
     Partnership,  256,000  shares of common stock and 83,333  warrants owned by
     Mr.  Soltero's  wife and  1,740,866  held as attorney  under a voting trust
     agreement. See "Principal Shareholders--Voting Trust Agreement."

(3)  Includes 200,000 shares of common stock subject to an employee stock option
     and the  following  shares,  beneficial  ownership of which is  disclaimed:
     640,000   shares  of  common  stock  owned  by  the  Hogue  Family  Limited
     Partnership, 241,000 shares of common stock and 83,333 warrants held by Mr.
     Hogue's wife and 1,740,866 held as attorney under a voting trust agreement.
     See "Principal Shareholders--Voting Trust Agreement."

(4)  Includes 200,000 shares of common stock subject to an employee stock option
     and 75,000 shares owned by Mr. Lucas' wife the following shares, beneficial
     ownership of which is disclaimed.

(5)  Includes  200,000  shares of common  stock  subject  to an  employee  stock
     option.

(6)  Includes 50,000 shares of common stock subject to an employee stock option.

(7)  Includes 1,096,666 shares subject to options or warrants and 3,481,732 held
     as attorney under a voting trust agreement.

(8)  Includes  500,000  shares  subject to warrants.  The address of Royal Trust
     Corporation  Inc. is Royal Bank Plaza,  200 Bay Street,  Toronto,  Ontario,
     Canada M5J 2J5.



      Cotton  Valley  is  negotiating  an  agreement  with  Liviakis   Financial
Communications,  Inc.  of  Sacramento,  California  ("Liviakis")  to assist  and
consult  with  Cotton  Valley in matters  concerning  corporate  finance  and to
provide investor  communications and public relations services. In consideration
of Liviakis'  services,  Cotton Valley may sell a total of 500,000 shares of its
common stock to Liviakis and an officer of Liviakis for $.75 per share and issue
1,490,000  shares of its common stock to Liviakis.  Cotton Valley may also grant
Liviakis and an officer of Liviakis an option to purchase  500,000 shares of its
common stock from January 2, 1998, until November 8, 2001.

Voting Trust Agreement

      Unaffiliated  parties that  transferred  their  interests in the Texas and
Alabama properties to Cotton Valley in exchange for securities  provided a Power
of Attorney to Eugene A. Soltero and James E. Hogue to vote 3,481,732  shares of
common stock held by such property  contributors  in the  attorneys'  discretion
between  January 1, 1996,  and January 1, 2001.  Each property  contributor  may
transfer to unrelated  third parties its common stock of Cotton Valley,  subject
to the Voting Trust  Agreement,  at any time. The Power of Attorney  provided by
each of the  property  contributors  to Messrs.  Soltero and Hogue  expires with
respect to the common stock transferred by any property contributor.




                                       26

<PAGE>



                            DESCRIPTION OF SECURITIES

General

      Cotton  Valley is  authorized  to issue an  unlimited  number of shares of
common stock,  without par value, and an unlimited number of shares of preferred
stock, without par value, issuable in series. As of the date of this prospectus,
Cotton Valley's issued and outstanding  capital  securities consist of 9,204,318
shares of common  stock and  2,856,886  options and  warrants to acquire  common
stock. After giving effect to this offering,  the issued and outstanding capital
stock of Cotton  Valley  will  consist  of  9,204,318  shares  of common  stock,
1,250,000  Units,  1,250,000  shares of Preferred  Stock and 1,250,000  Warrants
underlying the Units,  930,000 employee stock options and 1,926,886  options and
warrants issued in Canadian  financings.  In addition,  the Underwriters will be
issued  warrants  to  purchase  125,000  Units  at a price  equal to 120% of the
initial public offering price per Unit. See  "Description  of  Securities--Other
Options  and  Warrants,"  "Underwriting"  and  note  5  of  Notes  to  Financial
Statements.

      No United States market currently exists for any of the Securities. Cotton
Valley intends to apply for listing of the Securities on the AMEX.

Units

      Each Unit  consists of one share of Preferred  Stock and one Warrant.  The
Preferred Stock and the Warrants may not be traded separately until ___________,
unless separated  earlier upon three days' prior written notice to Cotton Valley
from the Representative.

Common Stock

      Holders of common  stock are entitled to one vote per share on all matters
submitted to a vote of shareholders. They are entitled to receive dividends when
and as declared by the board of directors out of legally  available funds and to
share ratably in the assets of Cotton Valley legally  available for distribution
upon liquidation, dissolution or winding up.

      Holders of common stock do not have subscription, redemption or conversion
rights,  nor do they have any preemptive rights. The common stock underlying the
Units offered by this  prospectus  will be, when issued and paid for, fully paid
and nonassessable.

      Holders of common stock do not have cumulative voting rights,  which means
that the holders of more than half of all voting  rights with  respect to common
stock and Preferred Stock can elect all of Cotton Valley's directors.  The board
of  directors  is  empowered  to fill any  vacancies  on the board of  directors
created by resignations, subject to quorum requirements.

      All shareholder  action is taken by vote of a majority of voting shares of
the capital stock of Cotton Valley present at a meeting of shareholders at which
a quorum (a majority of the issued and outstanding  shares of the voting capital
stock) is present in person or by proxy.  Directors  are  elected by a plurality
vote.

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

      Cotton Valley's  common stock began trading  through The Canadian  Dealing
Network on June 24, 1996,  under the symbol "CVZC." From June 24, 1996,  through
September  30,  1996,  the  following  table  sets  forth  the  high and low bid
information for Cotton Valley's common stock in Canadian  Dollars as reported on
The Canadian Dealing Network. The information in the table reflects inter-dealer
prices, without retail mark-up, mark-down or commission, and may not necessarily
represent actual transactions.

                                       27

<PAGE>




             1996                    High             Low
             ----                   -----            -----
June 24-30                          $2.80            $2.50
July 1-September 30                 $2.60            $1.20


      As of October 31, 1996,  CV had 1,130 record  holders of its common stock,
207 of whom have United States addresses.

Preferred Stock

      Cotton Valley's articles of amalgamation  authorize its board of directors
to issue an unlimited  number of  preferred  shares in one or more series and to
fix  the  rights,  priorities,  preferences,  qualifications,   limitations  and
restrictions,  including the dividend rates,  conversion  rates,  voting rights,
terms  of  redemption,   liquidation   preferences  and  the  number  of  shares
constituting  any terms of the  designation of such series,  without any further
vote or action by the shareholders.  Issuing preferred shares could decrease the
amount of earnings and assets  available for  distribution  to holders of common
stock or adversely affect the rights and powers, including voting rights, of the
holders of the common stock.

      Cotton Valley has no present plans to issue any preferred stock other than
the Preferred Stock underlying the Units offered by this prospectus. Pursuant to
Policy 5.2 issued by the Ontario  Securities  Commission,  Cotton Valley may not
issue any  preferred  stock without the advance  written  consent of the Ontario
Securities  Commission.  Cotton  Valley does not  anticipate  any  difficulty in
obtaining this consent.

8% Cumulative Convertible Preferred Stock

      The board of  directors  has  authorized  the  issuance of up to 2,000,000
shares of 8% Cumulative  Convertible  Preferred Stock.  Holders of the Preferred
Stock are entitled to two votes per share on all matters  submitted to a vote of
Cotton Valley  shareholders.  In addition,  such holders are entitled to receive
cumulative  dividends  at the rate of 8% per annum,  payable at the  election of
Cotton Valley in cash or in shares of common stock.  The dividends  will be paid
annually,  within 60 days after the close of each fiscal year ending June 30. If
the dividend is paid in shares of common  stock,  the price of such common stock
will be the average  closing  price for  publicly  traded  shares  during the 20
trading days ended on the last day of the fiscal year.

      Holders of the  Preferred  Stock will have first  equity  preference  as a
class, limited in amount to $6.00 per share of Preferred Stock, in the assets of
Cotton  Valley  legally   available  for   distribution  in  the  event  of  the
liquidation, dissolution or winding up.

      Each outstanding  share of Preferred Stock may be converted at any time by
the holder into two shares of common stock.  Each share of Preferred  Stock will
convert into two shares of common stock automatically upon the first to occur of
the following:

         (1)    The  closing  price for  shares of  common  stock in any  United
                States  public  market  meets or  exceeds  $___ per share for 20
                consecutive trading days; or

         (2)    Cotton Valley's  auditors release audited  financial  statements
                according  to  United  States  generally   accepted   accounting
                principles  that show  Cotton  Valley has had net income for the
                previous 12-month (or shorter) period exceeding $2,000,000; or

         (3)    Cotton Valley's  auditors release audited  financial  statements
                according to Canadian generally accepted  accounting  principles
                that show  Cotton  Valley has had net  income  for the  previous
                12-month (or shorter) period exceeding Cdn $2,600,000; or

         (4)    December 31, 2002.

                                       28

<PAGE>



      Holders of the  Preferred  Stock do not have  subscription,  redemption or
conversion  rights other than as set out above,  nor do they have any preemptive
rights.  If Cotton  Valley  elects to sell  additional  shares of its  common or
preferred stock  following this offering,  investors in this offering would have
no right to  purchase  additional  shares  of such  stock.  Consequently,  their
percentage  equity  interest in Cotton  Valley  could be diluted.  The shares of
Preferred  Stock  underlying the Units offered by this  prospectus will be, when
issued and paid for, fully paid and nonassessable.

      Holders of the Preferred Stock do not have cumulative voting rights, which
means that the  holders of more than half of the voting  rights of common  stock
and Preferred Stock can elect all of Cotton Valley's  directors,  if they choose
to do so. In such event,  the holders of the remaining  shares would not be able
to  elect  any  directors.  The  board of  directors  is  empowered  to fill any
vacancies on the board of directors  created by the  resignation  of  directors,
subject to applicable legislation.

Warrants

      Each Warrant entitles the holder to purchase one share of common stock for
$____ per share  until  ___________,  1998.  The  Warrants  are not  immediately
exercisable and are not  transferable  separately from the Preferred Stock until
________________.  Cotton Valley may redeem the Warrants at $0.01 per Warrant at
any time after ________________, upon 30 days written notice to the holders.

Other Options and Warrants

      Employee  Stock  Options.  Cotton  Valley is authorized to issue shares of
common  stock  under its  employee  stock  option plan to  employees,  officers,
directors,  consultants and other service providers, provided that insiders must
not in aggregate hold options exceeding 10% of the outstanding shares. As of the
date of this prospectus, options have been granted to acquire a total of 930,000
shares for $1.83 per share. These options expire in 1999 and 2000.

      Canadian Financings.  In connection with financing activities completed in
Canada and the acquisition of Arjon,  Cotton Valley granted options and warrants
as  reflected  in the table below.  At October 31,  1996,  1,926,886  options or
warrants  were  outstanding.  Each  option or  warrant  entitles  the  holder to
purchase one share of common stock at the prices set forth in the table.


Number        Exercise Price Cdn $      Exercise Price US $   Expiration Date
------        --------------------      -------------------   ---------------
1,340,724            $2.75                     $2.00          December 31,1997
  125,000            $2.25                     $1.64          April 30, 1998
   98,421            $2.25                     $1.64          December 31,1997
   37,741            $2.02                     $1.48          August 31, 1998
  325,000            $0.66                     $0.48          December 31,1998


Transfer Agent and Registrar

      The  transfer  agent and  registrar  for Cotton  Valley's  common stock is
Equity Transfer Services Inc., Toronto,  Ontario,  Canada. Cotton Valley intends
to appoint  Continental  Stock  Transfer and Trust  Company of Jersey City,  New
Jersey, as United States transfer agent.


