U.S. SECURITIES AND EXCHANGE COMMISSION
                         Washington D.C. 20549

                             FORM 10-KSB
(X)   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
      SECURITIES ACT OF 1934 (Fee Required)

                 For Fiscal Year Ended August 31, 1998

( )   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
      SECURITIES EXCHANGE ACT OF 1934 (No Fee Required)

              For the Transition Period ______ to ______

                      Commission File No. 0-25660

                         HALSTEAD ENERGY CORP.
            (Name of small business issuer in its charter)

             Nevada                                  87-0446395
(State of Other Jurisdiction of         (I.R.S. Employer Identification No.)
Incorporation or Organization)          

               33 Hubbells Drive, Mt. Kisco, New York 10549
                 (Address of Principal Executive Offices)     
     
                                (914) 666-3200
                 (Issuer's Telephone Number, Including Area Code)

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

Securities registered pursuant to
Section 12(g) of the Exchange Act            Common Stock, $.001 Par Value

Check whether the issuer:  (1) filed all reports required to be filed by Section
13 or 15(d) of the  Exchange  Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports),  and (2) has been
subject to such filing requirements for the past 90 days. 
( ) Yes (X) No


Check if there is no disclosure of delinquent  filers in response to Item 405 of
Regulation  S-B contained in the form, and no disclosure  will be contained,  to
the  best  of  registrant's   knowledge,  in  definitive  proxy  or  information
statements  incorporated  by  reference  in Part III of this Form  10-KSB or any
amendment to this Form 10-KSB. 
( ) Yes (X) No



<PAGE>


The issuer's revenues for it most recent fiscal year were $13,272,991.

The  aggregate  market value of the voting stock held by  non-affiliates  of the
issuer as of November 1, 1998 was $3,957,499.

As of  November 1, 1998,  the issuer had  3,013,750  shares of its Common  Stock
outstanding.





<PAGE>


PART 1

ITEM 1.   BUSINESS

Background

      Halstead Energy Corp.  (the "Company") was originally  incorporated in the
State of Utah on January 15,  1986 under the name of  Technical  Analysis,  Inc.
Effective  October 8, 1990,  the Company  changed its corporate  domicile to the
State of Nevada.  On August 5, 1993 the Company acquired Halstead Quinn Propane,
Inc.  ("HQ  Propane") in exchange for 1,085,000  shares of the Company's  Common
Stock.  Simultaneous  with such  acquisition,  the  Company  changed its name to
Halstead Energy Corp.

      The  Company's  operating  entities  are engaged in the  wholesale  and/or
retail  distribution  of, and the  provision  of services  relating to fuel oil,
liquid propane gas,  gasoline and diesel fuel primarily in Westchester,  Putnam,
Dutchess,  Rockland and surrounding  counties in New York State. The Company has
four principal operating divisions: HQ Propane, a wholly-owned subsidiary of the
Company;  and  Halstead  Quinn  Terminal  ("HQ  Terminal"),   HQ  Gasoline  ("HQ
Gasoline")and Dino Oil ("Dino"), which are separate divisions of HQ Propane.    


Recent Developments

     The  Company  sold  the  customer  list and  certain  other  assets  of its
wholly-owned subsidiary,  White Plains Fuel, Inc., in October 1998, to the third
party that had operated such business  since June 1995,  for a purchase price of
$361,000.

     In April 1998, HQ Propane  acquired  certain  assets  (including a customer
list) from a small retail propane  distributor  serving  Westchester  and Putnam
counties.

     In October 1998,  the Company  effected a  one-for-two  reverse stock split
respecting the Company's  common stock.  Except as expressly set forth herein to
the  contrary,  all share,  share price,  exercise  price and  conversion  price
information shall be stated/restated to reflect such reverse stock split.

     The  Company's  Common Stock was delisted from The Nasdaq Small Cap Market,
Inc. ("Nasdaq"), effective as of the close of business on November 9, 1998, as a
result of Nasdaq's determination that the Company failed to satisfy the terms of
a Nasdaq  qualifications  exception  which was  granted  on  September  8, 1998.
Although  the  Company  intends  to  challenge  the  delisting,  there can be no
assurance  that the Comany's  common stock will be re-listed on The Nasdaq Small
Cap Market after completion of the review process.  If the Company's  securities
are  excluded  from The Nasdaq  Small Cap Market,  it may  adversely  affect the
prices of such securities and the ability of holders to sell them.
    
