NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997 AND 1996

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES.

PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include the accounts of Altex Industries, Inc. and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.

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

PROPERTY AND EQUIPMENT: The Company follows the successful efforts method of accounting for oil and gas operations, under which exploration costs, including geological and geophysical costs, annual delay rentals, and exploratory dry hole costs, are charged to expense as incurred. Costs to acquire unproved properties, to drill and equip exploratory wells that find proved reserves, and to drill and equip development wells are capitalized. Capitalized costs relating to proved oil and gas properties are depleted on the units-of-production method based on estimated quantities of proved reserves. Upon the sale or retirement of property and equipment, the cost thereof and the accumulated depreciation, depletion, or valuation allowance are removed from the accounts, and the resulting gain or loss is credited or charged to operations.

IMPAIRMENT OF LONG-LIVED ASSETS: The Company assesses long-lived assets for impairment when circumstances indicate that the carrying value of such assets may not be recoverable. This review compares the asset's carrying value with management's best estimate of the asset's expected future undiscounted cash flows without interest costs. If the expected future cash flows exceed the carrying value, no impairment is recognized. If the carrying value exceeds the expected future cash flows, an impairment equal to the excess of the carrying value over the estimated fair value of the asset is recognized. No such impairment may be restored in the future. The Company's proved oil and gas properties are assessed for impairment on an individual field basis.

CASH EQUIVALENTS: For purposes of the statement of cash flows, the Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents.

INCOME TAXES: The Company follows the asset and liability method of accounting for deferred income taxes. The asset and liability method requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between financial accounting and tax bases of assets and liabilities.

EARNINGS PER SHARE: Earnings per share of common stock is based upon the weighted average number of shares of common stock outstanding during the year.

DEFERRED TAX ASSETS
   Net operating loss carryforward                                                      $       2,658,000
   Depletion carryforward                                                                         265,000
   Investment tax credit carryforward                                                              56,000
   Tax basis of assets written off for financial statement purposes                               688,000
TOTAL GROSS DEFERRED TAX ASSETS                                                                 3,667,000
   Less valuation allowance                                                                    (3,648,000)
NET DEFERRED TAX ASSETS                                                                            19,000
DEFERRED TAX LIABILITIES
   Depletion, depreciation, amortization, and valuation allowance for income
      tax purposes in excess of amounts for financial statement purposes                          (19,000)
NET DEFERRED TAX LIABILITY                                                              $              --

Income tax expense is different from amounts computed by applying the statutory Federal income tax rate for the following reasons:

                                                                                    1997             1996
                                                                                    ----             ----
TAX EXPENSE AT 34% OF NET EARNINGS                                       $          136,000           35,000
CHANGE IN VALUATION ALLOWANCE FOR NET DEFERRED TAX ASSETS                          (497,000)        (472,000)
EXPIRATION OF TAX CARRYFORWARDS                                                     394,000          440,000
OTHER                                                                               (33,000)          (3,000)
                                                                           ----------------  ---------------
INCOME TAX EXPENSE                                                       $               --               --
                                                                           ================  ===============

NOTE 3 - RELATED PARTY TRANSACTIONS. Pursuant to an employment agreement with
the Company, the Company's president has purchased from the Company 2,383,615 shares of the Company's common stock at a price of $.09375 per share and 1,376,249 shares at a price of $0.06 per share in non-cash transactions with the proceeds of a $306,000 loan from the Company. The loan, which is secured by the shares, is due at the end of the term of the employment agreement, and the president can pay the principal amount of the loan with shares of the Company's common stock. The agreement provides that the Company will reimburse the president for interest expense related to the loan, will indemnify him against additional tax due as a result of such reimbursement and indemnification, and also provides for termination and permanent disability benefits under certain circumstances. The Company recognized $18,000 and $17,000 of both interest income and general and administrative expense related to the loan in 1997 and 1996, respectively. In 1997 the Company also recognized $12,000 in indemnification expense. The employment agreement also provides that the Company's president will receive an annual bonus equal to no less than 10% of the Company's earnings before income tax. The Company has agreed to pay the $44,000 bonus for 1997 in shares of common stock to be issued at fair market value and has, accordingly, provided for the issuance of 733,665 shares of common stock at $0.06 per share.

NOTE 4 - MAJOR CUSTOMERS. In 1997 and 1996 the Company had four customers who
individually accounted for 10% or more of the Company's revenue and who, in aggregate, accounted for 90% and 87% of revenue in 1997 and 1996, respectively. In 1997 the four customers individually accounted for 53%, 13%, 13%, and 12% of revenue; and in 1996 the four customers individually accounted for 47%, 16%, 12%, and 12% of revenue.

NOTE 5 - LEASES. The Company rents office space under a noncancellable operating
lease that expires in April 1999. At September 30, 1997, required future payments under the lease are $20,000 for the year ending September 30, 1998, and $11,000 for the year ending September 30, 1999. The Company incurred rent expense of $19,000 and $18,000 in 1997 and 1996, respectively.

NOTE 6 - RECLAMATION, RESTORATION, AND DISMANTLEMENT. The Company is completing
the restoration of the area that had contained its East Tisdale Field in Johnson County, Wyoming. Areas within the field had contained crude-oil contaminated soil that the Company removed and road-spread. The Company recognized $10,000 and $93,000 in RR&D related to the field in 1997 and 1996, respectively. The Company is discussing with regulatory authorities and with the landowner whether the Company will be required to perform further restoration. At most, the Company will be required to seed disturbed areas and to complete minor trash removal. Barring unforeseen events, the Company does not believe that the expense associated with final restoration activities will be material, although this cannot be assured. After its bonds with the state and the Bureau of Land Management are released, the Company does not believe it will have any further liability in connection with the field, although this cannot be assured.

NOTE 7 - SUPPLEMENTAL FINANCIAL DATA - OIL AND GAS PRODUCING ACTIVITIES
(UNAUDITED). The Company's operations are confined to the continental United States, and all of the Company's reserves are proved developed. Prices and costs in the tables below have been estimated using prices and costs in effect at the end of the years indicated. Prices are estimated net of estimated quality and transportation adjustments. Income tax expense is not reflected in the tables below because of the antici pated utilization of net operating loss carryforwards and tax credits. The estimation of reserves is complex and subjective, and reserve estimates tend to fluctuate in light of new production data.

                                                                                        SEPTEMBER 30,
                                                                                            1997

Proved Properties                                                                 $           2,148,000
Accumulated depreciation, depletion, amortization, and valuation allowance                   (1,948,000)
Net capitalized cost                                                              $             200,000

                                                   OIL               GAS
                                                  (BBLS)            (MCF)

BALANCE AT SEPTEMBER 30, 1995                     217,000           975,000
  Revisions of previous estimates                 120,000           305,000
  Production                                      (37,000)         (148,000)
BALANCE AT SEPTEMBER 30, 1996                     300,000         1,132,000
  Sales of minerals in place                      (54,000)          (26,000)
  Revisions of previous estimates                   4,000           377,000
  Production                                      (31,000)         (160,000)
BALANCE AT SEPTEMBER 30, 1997                     219,000         1,323,000

                                                                           AT SEPTEMBER 30
                                                                         1997           1996
                                                                         ----           ----

Estimated future revenue                                     $         6,413,000      8,602,000
Estimated future expenditures                                         (4,229,000)    (5,143,000)
Estimated future net revenue                                           2,184,000      3,459,000
10% annual discount of estimated future net revenue                     (842,000)    (1,300,000)
Present value of estimated future net revenue                $         1,342,000      2,159,000