                       SECURITIES ELIGIBLE FOR FUTURE SALE

      Upon completion of this offering, 9,204,318 shares of common stock will be
outstanding.  All  shares  sold in this  offering  will be  freely  transferable
without  restriction or further  registration  under the Securities  Act, except
shares  purchased  by an  affiliate  (in  general,  a person who is in a control
relationship  with Cotton  Valley) which will be subject to the  limitations  of
Rule 144 promulgated  under the Securities  Act. The 9,204,318  shares of common
stock are

                                       29

<PAGE>



registered  on Form 20-F and  currently  eligible for sale without  restriction,
other than shares held by  affiliates.  Subject to the  limitations of Rule 144,
restricted  securities  will  be  freely  transferable  upon  expiration  of the
applicable  two-year holding period and other  provisions.  In addition,  Cotton
Valley  has  granted   1,926,886   warrants  to  purchase   common  stock.   See
"Capitalization," "Management" and "Principal Shareholders."

      Under Rule 144 as currently in effect,  a person (or persons  whose shares
are  aggregated  with those of others) whose  restricted  shares have been fully
paid for and meet the rule's two-year holding provisions,  including persons who
may be deemed  affiliates of Cotton Valley,  may sell  restricted  securities in
brokers'  transactions  or directly  to market  makers,  provided  the number of
shares sold in any three-month  period is not more than the greater of 1% of the
total shares of common stock then  outstanding  (approximately  90,000 shares of
common stock  immediately  after this  offering) or the average  weekly  trading
volume for the four  calendar week period  immediately  prior to each such sale.
After  restricted  securities have been fully paid for and held for three years,
restricted  securities  may be sold by persons who are not  affiliates of Cotton
Valley  without  regard to volume  limitations.  Restricted  securities  held by
affiliates must continue,  even after the three-year  holding period, to be sold
in brokers'  transactions  or directly to market  makers,  subject to the volume
limitations described above.

      Subject  to  certain  limitations  on the  aggregate  offering  price of a
transaction  and other  conditions,  Rule 701 may be relied upon with respect to
the  resale  of  securities  originally  purchased  from  Cotton  Valley  by its
employees,  directors,  officers, consultants or advisors before the date Cotton
Valley becomes subject to the reporting  requirements of the Securities Exchange
Act of 1934,  as amended,  pursuant  to written  compensatory  benefit  plans or
written  contracts  relating to the compensation of such persons,  including the
employee  stock  option  plan.  Securities  issued in  reliance  on Rule 701 are
restricted  securities and, beginning 90 days after the date of this prospectus,
may be sold by persons other than affiliates, subject only to the manner of sale
provisions of Rule 144 and by affiliates under Rule 144 without  compliance with
its two-year  minimum  holding  period  requirements.  Such  securities  will be
subject, however, to any lock-up agreements related to such securities.

      Prior to this offering, no public market has existed for any Securities in
the United  States.  No predictions  can be made as to the effect,  if any, that
market sales of shares or the  availability  of shares for sale will have on the
market price  prevailing from time to time. The sale, or availability  for sale,
of  substantial  amounts of common stock in the public  market  could  adversely
affect prevailing market prices.

      Cotton  Valley  intends  to  file  a  registration   statement  under  the
Securities Act covering  shares of common stock available for issuance under the
employee stock option plan. See  "Description of  Securities--Other  Options and
Warrants--Employee  Stock Options." Such registration  statement relating to the
employee  stock  option plan is expected to be filed soon after the date of this
prospectus and will  automatically  become effective upon filing. As of the date
of this prospectus,  930,000 shares are subject to outstanding options under the
employee stock option plan.





                                       30

<PAGE>



                        CERTAIN INCOME TAX CONSIDERATIONS

Canadian Federal Income Tax Considerations for United States Residents

      The following is a summary of certain of the Canadian  federal  income tax
considerations  which will  generally be  applicable  to holders of common stock
("U.S.  residents")  who are  residents of the United States for the purposes of
the Canada-United States Income Tax Convention (1980) ("the Convention") and are
not  residents of Canada for the  purposes of the Income Tax Act (Canada)  ("the
Canadian Tax Act"), who deal at arm's length with Cotton Valley for the purposes
of the  Canadian Tax Act and who do not use or hold and are not deemed to use or
hold such  common  stock in, or in the course  of,  carrying  on a  business  in
Canada.  This summary is based upon the current  provisions  of the Canadian Tax
Act  and  the  regulations  thereunder,  proposed  amendments  thereto  publicly
announced by the Minister of Finance,  Canada, prior to the date hereof, and the
provisions of the Convention as in effect on the date hereof.

     This  summary is of general  nature only and is not intended to be legal or
tax advice to any particular U.S. resident.  Accordingly,  U.S. residents should
consult  with  their own tax  advisors  for  advice  with  respect  to their own
particular circumstances.

      A U.S.  resident  will not be subject to tax in Canada on any capital gain
realized on a disposition of the  Securities  unless the value of the Securities
constitutes  "taxable  Canadian  property" of the U.S. resident and the value of
the Securities is derived principally from real property situated in Canada. The
value of these Securities is not derived principally from real property situated
in Canada.

      Dividends  paid or  credited  or deemed to be paid or  credited  to a U.S.
resident in respect of the common  stock will  generally  be subject to Canadian
withholding  tax.  Currently,   under  the  Convention,  the  rate  of  Canadian
withholding  tax which  would  apply on  dividends  paid by  Cotton  Valley to a
resident of the United  States is (i) 6% with respect to dividends  paid in 1996
and 5%  thereafter if the  beneficial  owner of the dividends is a company which
owns at least  10% of the  voting  stock of Cotton  Valley,  and (ii) 15% in all
other cases.

United States Federal Income Tax Considerations

      The  following  is a general  description  of the material  United  States
federal income tax  consequences  applicable to U.S.  holders of the Securities.
The following  discussion  deals only with Securities held as a capital asset by
U.S. holders. It does not deal with special situations, such as those of foreign
persons,   dealers  in  securities,   financial  institutions,   life  insurance
companies,  holders whose "functional currency" is not the United States dollar,
or certain "straddle" or hedging transactions.  A "U.S. holder" is (i) a citizen
(not resident in Canada  pursuant to the  convention)  or resident of the United
States,  (ii) a  corporation  created or organized  under the laws of the United
States or any state  thereof  (including  the  District of  Columbia) or (iii) a
person  otherwise  subject to United States  federal income tax on its worldwide
income. Prospective purchasers are urged to consult their tax advisors regarding
the particular tax consequences arising under any state or local law.

      The gross  amount of a  distribution  with  respect  to common  stock will
include  the amount of any  Canadian  federal  income tax  withheld  and will be
includible  in gross  income  as a  taxable  dividend  to the  extent  of Cotton
Valley's current and accumulated  earnings and profits  (calculated under United
States tax  principles),  as a return of capital to the extent in excess of such
earnings  and profits and not in excess of the  holder's tax basis in the common
stock,  and as capital gain to the extent of any balance.  Dividends will not be
eligible  for  the  dividends-received  deduction.  Holders  generally  will  be
entitled,  subject to certain  limitations,  to a credit  against  their  United
States federal  income tax for Canadian  federal income taxes withheld from such
dividends.  Holders may claim a deduction for such taxes if they do not elect to
claim such foreign tax credit.

      If a  dividend  distribution  is  paid in  Canadian  dollars,  the  amount
includible  in income will be the United  States  dollar  value,  on the date of
receipt, of the Canadian dollar amount distributed.  Any subsequent gain or loss
in respect of such Canadian dollars arising from exchange rate fluctuations will
be ordinary income or loss.

                                       31

<PAGE>



      The sale of common stock will generally  result in the recognition of gain
or loss in an amount equal to the difference  between the amount realized on the
sale and the holder's adjusted basis in such common stock. Gain or loss upon the
sale of the common stock will be long-term or  short-term  capital gain or loss,
depending on whether the common stock has been held for more than one year.

      Special rules are applicable to United States  persons  holding stock in a
"passive foreign investment company" (PFIC), any foreign corporation of which at
least 75% of its gross  income  for the  taxable  year is  passive  income  (the
"Income  Test")  or at least  50% by value of the  assets  it holds  during  the
taxable  year  produce or are held for the  production  of passive  income  (the
"Asset Test").  For that purpose,  "passive income" includes the excess of gains
over  losses  from   certain   commodities   transactions,   including   certain
transactions  involving  oil  and  gas.  Gains  from  commodities  transactions,
however,  are  generally  excluded  from the  definition  of  passive  income if
"substantially  all" of a merchant's,  producer's or handler's business is as an
active merchant, producer or handler of such commodities.

      Cotton  Valley  believes it is not  currently  and will not become a PFIC.
However,  the application of the PFIC provisions of the Internal Revenue Code of
1986,  as amended (the "Code"),  to oil and gas  producers is somewhat  unclear.
Therefore, no assurance can be made regarding the PFIC status of Cotton Valley.

      If Cotton  Valley  were a PFIC,  a U.S.  holder of common  stock  would be
subject to a special  tax regime  with  respect  to certain  dividends  and with
respect to gain on a disposition  of such shares  (including a gift or pledge of
shares). Such income would be allocated ratably over the holder's holding period
for the  shares,  would be taxed,  in the year of dividend  or  disposition,  at
ordinary  income tax rates (using the highest tax rate in effect for each period
to which the income is  allocated),  and would be subject to an interest  charge
reflecting  the deferral of tax from the year to which the income was  allocated
to the year of dividend or disposition.

      Purchasers of Units are urged to consult their tax advisors  regarding the
potential application of the matters described above.



                                       32

<PAGE>



                                  UNDERWRITING

      Pursuant  to the terms and  subject  to the  conditions  contained  in the
Underwriting  Agreement,  Cotton  Valley has agreed to sell to the  Underwriters
named  below  (the  "Underwriters"),  and  each of the  Underwriters,  for  whom
National  Securities  Corporation  is acting as  Representative,  have agreed to
purchase the number of Units set forth  opposite their  respective  names in the
following table.


Underwriters                                                  Number of Units
------------                                                  ---------------
National Securities Corporation.....................



                                                                 --------
        Total.......................................             1,250,000
                                                                 =========


      The Representative has advised Cotton Valley that the Underwriters propose
to offer the Units to the public at the initial  public  offering price per Unit
set forth on the cover page of this  prospectus  and to certain  dealers at such
price less a  concession  of not more than $___ per Unit,  none of which will be
reallowed  to other  dealers.  After the  initial  public  offering,  the public
offering  price,  concession  and  reallowance  to dealers may be reduced by the
Representative.  No such  reduction  shall  change the amount of  proceeds to be
received by Cotton Valley as set forth on the cover page of this prospectus.

      Cotton  Valley has  granted  to the  Underwriters  an option,  exercisable
during the 45-day  period after the date of this  prospectus,  to purchase up to
187,500 additional Units to cover over-allotments, if any, at the same price per
Unit as Cotton Valley will receive for the 1,250,000 Units that the Underwriters
have agreed to  purchase.  To the extent  that the  Underwriters  exercise  such
option,  the Underwriters will have a firm commitment to purchase  approximately
the same  percentage  of such  additional  Units  that the number of Units to be
purchased  by it shown in the above  table  represents  as a  percentage  of the
1,250,000 Units offered hereby. If purchased, such additional Units will be sold
by the  Underwriters on the same terms as those on which the 1,250,000 Units are
being sold.