Retail Propane Distribution

     HQ Propane (formerly  Halstead Quinn Fuel Oil Co., Inc.),  based in central
Westchester  County in Mt. Kisco,  New York,  was  established in 1946 and since
1958 has been a retail  distributor of liquid propane gas and propane  equipment
and also provides services related thereto. A. Tarricone,  Inc. ("ATI") acquired
HQ Propane in 1975 and subsequently  spun it off to its shareholders in December
1992.  In July 1996,  HQ Propane  acquired the customer  list and certain  other
assets  of  E.F.  Osborn  & Sons,  a  Pawling,  New  York-based  retail  propane
distributor), and in April 1998, HQ Propane acquired certain assets (including a
customer list) from another small retail propane distributor serving Westchester
and Putnam counties.

     HQ Propane has over 7,000 accounts.  Of these accounts,  approximately 80%
are  Westchester  County  residents  and  businesses,  and the remaining 20% are
located  throughout the surrounding  counties of Putnam and Dutchess in New York
State.

     Westchester  County  harbors many  affluent  communities  whose  lifestyles
create an above  average  demand  for  energy-intensive  applications  and,  the
Company  believes,  are also more resistant to recessionary  pressures.  This is
partly exemplified by the slow but steady growth in sales revenues over the last
three years. The Company believes that, in Westchester  County, HQ Propane has a
market share of  approximately  18%. In terms of accounts,  the Company believes
that HQ Propane is the second largest retail propane  distributor in Westchester
County.

      Although  propane can be used for  virtually  all  household  and business
utility applications,  of HQ Propane's customers,  approximately 78% use propane
for hot water  heating  and  cooking;  approximately  16% use  propane  for pool
heating;  and  approximately  6% use  propane for home  heating.  HQ Propane has
focused its  marketing  efforts on hot water  heating  and cooking  applications
because these uses are relatively constant throughout the year, thereby reducing
seasonal  fluctuations,  and because  its gross  profit  margins  from hot water
heating use are significantly more than that of a residential propane heating or
commercial propane account.

      The Company believes that propane has distinct advantages over alternative
energy sources,  including efficiency,  cost and availability.  These attributes
result in the retail customer realizing reduced utility bills. With an increased
marketing  effort,  the Company  believes that HQ Propane has the opportunity to
gain a larger  share of the  Westchester  County  energy  market  by  converting
electricity  and fuel  oil  users  to  propane  and by  having  owners  of newly
constructed buildings select propane as their energy source.

      HQ Propane's  base of  operations  is centrally  located at the  Company's
headquarters in Mount Kisco,  New York. HQ Propane also maintains an inland fuel
oil  storage  terminal  and a 30,000  gallon  propane  storage  tank for its own
operations.  The fuel oil  facility is presently  leased to a major  independent
fuel oil distributor.

Wholesale Distribution and Storage

      HQ Terminal, owns a deep water terminal in Yonkers, New York, near the New
York City border.  The five million gallon  terminaling  facility allows for the
wholesale  distribution of fuel oil,  gasoline and diesel fuel and also provides
storage facilities for other petroleum companies through warehousing  agreements
known as thruputs.  The Company's own product  requirements  are often  supplied
through this facility.

      The terminal  facility has 11 above ground tanks that provide an aggregate
storage  capacity of 5,000,000  gallons for gasoline,  diesel fuel and fuel oil.
These tanks feed three gasoline racks, five oil racks and two diesel fuel racks.
The terminal has been upgraded to comply with all governmental regulations.

      The  terminal  facility  has  2.439  acres  of  above-ground  land  and an
additional  3.511  acres of land  underwater.  The large  amount  of  underwater
acreage has enabled the Company to extend the dock lines out to deep water.  The
Company  believes that the terminal is the only terminal on the east side of the
Hudson River between Long Island Sound to the east,  the Bronx,  New York to the
south and Newburgh, New York to the north that has 17 feet of draft at low tide.
This  provides a  competitive  advantage,  particularly  with  regard to thruput
customers,  because  the high  draft  allows  large  seafaring  vessels  to dock
independent of tide schedules.