      The  holders  of  _____  shares  of  common  stock  have  agreed  with the
Representative  that, for at least two years after the date of this  prospectus,
subject to certain  limited  exceptions,  they will not  directly or  indirectly
sell, offer to sell,  contract to sell,  pledge,  make gifts of, grant an option
for the sale of or  otherwise  dispose of any shares of common  stock,  or other
securities  convertible  into,  exercisable  for or  exchangeable  for shares of
common stock,  owned directly by such holders or with respect to which they have
the  power  of   disposition,   without  the  prior   written   consent  of  the
Representative.  All of such shares will be eligible for  immediate  public sale
following  expiration of the lock-up periods,  subject to the provisions of Rule
144. See "Shares Eligible for Future Sale."

      The  Underwriters  have the right to offer the  Securities  offered hereby
only through licensed securities dealers in the United States who are members of
the National Association of Securities Dealers,  Inc.("NASD") and may allow such
dealers such portion of its ___ percent (__%) commission as each Underwriter may
determine.

      The Underwriters will not confirm sales to any discretionary accounts.

      Cotton  Valley  has  agreed  to pay the  Representative  a  nonaccountable
expense  allowance of 2.5% of the gross amount of the Units sold  (_______  upon
the sale of the Units offered,  _____ if the over-allotment  option is exercised
in full) at the closing of the offering.  The  Underwriters'  expenses in excess
thereof will be paid by the  Representative.  to the extent that the expenses of
the  underwriting  are less than that amount,  such excess shall be deemed to be
additional  compensation  to the  Underwriters.  In the  event the  offering  is
terminated before its successful  completion,  Cotton Valley may be obligated to
pay the Representative a maximum of $______ on an accountable basis for expenses
incurred by the Representative in connection with the offering.

                                       33

<PAGE>



Underwriters' Warrants

      Upon the closing of this offering, Cotton Valley has agreed to sell to the
Underwriters,  for nominal  consideration,  125,000 warrants (the "Underwriters'
Warrants").  The  Underwriters'  Warrants are  exercisable at 120% of the public
offering price per Unit for a four-year period commencing one year from the date
of this  offering.  The  Underwriters'  Warrants  may not be sold,  transferred,
assigned or hypothecated for a period of one year from the date of this offering
except to the  officers of the  Underwriters  and their  successors  and dealers
participating   in  the  offering   and/or  their  partners  or  officers.   The
Underwriters'  Warrants  will  contain  antidilution  provisions  providing  for
appropriate  adjustment  of the number of shares  subject to the Warrants  under
certain circumstances. The holders of the Underwriters' Warrants have no voting,
dividend or other rights as shareholders of Cotton Valley with respect to shares
underlying the Underwriters' Warrants until the Underwriters' Warrants have been
exercised.

      For the term of the  Underwriters'  Warrants,  the holders thereof will be
given  the  opportunity  to  profit  from a rise in the  market  value of Cotton
Valley's   shares,   with  a  resulting   dilution  in  the  interest  of  other
shareholders.  The  holders of the  Underwriters'  Warrants  can be  expected to
exercise the  Underwriters'  Warrants at a time when Cotton Valley would, in all
likelihood,  be able to obtain  needed  capital by an offering  of its  unissued
shares on terms more  favorable  to Cotton  Valley  than those  provided  by the
Underwriters'  Warrants.  Such  facts may  adversely  affect  the terms on which
Cotton  Valley can obtain  additional  financing.  Any  profit  realized  by the
Underwriters on the sale of the  Underwriters'  Warrants or shares issuable upon
exercise of the  Underwriters'  Warrants may be deemed  additional  underwriting
compensation.

Indemnification

      The Underwriting  Agreement  provides for  indemnification  between Cotton
Valley  and  the  Underwriters  against  certain  civil  liabilities,  including
liabilities under the Securities Act. In addition,  the  Underwriters'  Warrants
provide  for  indemnification  among  Cotton  Valley  and  the  holders  of  the
Underwriters'  Warrants and underlying shares against certain civil liabilities,
including  liabilities under the Securities Act and the Securities  Exchange Act
of 1934.

Determination of Offering Price

      The initial public  offering  price was determined by negotiation  between
Cotton Valley and the Representative.  The factors considered in determining the
public  offering price include Cotton Valley's  business  potential and earnings
prospects,  the oil and gas industry and the general condition of the securities
markets  at the  time of the  offering.  The  offering  price  does not bear any
relationship to Cotton Valley's assets,  revenue, book value, net worth or other
recognized  objective  criteria of value.  The number of shares of common  stock
into which  Preferred  Stock may be  converted,  and the  exercise  price of the
Warrants,   was  determined  by  negotiation   between  Cotton  Valley  and  the
Representative.

American Stock Exchange

      Cotton  Valley  intends to apply to list the  Securities  on the  American
Stock  Exchange.  No assurance can be given that the Securities  will be listed,
that a market for the  Securities  will develop or, if it does develop,  that it
will be maintained.

                        LIMITATIONS ON DIRECTOR LIABILITY

      Under the securities law of the Province of Ontario,  a right of action is
given for damages for a  "misrepresentation"  contained in a  prospectus  at the
time of purchase against every director of the issuer at the time the prospectus
or its later  amendment  was filed.  A  misrepresentation  is defined to mean an
untrue  statement of material  fact or an omission to state a material fact that
is required to be stated or that is necessary to make a statement not misleading
in the  light of the  circumstances  in  which it was  made.  Every  person  who
purchases  the  security  offered  by  the  prospectus   during  the  period  of
distribution  is deemed to have  relied upon the  misrepresentation  if it was a
misrepresentation at the time of purchase.

                                       34

<PAGE>



      The general defense  available for directors to such an action is proof by
the director that the purchaser  purchased the securities  with knowledge of the
misrepresentation.  In addition,  specific  defenses are  available to directors
provided a director can  demonstrate  that the  prospectus was filed without the
director's  knowledge  and consent and  reasonable  general  notice was given on
becoming aware of the filing.  In addition,  a director may also avoid liability
for a  misrepresentation  in a prospectus if the director did not believe, as to
the non-expertised portion of the prospectus,  that a representation is false or
misleading,  and if the director  conducted a reasonable  investigation so as to
provide reasonable  grounds for belief that there had been no  misrepresentation
(the due diligence defense).

      A director of Cotton Valley is also subject to potential  liability  under
the Ontario Business Corporations Act ("OBCA"). The OBCA requires every director
of a  corporation  in  exercising  the  director's  power  and  discharging  the
director's  duties to act  honestly  and in good  faith  with a view to the best
interests of the  corporation.  In addition,  every director of a corporation is
required in exercising  his or her powers and  discharging  his or her duties to
exercise the care,  diligence and skill that a reasonably  prudent  person would
exercise in comparable  circumstances.  Failure to meet these duties will result
in a director becoming liable for actions taken on behalf of the corporation.  A
director may be  indemnified  by a  corporation  against all costs,  charges and
expenses,  including  an amount  paid to settle an action or satisfy a judgment,
reasonably  incurred  by the  director  in  respect of any  civil,  criminal  or
administrative  action or  proceeding  to which the  director is made a party by
reason of being or having been a director of the  corporation,  if the  director
acted  honestly  and in good  faith  with a view to the  best  interests  of the
corporation.

                                  LEGAL MATTERS

      The  validity of the  issuance of the  Securities  offered  hereby will be
passed upon for Cotton Valley by Weir & Foulds, 2 First Canadian Place, Toronto,
Ontario,  Canada M5X 1J5.  Certain  legal  matters  will be passed  upon for the
Underwriters by Maurice J. Bates, L.L.C.

                                     EXPERTS

      The financial  statements  of Cotton Valley at June 30, 1996,  and for the
period  then ended  appearing  in this  prospectus  have been  audited by Hein +
Associates, LLP, independent certified public accountants, as set forth in their
report appearing elsewhere in this prospectus, and are included in reliance upon
such report given upon the authority of such firm as experts in  accounting  and
auditing.

      The reserve report of K&A Energy Consultants,  Inc. of the proved reserves
and  future net  revenues  attributable  to Cotton  Valley's  properties  in the
Cheneyboro  Field and the reserve  report of Wendell & Associates  of the proved
reserves and projected  estimated  future  production and revenue for the Movico
Field   included  in  this   Prospectus   as  Appendix  A-1  and  Appendix  A-2,
respectively, have been so included in reliance upon the authority of such firms
as experts in petroleum engineering.



                                       35

<PAGE>



                                    GLOSSARY

      In this prospectus, the following terms have the meanings indicated:

      3-D Seismic - The method by which a three-dimensional image of the earth's
subsurface is created through the  interpretation of collected seismic data. 3-D
seismic surveys allow for a more detailed  understanding  of the subsurface than
do conventional seismic surveys and contribute significantly to field appraisal,
development and production.

      Bbl - Barrels of oil.

      Commercial  Quantities/Well - A well that will make a profit over the cost
of operating the well.

      Completion - The casing,  perforation,  stimulation  and  installation  of
permanent  equipment for the production of oil and gas. Completion costs are the
costs incurred for the services, equipment and labor required therefor.

      Development  Well - A well drilled within the proved area of an oil or gas
reservoir to the depth of a stratigraphic horizon known to be productive.

      Exploratory  Well - A well  drilled  to  find a new  reservoir  in a field
previously  found to be  productive of oil and gas in another  reservoir,  or to
extend a known reservoir. Generally, an exploratory well is any well that is not
a  development  well,  a service  well or a  stratigraphic  test well as defined
below.

      Gas Well - A well capable of producing gas as its primary product.

      Gross Acres or Gross Wells - The total acres or well,  as the case may be,
in which a working interest is owned.

      Mcf - One thousand cubic feet of gas.

      Net Acres - Calculated by multiplying the number of gross acres in which a
party has an interest by the fractional interest of the party in each such acre.

      Net Revenue Interest - The share of revenues from oil an/or gas production
net of all other  interest  burdening  the gross  revenues  such as  landowner's
royalty and overriding royalties, etc.

      Oil and Gas Lease - Contractual  right to enter onto lands to explore for,
develop and produce oil and gas. An oil and gas lease is real property.

      Oil Well - well capable of producing oil as its primary product.

      Producer or Productive  Well - A well that is producing oil or gas or that
is capable of production.

      Proved  Resources  - The  estimated  quantities  of  crude  oil  and  gas,
condensate  and gas liquids  recoverable  in future years from known  reservoirs
under existing economic and operating  conditions,  i.e., prices and costs as of
the date the  estimate  is made.  Prices  include  consideration  of  changes in
existing  prices  provided  only  by  contractual   arrangements,   but  not  on
escalations based upon future conditions.

      (i)  Reservoirs  are  considered  proved  if  economic  produceability  is
           supported by either actual  production or conclusive  formation test.
           The area of a reservoir  considered  proved includes (A) that portion
           delineated  by  drilling  and  defined  by gas-oil  and/or  oil-water
           contacts,  if any; and (B) the immediately adjoining portions not yet
           drilled,   but  which  can  be  reasonably   judged  as  economically
           productive on the basis of available geological and engineering data.
           In the absence of  information  on fluid  contacts,  the lowest known
           structural occurrence of hydrocarbons controls the lower proved limit
           of the reservoir.

                                       36

<PAGE>



      (ii) Reserves which can be produced  economically  through  application of
           improved recovery  techniques such as fluid injection are included in
           the  "proved"  classification  when  successful  testing  by a  pilot
           project,  or the operation of an installed  program in the reservoir,
           provides support for the engineering analysis on which the project or
           program was based.

      (iii)Estimates  of proved  reserves do not include (A) oil that may become
           available  from known  reservoirs  but is  classified  separately  as
           "indicated additional reserves",  (B) crude oil, gas and gas liquids,
           the  recovery  of which is subject  to  reasonable  doubt  because of
           uncertainty  as to  geology,  reservoir  characteristics  or economic
           factors,  (C)  crude  oil,  gas and gas  liquids  that  may  occur in
           undrilled prospects or (D) crude oil, gas and gas liquids that may be
           recovered from oil shales, coal, gilsonite and other such sources.

      Proved Developed  Reserves - Reserves that can be expected to be recovered
through existing wells with existing equipment and operating methods. Additional
oil and gas expected to be obtained  through the  application of fluid injection
or other improved  recovery  techniques for supplementing the natural forces and
mechanisms of primary recovery are included as "proved developed  reserves" only
after testing by a pilot project or after the operation of an installed  program
has  confirmed  through  production  response  that  increased  recovery will be
achieved.

      Proved  Undeveloped  Reserves - Reserves that are expected to be recovered
from new wells on undrilled  acreage or from  existing  wells where a relatively
major  expenditure is required for  recompletion.  Reserves on undrilled acreage
are  limited  to those  drilling  units  offsetting  productive  units  that are
reasonably  certain  of  production  when  drilled.  Proved  reserves  for other
undrilled  units are claimed only where it can be  demonstrated  with  certainty
that there is continuity of production from the existing  productive  formation.
Estimates for proved  undeveloped  reserves are not  attributable to any acreage
for which an application of fluid injection or other improved recovery technique
is  contemplated,  unless such techniques  have been proved  effective by actual
tests in the area and in the same reservoir.

      Undeveloped  Acreage  - Oil  and gas  acreage  (including,  in  applicable
instances,  rights in one or more  horizons  which may be penetrated by existing
well bores,  but which have not been tested) to which Proved  Reserves  have not
been assigned by petroleum engineers.

      Working  Interest - The  operating  interest in an Oil and Gas Lease which
gives the owner the right to drill,  produce and conduct operating activities on
the property and a share of  production,  subject to all  royalties,  overriding
royalties and other  burdens and to all costs of  exploration,  development  and
operations and all risks in connection therewith.



                                       37

<PAGE>

                          INDEPENDENT AUDITOR'S REPORT



Board of Directors
Cotton Valley Resources Corporation
(Formerly Cotton Valley Energy Limited)
Dallas, Texas


We have  audited  the  consolidated  balance  sheet of Cotton  Valley  Resources
Corporation  (formerly  Cotton  Valley  Energy  Limited)  (a  development  stage
company) as of June 30, 1996,  and the  consolidated  statements of  operations,
stockholders' equity and cash flows for the year ended June 30, 1996, the period
from February 15, 1995 (date of  incorporation)  to June 30, 1995 and the period
from  February 15, 1995 to June 30, 1996.  These  financial  statements  are the
responsibility of the Company's management.  Our responsibility is to express an
opinion on these financial statements based on our audits.

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

In our opinion, the consolidated  financial statements referred to above present
fairly, in all material  respects,  the financial  position of the Company as of
June 30,  1996,  and the results of its  operations  and cash flows for the year
ended June 30, 1996,  the period from February 15, 1995 to June 30, 1995 and the
period from  February  15, 1995 to June 30, 1996 in  accordance  with  generally
accepted accounting principles.

The  accompanying  financial  statements  have been  prepared  assuming that the
Company  will  continue  as a  going  concern.  As  discussed  in  Note 2 to the
financial  statements,  the Company is in the  development  stage and has had no
significant  revenues from operations,  which raises substantial doubt about its
ability to continue as a going  concern.  Management's  plans in regard to these
matters are  described in Note 2. The  financial  statements  do not include any
adjustments that might result from the outcome of this uncertainty.



HEIN + ASSOCIATES LLP

Dallas, Texas
November 1, 1996





<PAGE>



                       COTTON VALLEY RESOURCES CORPORATION
                          (a development stage company)

                           CONSOLIDATED BALANCE SHEET
                          (Expressed in U. S. Dollars)
                                                                   June 30, 1996


                                     ASSETS
                                     ------

CURRENT ASSET - Cash ............................................    $   803,070

PROVED OIL AND GAS PROPERTIES  (full cost method) ...............     11,140,724

OFFICE EQUIPMENT, net of accumulated depreciation of $1,684 .....         35,536
                                                                     -----------

            Total Assets ........................................    $11,979,330
                                                                 ===============


                      LIABILITIES AND STOCKHOLDERS' EQUITY
                      ------------------------------------
<TABLE>
<S>                                                                             <C>
CURRENT LIABILITY -  Accounts payable ........................................   $    516,689

LONG-TERM DEBT ...............................................................        586,049

ADVANCES FROM RELATED PARTIES ................................................        171,709

DEFERRED INCOME TAXES ........................................................      1,740,000

STOCKHOLDERS' EQUITY:
   Preferred stock, no par value, authorized-unlimited, issued - none ........           --
   Common stock, no par value, authorized-unlimited, issued - 9,191,596 shares      9,443,160
   Deficit accumulated in development stage ..................................       (478,277)
                                                                                 ------------
            Total Stockholders' Equity .......................................      8,964,883

            Total Liabilities and Stockholders' Equity .......................   $ 11,979,330
                                                                                 ============
</TABLE>













              See accompanying notes to these financial statements

                                       F-2


<PAGE>



                       COTTON VALLEY RESOURCES CORPORATION
                          (a development stage company)


                      CONSOLIDATED STATEMENTS OF OPERATIONS
                          (Expressed in U. S. Dollars)



                                              PERIOD FROM      PERIOD FROM
                                              FEBRUARY 15,     FEBRUARY 15,
                                YEAR ENDED       1995 TO         1995 TO
                               JUNE 30, 1996  JUNE 30, 1995    JUNE 30, 1996
                               ------------   -------------    -------------

REVENUE - Interest income ...   $     5,386    $      --      $     5,386

EXPENSES:
   General and administrative       529,776         74,917        604,693
   Interest .................       138,970           --          138,970
                                -----------    -----------    -----------
          Total Expenses ....       668,746         74,917        743,663
                                -----------    -----------    -----------

LOSS BEFORE INCOME TAXES ....      (663,360)       (74,917)      (738,277)

INCOME TAX BENEFIT ..........       235,000         25,000        260,000
                                -----------    -----------    -----------

NET LOSS ....................   $  (428,360)   $   (49,917)   $  (478,277)
                                ===========    ===========    ===========

NET LOSS PER SHARE ..........   $     (0.05)   $     (0.01)
                                ===========    ===========

WEIGHTED AVERAGE SHARES .....     9,186,000      8,438,000
                                ===========    ===========




















              See accompanying notes to these financial statements

                                       F-3


<PAGE>





                       COTTON VALLEY RESOURCES CORPORATION
                          (a development stage company)

            CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
             FOR THE PERIOD FROM FEBRUARY 15, 1995 TO JUNE 30, 1996
                          (Expressed in U. S. Dollars)
<TABLE>
<S>                                                       <C>       <C>         <C>         <C>         <C>             <C>

                                                                                                             DEFICIT
                                                                                                          ACCUMULATED
                                                                COMMON STOCK          SPECIAL SHARES     IN DEVELOPMENT
                                                            SHARES      AMOUNT     SHARES       AMOUNT       STAGE           TOTAL
                                                            ------      ------     --------     ------       ------         -------
Issued upon incorporation to officers  ($.003 per share)    560,001      $1,401   2,100,000      $   8        $  --         $ 1,409
Issued March 10, 1995 for the potential acquisition of
   subsequently abandoned oil and gas properties
   (621,600 shares issued and 310,800 shares canceled
    - $.003 per share) .................................    310,800         777        --           --           --             777
Issued March 10, 1995 for the acquisition of oil and gas
   properties ($1.82 per share) ........................  3,875,957   7,072,914        --           --           --       7,072,914
Issued June 1, 1995 for cash ($1.00 per share) .........     10,000      10,000        --           --           --          10,000
Net loss ...............................................       --          --          --           --        (49,917)      (49,917)
                                                                                             -----------  -----------   -----------
BALANCES,  June 30, 1995 ...............................  4,756,758   7,085,092   2,100,000            8      (49,917)    7,035,183

Issued July - December 1995 in connection with  notes
   payable ($1.49 per  share) ..........................    107,258     160,008        --           --           --         160,008
Repayment and conversion to equity of notes payable,
   net of amortized discount ...........................       --       (72,000)       --           --           --         (72,000)
Issued December 29, 1995 to officers upon conversion
   of special shares ($.04 per share) ..................  1,440,000       5,840  (2,100,000)          (8)        --           5,832
Issued December 29, 1995 as advance for stock offering
   costs ($.04 per share) ..............................    340,000      12,409        --           --           --          12,409
Issued December 29, 1995 to officers for services ($.04
   per share) ..........................................    300,000      10,950        --           --           --          10,950
Sale of shares for cash during April - June 1996 ($1.64
   per share) ..........................................  1,272,500   2,089,872        --           --           --       2,089,872
Issued June 14, 1996 upon conversion of debentures
   ($1.48 per share) ...................................    288,529     426,474        --           --           --         426,474
Issued June 14, 1996 to former Arjon shareholders
   ($.21 per share) ....................................    686,551     146,300        --           --           --         146,300
Share issuance costs ...................................       --      (421,785)       --           --           --        (421,785)
Net loss ...............................................       --          --          --           --       (428,360)     (428,360)
                                                                                             -----------  -----------   -----------
BALANCES,  June 30, 1996 ...............................  9,191,596 $ 9,443,160        --    $      --    $  (478,277)  $ 8,964,883
                                                        =========== =========== ===========  ===========  ===========   ===========
</TABLE>

              See accompanying notes to these financial statements
                                       F-4


<PAGE>




                       COTTON VALLEY RESOURCES CORPORATION
                          (a development stage company)

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                          (Expressed in U. S. Dollars)
<TABLE>
<S>                                                              <C>            <C>            <C>

                                                                                  PERIOD FROM    PERIOD FROM
                                                                                 FEBRUARY 15,   FEBRUARY 15,
                                                                    YEAR ENDED      1995 TO        1995 TO
                                                                  JUNE 30, 1996  JUNE 30, 1995  JUNE 30, 1996
                                                                  -------------  -------------  -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
   Net loss ....................................................   $  (428,360)   $   (49,917)   $  (478,277)
   Adjustments to reconcile net loss to net cash used by
     operating activities:
         Deferred income tax benefit ...........................      (235,000)       (25,000)      (260,000)
         Amortization of debt discount .........................        88,000           --           88,000
         Depreciation ..........................................         1,683           --            1,683
         Common stock issued for services ......................        10,950          2,181         13,131
         Change in accounts payable ............................       286,689           --          286,689
         Other .................................................         5,843           --            5,843
                                                                   -----------    -----------    -----------
              Net cash used by operating activities ............      (270,195)       (72,736)      (342,931)

 CASH FLOWS FROM FINANCING ACTIVITIES:
   Advances from related parties ...............................       107,974         63,736        171,710
   Sale of common stock ........................................     2,089,872         10,000      2,099,872
   Issuance of convertible debentures ..........................       426,474           --          426,474
   Issuance of note payable subsequently converted into
     convertible debentures ....................................       146,300           --          146,300
   Costs related to sale of stock and debentures ...............      (409,376)          --         (409,376)
   Issuance of note payable ....................................       250,000           --          250,000
   Repayment of note payable ...................................      (250,000)          --         (250,000)
                                                                   -----------    -----------    -----------
              Net cash provided by financing activities ........     2,361,244         73,736      2,434,980