      The Company believes that another competitive  advantage is the terminal's
location. It is located in the most densely populated area in Westchester County
and it is the only  terminal  on the Hudson  River south of  Newburgh,  New York
which  distributes  gasoline.  All other  gasoline  distribution  terminals  are
located in the eastern part of Westchester County.

     The terminal  facility has been operated by ATI pending the approval of HQ
Propane's application with New York State for a Terminal  Operator's and Diesel
Motor Fuel License.  See "Certain  Relationships  and Related  Transactions" and
"BUSINESS--Certain Licenses Relating to the Company's Business."

Gasoline

     HQ Gasoline  supplies 25 retail gasoline  stations  throughout  eastern New
York State under the trade names "ATI" and "Gulf" and effective  January 7, 1999
, Getty.  HQ Gasoline's  ability to market under  different brand names provides
the Company with an opportunity to reach  consumers at the low,  middle and high
end of  the  market,  thereby  allowing  greater  flexibility  in its  marketing
strategies.  Because gasoline usage is relatively  constant throughout the year,
the operation of gasoline  stations  allows the Company to offset,  in part, the
seasonal  fluctuations that affect the company fuel oil distribution  divisions.
Most of the stations are situated in high traffic areas at major  intersections.
Presently, five of the 25 facilities are, or have received permits to construct,
combination  convenience  store/gasoline pumping facilities.  The balance of the
outlets are combination automotive repair shop/gasoline pumping facilities. Nine
of the 25 gasoline stations are leased from ATI. See "Certain  Relationships and
Related Transactions".

      In September 1996, the Company  acquired certain assets of Dino Oil, Inc.,
a Bronx, New York-based  commercial  gasoline  distributor.  The addition of the
Company's  Dino Oil division has  broadened the  Company's  marketing  region by
providing the Company with customer accounts (including various service stations
and fleet garages) located in the Bronx,  Queens,  Brooklyn,  and Manhattan,  as
well as Nassau, Suffolk and Westchester counties.

     In  December  1996,  the  Company  terminated  its  lease of four of its 21
stations  to  an  independent  third  party   distributor,   and  simultaneously
therewith,  entered into a master lease of eight of its 21 gasoline  stations to
another  independent  third party  distributor.  The master lease has an initial
term of ten (10) years,  and the lessee  thereunder  has an option to renew such
lease for an  additional  ten (10) year term.  The lease  requires  that  annual
rental  payments be made in advance,  on the first day of each year of the lease
term.  The lease is a triple net lease  agreement  which  requires the lessee to
maintain,  operate,  and supply all gasoline to the station outlets.  The lessee
must  also  make  the  necessary   capital   improvements   to  meet  applicable
environmental laws by 1998.

     The  Company  intends  to focus its  efforts  on  changing  the image of HQ
Gasoline  facilities.  The  industry  has  moved  away from the "mom & pop" type
operation  and into  high  volume,  automated  self-service  operations,  with a
particular  focus on  convenience. Repair shops,  in  particular,  are becoming
increasingly  less  desirable.  Accordingly,  in  order  to  optimize  potential
earnings at a site, the Company  intends to follow  industry trends by upgrading
approximately 12 of  these  facilities with  state-of-the-art  pumping apparatus
and canopies and, where  appropriate,  converting them to multiple revenue sites
by combing facilities with convenience stores, snack shops and/or car washes.

      In most cases,  canopies will be installed to improve lighting and provide
shelter  in  inclement  weather.  Industry  experts  estimate  that  up to a 20%
increase in volume is derived from this improvement alone.  Management  believes
that, in the Company's  geographic region,  canopies have contributed  increased
revenues of between 15% and 25%. Electronic  self-service pumping apparatus will
also be installed for the convenience of the public,  and will afford tremendous
overhead savings to the station operator.  The addition of a convenience  store,
snack shop, or car wash, where applicable, will introduce new sources of revenue
and optimize overall station profitability.