CASH FLOWS FROM INVESTING ACTIVITIES:
   Additions to oil and gas properties .........................      (751,759)          --         (751,759)
   Payment of liability related to oil and gas property ........      (500,000)          --         (500,000)
   Acquisition of office equipment .............................       (37,220)          --          (37,220)
                                                                   -----------    -----------    -----------
             Net cash used by investing activities .............    (1,288,979)          --       (1,288,979)
                                                                   -----------    -----------    -----------

INCREASE IN CASH ...............................................       802,070          1,000        803,070

CASH - beginning of period .....................................         1,000           --             --
                                                                                  -----------    -----------

CASH - end of year period ......................................   $   803,070    $     1,000    $   803,070
                                                                   -----------    -----------    -----------

SUPPLEMENTAL INFORMATION
   Cash paid for interest ......................................   $    37,010    $      --      $    37,010
   Liabilities incurred in acquisition of oil and gas properties          --        1,086,049      1,086,049
   Conversion of debentures to common stock ....................       426,474           --          426,474
   Retirement of debenture upon merger with Arjon ..............       146,300           --          146,300
   Oil and gas property option acquired with payable ...........          --          230,000        230,000
   Oil and gas properties acquired with common stock ...........          --        7,072,914      7,072,914
   Issuance of common stock for stock offering costs ...........        12,409           --           12,409
</TABLE>

              See accompanying notes to these financial statements
                                       F-5


<PAGE>



                       COTTON VALLEY RESOURCES CORPORATION
                          (a development stage company)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           (Expressed in U.S. Dollars)

1.       NATURE OF OPERATIONS

         The Company was incorporated under the laws of Ontario as Cotton Valley
         Energy  Limited  (CVEL) on February  15,  1995.  It acquired all of the
         shares  of  Cotton  Valley   Energy   Corporation   (CVEC),   a  Nevada
         corporation,  on June  30,  1995 in a  one-for-one  share  and  warrant
         exchange.  CVEC was also  incorporated  in February  1995.  CVEL had no
         substantive activity, so the acquisition of CVEC was accounted for as a
         recapitalization   of  CVEL  with  the  net   assets  of  CVEC.   These
         consolidated  financial statements have been prepared as if the Company
         had acquired CVEC at the Company's inception.

         The Company also owns 100% of the outstanding shares of CV Trading Co.,
         a Nevada  corporation  that was formed to conduct  oil and gas  trading
         activities,  and Cotton Valley Operating  Company,  a Texas corporation
         formed  to  operate  oil and gas  wells.  Neither  of the  subsidiaries
         commenced operations prior to July 1, 1996.
         Intercompany accounts and transactions are eliminated in consolidation.

         On June 14,  1996,  the  Company  merged with Arjon  Enterprises,  Inc.
         (Arjon),  an Ontario  corporation and reporting issuer in Ontario. As a
         result of that merger the  company's  name was changed to Cotton Valley
         Resources  Corporation.  Arjon had no business  activities and its only
         asset  consisted  of  convertible  debentures  of  the  Company  in the
         principal  amount of  $146,300.  The Company  accounted  for the merger
         using the purchase method.  Former Arjon shareholders  received 686,551
         common shares (representing  approximately 7.5% of the then outstanding
         common shares) of the Company.

         The  Company  is in the  development  stage  and had no  revenues  from
         operations  through  June 30, 1996.  The  Company's  planned  principal
         business  activity  is to  acquire,  explore,  and  develop oil and gas
         properties.   The  Company   also   intends  to  develop   natural  gas
         transportation and marketing projects.

         The recoverability of amounts capitalized for oil and gas properties is
         dependent upon the identification of economically recoverable reserves,
         together  with  obtaining  the  necessary  financing  to  exploit  such
         reserves and the achievement of profitable operations.

2.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Oil and Gas Properties

         The Company follows the full-cost  method of accounting for oil and gas
         properties.   Accordingly,   all  costs  associated  with  acquisition,
         exploration and development of oil and gas reserves, including directly
         related overhead costs, are capitalized into a "full-cost pool."

         All  capitalized  costs  of  oil  and  gas  properties,  including  the
         estimated future costs to develop proved reserves, are amortized on the
         unit-of-production  method using  estimates of proved  reserves.  Costs
         directly  associated  with the  acquisition  and evaluation of unproved
         properties  are excluded from the  amortization  base until the related
         properties  are  evaluated.   Such  unproved  properties  are  assessed
         periodically  and a provision  for  impairment is made to the full-cost
         amortization base when appropriate. Sales of oil and gas properties are
         credited to the full-cost pool unless the sale would have a significant
         effect  on  the  amortization  rate.  Abandonments  of  properties  are
         accounted  for  as  adjustments  to  capitalized  costs  with  no  loss
         recognized.
                                       F-6


<PAGE>



                       COTTON VALLEY RESOURCES CORPORATION
                          (a development stage company)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           (Expressed in U.S. Dollars)

         The net capitalized costs are subject to a "ceiling test," which limits
         such costs to the aggregate of the estimated preset value of future net
         revenues  from  proved  reserves  discounted  at ten  percent  based on
         current economic and operating conditions.

Office Equipment

         Office equipment is recorded at cost and depreciated on a straight-line
         basis over the estimated  useful lives of the assets,  which range from
         three to five years.

Foreign Currency Translation

          The company's assets and principal  activities are in the U.S. and its
          functional  currency is the U.S. dollar.  The effects of exchange rate
          changes  on  transactions  denominated  in  Canadian  dollars or other
          currencies are charged to operations. Foreign exchange gains or losses
          were insignificant for all periods presented.

Income Taxes

         The Company  applies  Statement of  Accounting  Standards No. 109 (SFAS
         109).  As required by SFAS 109,  income taxes  provided are for the tax
         effects  of  transactions  reported  in the  financial  statements  and
         consist of taxes currently due, if any, plus net deferred taxes related
         primarily to  differences  between the basis of assets and  liabilities
         for  financial  and  income  tax  reporting.  Deferred  tax  assets and
         liabilities  represent  the  future tax  return  consequences  of those
         differences, which will either be taxable or deductible when the assets
         and liabilities  are recovered or settled.  Deferred tax assets include
         recognition  of operating  losses that are  available to offset  future
         taxable  income and tax credits  that are  available  to offset  future
         income taxes.  Valuation allowances are recognized to limit recognition
         of  deferred  tax assets  where  appropriate.  Such  allowances  may be
         reversed  when  circumstances  provide  evidence  that the deferred tax
         assets will more likely than not be realized.

Deferred Site Restoration

         A  provision  is  established  for  estimated   future  costs  of  site
         restoration of oil and gas production interests,  including the removal
         of  production  facilities  at the end of their useful life.  Costs are
         based on management's estimates of the anticipated method and extent of
         site restoration.  The annual charge is determined on the same basis as
         the depletion and amortization of the underlying asset.

Net Loss Per Share

         Per share information is based on the weighted average number of common
         stock and common stock equivalent  shares  outstanding.  As required by
         the Securities and Exchange  Commission  rules, all warrants,  options,
         and shares issued within a year of a public  offering are assumed to be
         outstanding  for each year presented for purposes of the loss per share
         calculation.  Stock  options and warrants  were  antidilutive  for both
         periods and  therefore did not enter into the  calculation  of net loss
         per share.


                                       F-7


<PAGE>



                       COTTON VALLEY RESOURCES CORPORATION
                          (a development stage company)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           (Expressed in U.S. Dollars)


Cash Flow Statement

         For purposes of the statement of cash flows, the Company  considers all
         highly liquid debt instruments  purchased with an original  maturity of
         three months or less to be cash equivalents.

Stock-Based Compensation

         In October  1995,  the  Financial  Accounting  Standards  Board  issued
         Statement of Financial  Accounting  Standards No. 123 - Accounting  for
         Stock-Based  Compensation  (SFAS 123),  which is effective  for periods
         beginning  after  December 15, 1995.  SFAS 123 requires that  companies
         recognize  compensation expense for grants of stock, stock options, and
         other  equity  instruments  based on fair  value.  If the grants are to
         employees, companies may elect to disclose only the pro forma effect of
         such  grants  on net  income  and  earnings  per  share in the notes to
         financial  statements.  The Company  expects to adopt the provisions of
         SFAS  123  in  its  1997  fiscal  year  and  to  elect  the  disclosure
         alternative for employee grants.

Continuation as a Going Concern

         The accompanying  financial statements have been prepared assuming that
         the Company will continue as a going concern.  However,  the Company is
         in the  development  stage  and has had no  significant  revenues  from
         operations,  which  raises  substantial  doubt  about  its  ability  to
         continue as a going concern. Management is seeking additional financing
         as described  in Note 9. The  financial  statements  do not include any
         adjustments that might result from the outcome of this uncertainty.

Use of Estimates

         The preparation of the Company's  consolidated  financial statements in
         conformity with generally accepted  accounting  principles requires the
         Company to make  estimates  and  assumptions  that  affect the  amounts
         reported in these financial  statements and accompanying  notes. Actual
         results could differ from those estimates.  Significant assumptions are
         required  in the  valuation  of proved oil and gas  reserves,  which as
         described  above may affect the amount at which oil and gas  properties
         are recorded.  It is at least reasonably possible those estimates could
         be revised in the near term and those revisions could be material.

3.       OIL AND GAS PROPERTIES

Cheneyboro Field

         The Company acquired approximately 5,000 acres of oil and gas leases in
         the Cheneyboro Field of Navarro County,  Texas during fiscal years 1995
         and 1996. The Company issued 3,252,533  common shares,  granted 406,567
         Class A  warrants  (see  Note  5),  and  paid  $500,000  in cash  and a
         promissory note of $586,049 as consideration. The stock was recorded at
         an estimated value of $5,935,281.  During the year ended June 30, 1996,
         the  Company  capitalized  management  fees and  salaries  of  $195,476
         directly  related to the  acquisition  and proposed  development of the
         property, and incurred other development costs of $127,278.

                                       F-8


<PAGE>



                       COTTON VALLEY RESOURCES CORPORATION
                          (a development stage company)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           (Expressed in U.S. Dollars)

Movico Field, Mobile County, Alabama

         The  Company  acquired an option to acquire a  one-quarter  interest in
         1,280 acres of oil and gas leases in the Movico Field of Mobile County,
         Alabama in fiscal year 1995.  The Company issued 623,424 common shares,
         granted  77,928  Class A  warrants  (see  Note 5),  and  agreed  to pay
         $230,000  as  consideration.  The  stock  was  recorded  at a value  of
         $1,137,635. The interest in the leases is to be assigned to the Company
         upon  payment of the  $230,000  which  amount is  included  in accounts
         payable in the accompanying balance sheet.

Sword Unit, Offshore Santa Barbara, California

         The  Company has entered  into option  agreements  to acquire a working
         interest in the Sword Unit,  Offshore  Santa Barbara,  California.  The
         Company has paid  $400,000 as of June 30, 1996.  To complete the option
         and acquire the working  interest,  the Company must pay  $8,000,000 in
         cash and $4,000,000 in marketable  securities (which may consist of the
         Company's  common shares) on closing  sometime in 1997, and participate
         in a $4,000,000  letter of credit to fund  development.  The option has
         been  recorded  at  cost of  $400,000,  plus  the  Company's  share  of
         environmental studies of $29,005, for a total of $429,005.

4.       LONG-TERM DEBT

         The Company has  promissory  notes  payable  totaling  $586,049 for the
         unpaid  purchase price of the  Cheneyboro  oil and gas properties  (see
         Note 3). The notes are  collateralized  by the  properties  and are due
         July 17, 1997.
         Interest is payable quarterly at 12%.

5.       STOCKHOLDERS' EQUITY

         The Company has an  unlimited  number of preferred  shares  authorized,
         which may be issued in series and include  such rights and  preferences
         as authorized by the board of directors.  No shares were outstanding as
         of June 30, 1996.

         Shortly  after  incorporation,  the Company  issued  2,100,000  special
         shares for total cash  consideration  of $2.00 to officers,  which were
         subsequently  exchanged for 1,440,000 common shares of the Company. The
         special  shares were issued in exchange for  preferred  stock which had
         been issued upon incorporation of CVEC and subsequently cancelled.

         In connection with the acquisition of oil and gas properties, including
         a property  abandoned  following its  acquisition,  the Company granted
         518,345  Class A warrants.  In  connection  with the  issuance of notes
         payable and  debentures,  the Company granted 112,390 Class A warrants.
         The Company also issued 636,250 Class A warrants in conjunction  with a
         private placement of common shares.  Each Class A warrant is a right to
         purchase one common share for $2.00 until December 31, 1997.

         Effective  January  31,  1996,  each  2.5  outstanding  shares  of  the
         Company's  common  stock  were  consolidated  into  one  share  and the
         previously   authorized   unlimited   number  of  special  shares  were
         cancelled. The financial statements reflect the consolidation of common
         shares as if it occurred on inception of the Company.

                                       F-9


<PAGE>



                       COTTON VALLEY RESOURCES CORPORATION
                          (a development stage company)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           (Expressed in U.S. Dollars)

         In  December  1995,  the  Company  issued a total of 300,000  shares of
         common stock to two officers in exchange for services performed shortly
         after  incorporation  of the  Company.  The  shares  were  recorded  at
         $10,950, which represented the esimated value of the services.

         During the year  ended June 30,  1996,  the  Company  granted to senior
         employees  options that enable the employees to purchase 800,000 common
         shares of the  Company  for $1.83 per share  until  July 1,  2000.  The
         Company has granted to the placement agent of the debenture and private
         placement  offerings  three-year  options to  purchase up to 10% of the
         common shares issued upon conversion of the debentures at a price equal
         to the conversion  price.  As a result,  the agent has the right to buy
         37,741 common  shares at $1.48 per share until August 31, 1998;  73,739
         common shares at $2.00 per share until  December 31, 1997;  and 125,000
         common shares at $1.64 per share until April 30, 1998.

         In  conjunction  with the merger with Arjon,  a total of 431,755 common
         shares are issuable to former Arjon  shareholders for Arjon warrants in
         existence  prior to the merger.  These  shares are issuable as follows:
         333,334  common shares until  December 31, 1998 at an exercise price of
         $0.48 per share and 98,421 common shares at an exercise  price of $1.64
         per share until December 31, 1997.

6.       RELATED PARTY TRANSACTIONS

         During  the years  ended  June 30,  1996 and  1995,  the  Company  paid
         management  fees to two  corporations  controlled by senior officers of
         the  Company,  aggregating  $160,000  and  $50,000,   respectively.  In
         addition,  the Company has received  advances  from these two companies
         which total  $171,709 at June 30, 1996.  The advances are unsecured and
         without interest and are payable after June 30, 1997.

7.       INCOME TAXES

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

<TABLE>
<S>                                                         <C>           <C>
                                                                       JUNE 30,
                                                                1996          1995
                                                              --------       -------
Deferred tax liabilities:
   Difference in bases of oil and gas properties acquired   $(2,000,000)   $(2,000,000)
   Costs capitalized for books and deducted for tax .....       (65,000)          --
                                                            -----------    -----------
           Total deferred tax liaibliites ...............    (2,065,000)    (2,000,000)
                                                            -----------    -----------
Deferred tax asset (net operating loss carryforwards) ...       325,000         25,000
                                                            -----------    -----------
           Net deferred tax liability ...................   $(1,740,000)   $(1,975,000)
                                                            ===========    ===========
</TABLE>

         At June  30,  1996,  the  Company  has  available  net  operating  loss
         carryforwards  of  approximately  $930,000  to  reduce  future  taxable
         income. These carryforwards expire from 2002 to 2003.

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

         At June 30, 1996, the Company had deposits in one financial institution
         that were approximately $700,000 in excess of FDIC insurance limits.

                                      F-10


<PAGE>



                       COTTON VALLEY RESOURCES CORPORATION
                          (a development stage company)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           (Expressed in U.S. Dollars)

         The Company's financial instruments at June 30, 1996 are cash, accounts
         payable,  long-term  debt,  advances  from  related  parties  and stock
         warrants and  options.  Management  believes the fair market  values of
         cash  and  accounts  payable  approximate  carrying  values  due to the
         short-term  nature of these  instruments.  Management has estimated the
         fair values of long-term  debt and advances from related  parties based
         on expected  discounted cash flows and believes the fair values are not
         materially different than carrying values.  Management does not believe
         it is  practicable  to estimate the fair values of options and warrants
         due to the  relatively  limited  trading  activity  that  occurs in the
         Company's stock.

9.       SUBSEQUENT EVENTS

         The Company and an underwriter have an engagement letter for a proposed
         firm  commitment  underwritten  public offering of  approximately  $7.5
         million of securities  of the Company.  The  underwriter  would receive
         compensation of 10% of the public offering price plus an approximate 3%
         non-accountable  expense  allowance and a Securities  Purchase Warrant,
         equal to 10% of the number of securities purchased by the underwriters.
         The engagement  letter also provided the underwriter  with an option to
         purchase up to an additional 10% of the aggregate  number of securities
         offered in  connection  with the  offering.  The  engagement  letter is
         subject  to a  comprehensive  review  of  the  Company's  business  and
         prospects by the underwriter.

         The Company issued a private  placement  memorandum on July 1, 1996 for
         Units of Working  Interest to  participate in the drilling of a well on
         the Cheneyboro property.  In this offering the Company is attempting to
         raise approximately $425,000 to $850,000.

10.      SUPPLEMENTAL INFORMATION (UNAUDITED)

         Costs incurred by the Company with respect to its oil and gas producing
         activities were set forth below. No significant  costs were incurred in
         exploration activities or in the acquisition of unproved properties.


                                             FOR THE PERIODS ENDED
                                                     JUNE 30,
                                             1996                1995
                                            ------              ------
Proved property acquisition cost          $    524,005       $ 8,388,963
Development costs                              227,754              -
                                          ------------         ---------
              Total                       $    751,759       $ 8,388,963
                                          ============       ===========

11.      OIL AND GAS RESERVE INFORMATION (UNAUDITED)

         Proved oil and gas reserves are the estimated  quantities of crude oil,
         condensate  and  natural  gas which  geological  and  engineering  data
         demonstrate with reasonable certainty to be recoverable in future years
         from known reservoirs under existing economic and operating conditions.
         Proved developed oil and gas reserves are reserves that can be expected
         to be recovered  through  existing  wells with  existing  equipment and
         operating  methods.  The  following  estimated  net interests in proved
         reserves are based upon subjective engineering


                                      F-11



<PAGE>



                       COTTON VALLEY RESOURCES CORPORATION
                          (a development stage company)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           (Expressed in U.S. dollars)


         judgments  and may be  affected  by the  limitations  inherent  in such
         estimation.  The process of estimating reserves is subject to continual
         revision as  additional  information  becomes  available as a result of
         drilling,  testing, reservoir studies and production history. There can
         be no assurance that such  estimates will not be materially  revised in
         subsequent periods.

         The Company  emphasizes  that reserve  estimates of new  discoveries or
         undeveloped  properties  are more imprecise than those of producing oil
         and gas  properties.  The  Company's  reserves are  substantially  from
         undeveloped  properties.  Accordingly,  these estimates are expected to
         change  materially  as  future  information   becomes  available.   The
         Company's reserves were estimated by independent  petroleum  engineers.
         All of the Company's  reserves are located  onshore in the  continental
         United States.

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



                                            OIL AND          NATURAL
                                           CONDENSATE          GAS
                                             (BBLS)           (MCF)
                                           --------          --------
Balance at February 15, 1995                     -                  -
    Purchase of minerals in place          4,776,000         13,455,000
                                          -----------       -----------
Balance at June 30, 1995                   4,776,000         13,455,000
                                          -----------       -----------
Balance at June 30, 1996                   4,776,000 (1)     13,455,000 (1)
                                           ==========      ============

Proved developed reserves at June 30:
     1995                                       -                  -
                                         ============      ============
     1996                                     93,000            280,000
                                         ============      ============


         (1)      Proved  reserve  quantities  of  482,000  barrels  of oil  and
                  573,000 mcf of natural gas are subject to an option agreement.
                  The property interests had not been assigned to the Company as
                  of June 30, 1996.


         The  standardized  measure of discounted  future net cash flows at June
         30, 1996 and 1995  relating to proved oil and gas reserves is set forth
         below.  The assumptions  used to compute the  standardized  measure are
         those  prescribed by the Financial  Accounting  Standards  Board and as
         such, do not necessarily  reflect the Company's  expectations of actual
         revenues to be derived from those reserves nor their present worth. The
         limitations   inherent  in  the  reserve  quantity  estimation  process
         described  above are equally  applicable  to the  standardized  measure
         computations  since  these  estimates  are the basis for the  valuation
         process.





                                      F-12


<PAGE>



                       COTTON VALLEY RESOURCES CORPORATION
                          (a development stage company)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           (Expressed in U.S. Dollars)

         Standardized  measure of discounted  future net cash flows  relating to
proved reserves:


                                                              AT JUNE 30,
                                                        1996              1995
                                                   -----------------------------
Future cash inflows ............................ $ 129,867,000    $ 108,408,000
Future production costs ........................   (16,644,000)     (14,761,000)
Future development costs .......................   (13,560,000)     (13,475,000)
                                                  -------------    -------------
Future net cash flows, before income tax .......    99,663,000       80,172,000
Future income tax expenses .....................   (33,060,000)     (27,372,000)
                                                 -------------    -------------
Future net cash flows ..........................    66,603,000       52,800,000
10% discount to reflect timing of net cash flows   (21,653,000)     (19,800,000)
                                                 -------------    -------------
Standardized measure of discounted future net
   cash flows (1)............................... $  44,950,000    $  33,000,000
                                                 =============    =============

         (1)      Approximately   $4,000,000  of  the  standardized  measure  of
                  discounted   future  net  cash  flows  at  June  30,  1996  is
                  attributable  to an option  agreement.  The  related  property
                  interests  had not been assigned to the Company as of June 30,
                  1996.