     The  rebuilding  will  require  expenditures  that  range  from  $20,000 to
$550,000 per facility,  depending upon the individual  station site. The program
is site specific,  taking into  consideration  competition,  lot size,  building
dimensions,  traffic count,  community  demographics,  and area development.  By
completing  its  rebuilding  program,  the  Company  believes  it  will  achieve
increased cash flow from  operations as a result of increased sales revenues and
rental income.  In this regard,  as part of the rebuilding  program,  management
intends to acquire certain station leaseholds from ATI at fair market value. The
acquisition of these leasehold  interests will protect the Company's  investment
in, and long term earnings  potential,  from this revenue  source.  See "Certain
Relationships and Related Transactions".

Retail Fuel Oil

      The Company's  retail fuel oil  distribution  business was conducted by HQ
Propane's  subsidiary,  Rockland Fuel Oil,  Inc.,  until May 16, 1997,  when the
Company  entered into an agreement with an independent  third party  distributor
for the sale of its retail  fuel oil  customer  list and related  business.  The
terms of the sale were $200,000 at closing,  $200,000 on the first  anniversary,
and $127,000 on the second anniversary,  with interest on outstanding amounts at
a rate of 6% per annum. Rockland continues to own a facility in Haverstraw,  New
York which houses a 2,432 square foot  building and a terminal  situated on land
fronting the Hudson River. The terminal is capable of storing  2,500,000 gallons
of oil.

     The Company  acquired all of the stock of White Plains Fuel, Inc., a retail
distributor  of fuel oil and diesel  fuel,  on June 8,  1995,  in  exchange  for
168,020 shares of newly created Series A 7.5% Cumulative  Convertible Redeemable
Preferred  Stock of the Company.  The Company sold the customer list and certain
other assets of White Plains Fuel, Inc. in October 1998, to the third party that
had operated such business since June 1995, for a purchase price of $361,000.

Fundamental Characteristics of the Company's Business.

Unaffected by General Economy

      The Company's  business is relatively  unaffected by business  cycles.  As
fuel oil,  propane and gasoline are such basic  necessities,  variations  in the
amount purchased as a result of general economic conditions are limited.

Customer Stability

      HQ Propane has a relatively  stable  customer  base due to the tendency of
homeowners  to remain  with  their  traditional  distributors.  In  addition,  a
majority  of  the  home  buyers  tend  to  remain  with  the  previous   owner's
distributor.  As a result,  HQ Propane's  customer  base each year includes most
customers  retained from the prior year or home buyers who have  purchased  from
such customers.  Like many other companies in the industry,  HQ Propane delivers
propane to each of their customers an average of approximately  six times during
the year, depending upon weather conditions and historical consumption patterns.
Most of HQ Propane's  customers  receive their propane  pursuant to an automatic
delivery  system,  without the customer  having to make an affirmative  purchase
decision  each time propane is needed.  In addition,  HQ Propane  provides  home
heating equipment repair service on a seven day a week, 52 week a year basis.

     Retail  gasoline  customers are generally brand loyal or price shoppers who
generally factor appearance,  convenience,  and credit cards into their decision
making process before making an affirmative  decision.  HQ Gasoline's ability to
market under the  trademarks  "Gulf" and "ATI",  and effective  January 1, 1999,
"Getty"  largely  meet the  criteria  exercised  by  customers  in making  their
purchase  decisions.  However,  the Company must complete its station rebuilding
program in order to ensure that the standard which are particularly important to
the motoring public, such as appearance, are maintained.

      No single customer accounts for 10% or more of the Company's  consolidated
revenues.

Weather Stability

     The weather  patterns  during the winter can have a material  effect on the
Company's fuel oil and propane related businesses. Although average temperatures
over time have varied to a very  limited  extent and the Company does not expect
that  average  temperatures  will  vary  significantly  in  the  future,  winter
temperatures  can vary  significantly  from one year to the next.  A warmer than
usual  winter should reduce  the number of gallons of fuel oil and  propane sold
which would result in reduced  profits from the  Company's  fuel oil and propane
related operations. Severe ice and snow storms can also greatly effect consumers
driving patterns, thereby reducing the Company's gasoline revenues. Ice and snow
can also greatly reduce delivery  productivity,  thereby  reducing the number of
gallons  which can  physically  be delivered in a certain  period of time.  Such
conditions  would most likely demand  significant  overtime  hours  resulting in
increased payroll expense.