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


                                                        FOR THE PERIOD ENDED
                                                               JUNE 30,
                                                       1996             1995
                                                  ------------------------------
Standardized measure, beginning of period ........ $ 33,000,000    $       --
Net change in sales price, net of production costs   12,450,000            --
Accretion of discount ............................    3,300,000            --
Purchases of reserves in-place ...................         --        50,108,000
Net changes in income taxes ......................   (3,800,000)    (17,108,000)
                                                   ------------    ------------
Standardized measure, end of period .............. $ 44,950,000    $ 33,000,000
                                                   ============    ============















                                      F-13


<PAGE>

                       COTTON VALLEY RESOURCES CORPORATION
                          (a development stage company)

                      CONSOLIDATED CONDENSED BALANCE SHEET
                           (Expressed in U.S. Dollars)
                               September 30, 1996
                                   (Unaudited)

                                     ASSETS

CURRENT ASSET - Cash ..........................................    $    222,210

PROVED OIL AND GAS PROPERTIES (full cost method) ..............      11,322,923

OFFICE EQUIPMENT, net of accumulated depreciation of $4,470 ...          36,012

OTHER ASSETS ..................................................          35,000

         Total Assets .........................................    $ 11,616,145
                                                                   ============


                      LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITY - Accounts payable ..........................    $    443,168

LONG-TERM DEBT ................................................         586,049

ADVANCES FROM RELATED PARTIES .................................         171,709

DEFERRED INCOME TAXES .........................................       1,645,000

STOCKHOLDERS' EQUITY:

  Preferred stock, no par value, authorized-unlimited,
  issued - none Common Stock, no par value,
  authorized- unlimited, issued - 9,204,318 ...................       9,454,382
  Deficit accumulated in development stage ....................        (684,163)
                                                                   ------------
         Total Stockholders' Equity ...........................       8,770,219

         Total Liabilities and Stockholders' Equity ...........    $ 11,616,145
                                                                   ============

                                      F-14
<PAGE>



               See accompanying note to these financial statements


                       COTTON VALLEY RESOURCES CORPORATION
                          (a development stage company)

                      CONSOLIDATED STATEMENTS OF OPERATIONS
                           (Expressed in U.S. Dollars)
                                   (Unaudited)

                                       Period From   Period From     Period From
                                         July 1,       July 1,       February 15
                                         1996 To       1995 To         1995 To
                                      September 30,  September 30, September 30,
                                          1996           1995           1996
                                       ----------    -----------    -----------
REVENUE - Oil and gas sales .......   $    19,484    $      --      $    19,484

EXPENSES:
  General and administrative ......       302,788         33,379        907,481
  Interest ........................        17,581          6,250        151,166
                                          --------   -----------    -----------

         Total Expenses ...........       320,369         39,629      1,058,647
                                         ---------   -----------    -----------


LOSS BEFORE INCOME TAXES ..........      (300,885)       (39,629)    (1,039,163)

INCOME TAX BENEFIT ................        95,000         13,870        355,000
                                      -----------    -----------    -----------

NET LOSS ..........................   $  (205,885)   $   (25,759)   $  (684,163)
                                      ===========    ===========    ===========


NET LOSS PER SHARE ................   $     (0.02)   $     (0.01)
                                      ===========    ===========

WEIGHTED AVERAGE SHARES ...........     9,186,000      4,757,000
                                      ===========    ===========



























               See accompanying note to these financial statements


                                      F-15


<PAGE>


                       COTTON VALLEY RESOURCES CORPORATION
                          (a development stage company)

                 CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
                           (Expressed in U.S. Dollars)
                                   (Unaudited)
<TABLE>
<S>                                                 <C>            <C>            <C> 
                                                     Period From     Period From    Period From
                                                       July 1,         July 1,      February 15,
                                                       1996 To         1995 To         1995 To
                                                    September 30,    September 30,  June 30, 1996
                                                        1996            1995
                                                    -------------    -------------  -------------

CASH FLOWS FROM OPERATING
 ACTIVITES:
         Net loss ................................   $  (205,885)   $   (25,759)   $  (684,163)
         Adjustments to reconcile net
         loss to net cash used by
         operating activities:
            Deferred income tax benefit ..........       (95,000)       (13,870)      (355,000)
            Amortization of debt discount ........          --             --           88,000
            Depreciation .........................         2,786           --            4,469
            Common stock issued for services .....         7,207           --           20,338
            Change in accounts payable ...........       (73,521)          --          213,168
            Other ................................        (3,263)          --            2,580
                                                     -----------    -----------    -----------

            Net cash used by operating activities       (367,676)       (39,629)      (710,608)

CASH FLOWS FROM FINANCING
ACTIVITIES:
         Advances from related parties ...........          --           60,000        171,711
         Sale of common stock ....................         4,015           --        2,103,887
         Issuance of convertible debentures ......          --          355,650        426,474
         Issuance of note payable subsequently
         converted into convertible debentures ...          --          100,000        146,300
         Costs related to sale of stock
         and debentures ..........................          --             --         (409,376)
         Issuance of note payable ................          --             --          250,000
  Repayment of note payable ......................          --             --         (250,000)
                                                     -----------    -----------    -----------
         Net cash provided by financing activities         4,015        515,650      2,438,996

CASH FLOWS FROM INVESTING
ACTIVITIES:
         Acquisition of oil and gas properties ...      (182,199)      (477,021)    (1,433,958)
         Purchase of other assets ................       (35,000)          --          (72,220)
                                                                    -----------    -----------

         Net cash used by investing activities ...      (217,199)      (477,021)    (1,506,178)
                                                                    -----------    -----------


INCREASE (DECREASE) IN CASH ......................      (580,860)        (1,000)       222,210

CASH - beginning of period .......................       803,070          1,000           --

CASH - end of year period ........................   $   222,210          $ nil    $   222,210
                                                     ===========    ===========    ===========
                                      F-16
<PAGE>

SUPPLEMENTAL INFORMATION
         Cash paid for interest ..................   $    37,010    $      --      $    37,010
         Debt incurred in acquisition
         of oil and gas properties ...............       586,049           --          586,049
         Conversion of debentures to
         common stock ............................       426,474           --          426,474
         Retirement of debenture upon
         merger with Arjon .......................       146,300           --          146,300
         Oil and gas property option acquired
         with payable ............................          --          230,000        230,000
         Oil and gas properties acquired
         with common stock .......................          --        7,072,914      7,072,914
         Issuance of common stock for stock
         offering costs ..........................        12,409           --           12,409
</TABLE>
           

               See accompanying note to these financial statements

                                      F-17

              
<PAGE>

                       COTTON VALLEY RESOURCES CORPORATION
                          (a development stage company)

                     NOTE TO CONDENSED FINANCIAL STATEMENTS
                           (Expressed in U.S. Dollars)
                                   (Unaudited)

(1)          Nature of Business and Basis of Preparation and Presentation

          The Company's  primary  business focus is the acquisition of ownership
          interests in, and the production of oil and gas from, existing oil and
          gas fields that indicate a potential for increased  production through
          rehabilitation.

          The  consolidated  condensed  financial  statements  of Cotton  Valley
          Resources  Corporation and subsidiaries  (collectively  the "Company")
          included  herein have been  prepared by the  Company,  without  audit.
          Certain information and footnote  disclosures normally included in the
          financial  statements  prepared in accordance with generally  accepted
          accounting  principles  have  been  condensed  or  omitted,  since the
          Company  believes that the  disclosures  included are adequate to make
          the  information   presented  not   misleading.   In  the  opinion  of
          management,  the consolidated  condensed financial  statements include
          all adjustments  consisting of normal recurring  adjustments necessary
          to present fairly the financial position,  results of operations,  and
          cash  flows  as of the  dates  and for the  periods  presented.  These
          consolidated   condensed  financial   statements  should  be  read  in
          conjunction with the consolidated  financial  statements and the notes
          thereto  included in the  Registration  Statement on Form SB-2 for the
          fiscal year ended June 30, 1996.

          In October 1995, the Financial  Accounting Standards Board issued SFAS
          No. 123,  "Accounting for Stock-Based  Compensation," which sets forth
          accounting and disclosure  requirements  for stock-based  compensation
          arrangements.  The new  statement  encourages,  but does not  require,
          companies to measure stock-based  compensation cost using a fair-value
          method,   rather  that  the   intrinsic-value   method  prescribed  by
          Accounting Principles Board ("APB") Opinion No. 25. Companies choosing
          to   continue   to   measure   stock-based   compensation   using  the
          intrinsic-value  method must  disclose on a pro forma basis net income
          and net income per share  using the  fair-value  method.  Prior to the
          effective date of SFAS No. 123 in fiscal 1997, the Company will select
          the method under which it will measure stock-based compensation cost.

                                      F-18
<PAGE>


     No dealer,  salesperson,  or other person has been  authorized  to give any
information or to make any  representations  other than those  contained in this
prospectus and, if given or made, such information or  representations  must not
be relied upon as having been  authorized by Cotton Valley or the  Underwriters.
This prospectus  does not constitute an offer to sell or the  solicitation of an
offer  to buy any of the  securities  to which it  relates  in any  state to any
person to whom it is unlawful to make such offer or  solicitation in such state.
Neither the delivery of this prospectus nor any sale hereunder shall,  under any
circumstances,  create any  implication  that there has been no change in Cotton
Valley's affairs since the date hereof or that the information  contained herein
is correct as of any time subsequent to its date.

                           ---------------------------
                                 1,250,000 Units

                            COTTON VALLEY RESOURCES
                                   CORPORATION


                                 Consisting of
                 1,250,000 Shares of 8% Cumulative Convertible
                                 Preferred Stock


                                       and

                    1,250,000 Redeemable Warrants to Purchase
                                  Common Stock



                               P R O S P E C T U S



                         NATIONAL SECURITIES CORPORATION

<PAGE>

                  TABLE OF CONTENTS
                                                 Page
Prospectus Summary ................................
Risk Factors ......................................
Use of Proceeds ...................................
Capitalization ....................................
Dilution ..........................................
Dividend Policy ...................................                            
Management's Discussion and Analysis or
   Plan of Operation ..............................
Business and Properties ...........................
Management ........................................
Certain Relationships and Related Transactions ....
Principal Shareholders ............................
Description of Securities .........................
Securities Eligible for Future Sale ...............
Certain Income Tax Considerations .................
Underwriting ......................................
Limitations on Director Liability .................
Legal Matters .....................................
Experts ...........................................                            
Glossary ..........................................



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

      Until , 1997 (25 days  after  the date of this  prospectus),  all  dealers
effecting  transactions  in the  Units,  whether  or not  participating  in this
distribution,  may be required to deliver a  prospectus.  This is in addition to
the  obligation of dealers to deliver a prospectus  when acting as  Underwriters
and with respect to their unsold allotments or subscriptions.


                                                                   , 1997





<PAGE>



                                     PART II

                     INFORMATION NOT REQUIRED IN PROSPECTUS

Item 24.      Indemnification of Directors and Officers.

      Cotton Valley has no contract or arrangement that insures or indemnifies a
controlling  person,  director or officer of Cotton  Valley which affects his or
her  liability  in that  capacity.  Cotton  Valley's  bylaws  provide  for  such
indemnification, subject to applicable law.

      If  available  at  reasonable  cost,  Cotton  Valley  intends to  maintain
insurance  against any  liability  incurred by its  officers  and  directors  in
defense  of any  actions  to which  they are made  parties  by  reason  of their
positions as officers and directors.

Item 25.      Other Expenses of Issuance and Distribution.

      Expenses in  connection  with the public  offering of Securities by Cotton
Valley pursuant to this prospectus are as follows:


Securities and Exchange Commission Filing Fee                  $   4,307
American Stock Exchange Listing Fee                                    *
Accounting Fees and Expenses                                           *
Legal Fees and Expenses                                                *
Printing and Engraving                                                 *
Fees of Transfer Agent and Registrar                                   *
Listing, Blue Sky Fees and Expenses                                    *
Underwriter's Nonaccountable Expense Allowance                         *
Miscellaneous                                                          *
                                                         --------------
Total                                                    $             *
                                                         ==============
----------------------
         *Estimated

Item 26.      Recent Sales of Unregistered Securities.

     The following is a summary of  transactions by Cotton Valley since February
15, 1995 (date of incorporation)  involving securities which were not registered
under the  Securities  Act.  With regard to all of the  following  transactions,
which ocurred in the United  States,  Cotton Valley relied on the exemption from
registration under Section 4(2) of the Securities Act afforded on the basis that
such transactions do not involve any public offering. The transactions in Canada
took  place in  accordance  with  documents  filed with the  Ontario  Securities
Commission.  Management believes that Cotton Valley has complied in all material
respects with applicable Canadian securities regulation with respect to all such
transactions.

      a) Shares of Common Stock
<TABLE>
<S>              <C>                                                                    <C>           <C>


      Date                                 Transaction                                    Number          Consideration
      ----                                 -----------                                    ------          -------------
      02/95       To Eugene A. Soltero and James E. Hogue for                            1,840,001       $        1,401
                      pre-incorporation services
      03/95       To unaffiliated parties, for Cheneyboro Property                       3,252,533            5,935,279
      04/95       To various entities, for subsequently abandoned oil and
                      gas interests                                                        310,800                  777
      06/95       To two corporations, for Movico Property                                 623,424            1,137,635
      06/95       To an individual for cash                                                 10,000               10,000
      12/95       To Dalcun Investments Ltd. and Arjon Enterprises Inc. for
                      a $250,000 note and a $146,000 note, net                             107,258               88,008
</TABLE>


                                      II-1

<PAGE>


<TABLE>
<S>             <C>                                                                     <C>               <C>


      Date                                 Transaction                                     Number           Consideration
      ----                                 -----------                                    --------          -------------
      12/95       To Eugene A. Soltero in exchange for pre-incorporation                    80,000                2,920
                      services
                  To James E. Hogue, for pre-incorporation services                         80,000                2,920
                  To Peter Lucas, for post-incorporation services                          150,000                5,475
                  To C. Ron Burden, for post-incorporation services                        150,000                5,475
                  To Robert Harris, for services                                           100,000                3,650
                  To other individuals, for services                                       240,000                8,759
      04/96       To Royal Trust, for cash (1)                                           1,000,000            1,642,291
                  To Majendie Securities, Ltd., for cash (1)                                22,500               36,956
                  To Cramer & Cie, for cash (1)                                            150,000              246,375
                  To Tewson Ltd., for cash                                                 100,000              164,250
      06/96       To debenture holders, on conversion of debenture (2)                     288,259              426,474
                  To former Arjon shareholders on merger,                                  686,551              146,300
                      less commission and other costs (3)                                                     (421,785)
      07/96       To individuals, for services                                               4,388                7,207
                  To a former Arjon shareholder on exercise of warrant                       8,334                4,015
                                                                                         ---------           ----------

TOTAL ISSUED AND OUTSTANDING                                                             9,204,318           $9,443,160
                                                                                         =========           ==========
</TABLE>


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

(1)  Cotton  Valley sold in Canada  units,  consisting  of one Common  Share and
     one-half a Warrant to purchase a Common Share until  December 31, 1997,  at
     Cdn $2.75 ($2.00) per share, for Cdn $2.25 ($1.64) each.

(2)  Cotton Valley sold in Canada convertible debentures which were converted to
     shares of common  stock at the rate Cdn $2.02  ($1.48)  per share of common
     stock.

(3)  Costs  relate to the sale of units in  Canada,  the sale of  debentures  in
     Canada and the merger with Arjon.


      b) Reserved Shares

      In addition to the shares of common stock issued by Cotton Valley,  Cotton
Valley has reserved for issuance 2,856,886 shares of common stock pursuant to:

     (i)  1,266,985  Class A Warrants,  where each Class A Warrant  entitles the
          holder to  purchase  one share in the  common  stock of Cotton  Valley
          until  December 31,  1997,  at the price of Cdn $2.75  ($2.00).  These
          Class A Warrants were issued:

          (a)  636,250 in connection with a sale of Units in Canada;

          (b)  112,390 in connection with conversion of debenture; and

          (c)  518,345  in  connection  with  the  acquisition  of oil  and  gas
               interests.

     (ii) 236,480  Agent's Options in connection with the sale of debentures and
          Units. The terms are:

          (a)  37,741 at Cdn $2.02 ($1.48) until August 31, 1998;

          (b)  73,739 at Cdn $2.75 ($2.00) until December 31, 1997; and

          (c)  125,000 at Cdn $2.25 ($1.64) until April 30, 1998.

     (iii)930,000 stock options issued to directors and employees. These options
          are  exercisable  at Cdn  $2.50  ($1.83)  and  expire  August  6, 1999
          (130,000) and July 1, 2000 (800,000).

                                      II-2

<PAGE>



     (iv) 325,000 Warrants granted to former Arjon shareholders. Each Warrant is
          exercisable at Cdn $0.66 ($0.48) until December 31, 1998.

     (v)  98,421 Series B Warrants  granted to former Arjon  shareholders.  Each
          Warrant is exercisable at Cdn $2.25 ($1.64) until December 31, 1997.

Item 27.      Exhibits

      The  following  documents  are  filed  as  exhibits  to this  registration
statement:

<TABLE>
<S>              <C>                                                                                     <C>  

     Exhibit                                                                                              Sequentially
     Number                                              Description                                      Numbered Page
     -------                                             -----------                                      -------------
       1*         Underwriting Agreement
      3.1**       Articles of Amalgamation
      3.2         Bylaws
      4.1*        Text and Description of Graphics and Images Appearing on Certificate for Common
                  Stock
      4.2*        Text and Description of Graphics and Images Appearing on Certificate for Units
      4.3*        Text and Description of Graphics and Images Appearing on Certificate for Preferred
                  Stock
      4.4*        Text and Description of Graphics and Images Appearing on Certificate for Warrants
        5*        Opinion of Weir & Foulds
        9         Voting Trust Agreement, as amended
      10.1        Property Option Purchase Agreement (Movico)
      10.2        Letter Agreement with Decker Exploration, Inc. (Movico)
      20.1        Form of Proxy
      20.2        Special Meeting Memorandum
      20.3        Management Information Circular
       21         Subsidiaries
      23.1*       Consent of Weir & Foulds
      23.2        Consent of Hein + Associates, LLP
       27         Financial Data Schedule
</TABLE>

-----------------------
  *    To be filed by amendment.
  **   Previously filed and incorporated by reference herein.

Item 28.      Undertakings.

The undersigned registrant hereby undertakes:

     (1)  To file, during any period in which it offers or sells  securities,  a
          post-effective  amendment  to  this  registration  statement  to:  (i)
          include any prospectus  required by Section 10(a)(3) of the Securities
          Act;  (ii)  reflect  in the  prospectus  any  facts or  events  which,
          individually  or  together,  represent  a  fundamental  change  in the
          information  in the  registration  statement;  and (iii)  include  any
          additional   or   changed   material   information   on  the  plan  of
          distribution.  Notwithstanding the foregoing, any increase or decrease
          in the volume of  securities  offered  (if the total  dollar  value of
          securities offered would not exceed that which was registered) and any
          deviation from the low or high end of the estimated  maximum  offering
          range may be  reflected in the form of  prospectus  filed with the SEC
          pursuant  to Rule 424(b) if, in the  aggregate,  the changes in volume
          and price represent no more than a 20% change in the maximum aggregate
          offering  price set forth in the  "Calculation  of  Registration  Fee"
          table in the effective registration statement.
               
     (2)  For  determining  liability  under the  Securities  Act, to treat each
          post-effective  amendment  as a  new  registration  statement  of  the
          securities offered, and the offering of the securities at that time to
          be the initial bona fide offering.

                                      II-3

<PAGE>



     (3)  To file a post-effective  amendment to remove from registration any of
          the securities that remain unsold at the end of the offering.

     (4)  To  provide  to the  Underwriters  at  the  closing  specified  in the
          Underwriting   Agreement   certificates  in  such   denominations  and
          registered  in such names as  required by the  Underwriters  to permit
          prompt delivery to each purchaser.

     (5)  Insofar  as   indemnification   for  liabilities   arising  under  the
          Securities  Act may be  permitted  to  directors,  officers or persons
          controlling the registrant  pursuant to the foregoing  provisions,  or
          otherwise, the registrant has been advised that, in the opinion of the
          SEC, such  indemnification  is against public policy,  as expressed in
          the Securities Act and is, therefore, unenforceable. In the event that
          a claim for  indemnification  against such liabilities (other than the
          payment by the registrant of expenses  incurred or paid by a director,
          officer or  controlling  person of the  registrant  in the  successful
          defense  of any  action,  suit  or  proceeding)  is  asserted  by such
          director,  officer or controlling person in connection with the shares
          of common stock being  registered,  the registrant will, unless in the
          opinion of its  counsel  the matter  has been  settled by  controlling
          precedent,  submit to a court of appropriate jurisdiction the question
          whether  such  indemnification  by  it is  against  public  policy  as
          expressed  in the  Securities  Act and will be  governed  by the final
          adjudication of such issue.
              
     (6)  For  determining  any liability under the Securities Act, to treat the
          information  omitted from the form of prospectus filed as part of this
          registration statement in reliance upon Rule 430A and contained in the
          form of prospectus filed by the registrant  pursuant to Rule 424(b)(1)
          or (4) or 497(h) under the Securities Act as part of this registration
          statement as of the time the SEC declared it effective.

     (7)  For  determining any liability under the Securities Act, to treat each
          post-effective  amendment  that contains a form of prospectus as a new
          registration  statement for the securities offered in the registration
          statement,  and that  offering of the  securities  at that time as the
          initial bona fide offering of those securities.



                                      II-4

<PAGE>


                                   SIGNATURES

      Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies  that it has  reasonable  grounds to believe  that it meets all of the
requirements  for  filing on Form  SB-2 and has duly  caused  this  registration
statement  to be  signed  on its  behalf  by  the  undersigned,  thereunto  duly
authorized, in the City of Dallas, State of Texas, on _____________, 1996.


COTTON VALLEY RESOURCES CORPORATION
         (Registrant)
<TABLE>
<S>                                                   <C>

By:                                                    By:     
--------------------------------------------                 --------------------------------------------
         Eugene A. Soltero                                            Peter Lucas
         Chairman of the Board and Chief Executive                    Senior Vice President and Chief Financial
         Officer                                                      Officer
         (Principal Executive Officer)                                (Principal Financial and Accounting
                                                                      Officer)
</TABLE>


      Pursuant  to  the  requirements  of  the  Securities  Act  of  1933,  this
registration  statement  has been signed below by the  following  persons in the
capacities and on the dates indicated:

<TABLE>
<S>                                          <C>                                      <C>

Signature                                     Title                                    Date
---------                                     -----                                    ----
                                              Chairman of the Board and Chief          _______________, 1996
                                              Executive Officer
-----------------------------------------
Eugene A. Soltero
                                              President, Chief Operating Officer and
                                              Director
-----------------------------------------
James E. Hogue                                                                         _______________, 1996
                                              Senior Vice President and Chief
                                              Financial Officer
-----------------------------------------
Peter Lucas                                                                            _______________, 1996
                                              Senior Vice President of Exploration
-----------------------------------------
C. Ron Burden                                                                          _______________, 1996
                                              Director
-----------------------------------------
Wayne T. Egan                                                                          _______________, 1996


                                              Director
-----------------------------------------
Michael Kamis                                                                           _______________, 1996


                                              Director
-----------------------------------------
Richard J. Lachcik                                                                     _______________, 1996
</TABLE>



                                      II-5

<PAGE>