 Effects of Oil Price Volatility

      The price of crude oil  remains  volatile.  While this has not  materially
affected the Company's performance in the past (e.g. as a retailer,  the Company
has been  able to add an  increasing  gross  margin  onto its  wholesale  costs,
whatever their level, to offset the impact of inflation,  account  attrition and
weather),  there can be no assurance that such  performance  will continue.  

Petroleum Supply

     One  major  supplier   provides  the  Company  with  its  propane   product
requirements.  Three  major  suppliers  provide the  Company  with its  gasoline
requirements.  Approximately  20% of  such  requirements  are  met by  Gulf  Oil
pursuant to an agreement  with the Company.  All of the fuel oil and diesel fuel
product  requirements  of the  Company's  customers  are  met by ATI.  Upon  the
issuance of its diesel motor fuel  license from New York State,  HQ Propane will
assume ATI's role in procuring the Company's petroleum product requirements. See
"Certain  Relationships and Related Party  Transactions" and  "BUSINESS--Certain
Licenses Relating to the Company's Business."

      Management  believes that if the Company's  supply of any of the foregoing
products was interrupted,  the Company would be able to secure adequate supplies
from other sources  without a material  disruption in its  operations.  However,
there can be no assurance that adequate supplies of such petroleum products will
be readily available in the future.

Expansion

      The industries in which the Company's  petroleum products division compete
are highly fragmented and characterized by numerous local and national fuel oil,
gasoline,  diesel fuel and propane  distributors.  The Company intends to expand
its operating divisions through  acquisitions and aggressive sales and marketing
efforts to generate new divisions through  acquisitions and aggressive sales and
marketing  efforts to generate new accounts and increase  consumer  awareness of
the Company's products and quality.

      The Company's  acquisition strategy is to grow through the acquisition and
integration of additional  distributors in existing and new markets. The Company
believes  that  many of the  proprietors  of  businesses  competitive  with  the
Company's  operating  divisions  are of  retirement  age and may be receptive to
selling their operations. Another potential source of acquisitions are companies
that are  owned  by  individual  entrepreneurs  who find  expansion  within  the
petroleum products industry difficult,  either operationally or financially,  or
who have other investment opportunities.

      More   specifically,   HQ  Propane   intends  to  acquire   two  types  of
distributors.  The first type are relatively small distributors which management
believes could easily be integrated  into the Company's  operations.  Management
believes that such distributors  could result in significant  economies of scale
through the centralization of purchasing, marketing, credit, data processing and
other  administrative  functions  of the acquired  distributor.  The second type
consists of larger,  stand-alone  businesses which could not be integrated,  but
would,  in  all  probability,  be in  new  markets.  The  Company  expects  that
acquisitions of these  businesses  would provide not only attractive  investment
returns, but also provide hubs for future expansion.

      The Company also intends to expand HQ Gasoline by pursuing the acquisition
of single units and chains of retail service stations.  Such acquisitions  would
provide deeper market  penetration in the Company's existing marketing area, and
provide  expansion into new marketing  areas.  Besides the benefits derived from
the economics of scale, the Company would expect to achieve greater buying power
for  its  petroleum   products   purchases,   and  possibly  assume   additional
distributorships with various major oil companies.

Competition

     The Company's  business is highly  competitive.  In addition to competition
from alternative energy sources,  HQ Propane competes with propane  distributors
offering a broad range of services and prices,  from full  service  distributors
similar to HQ Propane,  to those offering delivery only.  Competition with other
companies in the propane  industry is based  primarily  on customer  service and
price. Long-standing customer relationships are typical in the propane industry.
Many companies in the industry,  including HQ Propane,  deliver propane to their
customers  based upon weather  conditions  and historical  consumption  patterns
without the customer having to make an affirmative  purchase  decision each time
propane is needed. In addition,  most companies,  including HQ Propane,  provide
equipment repair service on a 24-hour a day basis, which tends to build customer
loyalty.  As a result,  HQ Propane may  experience  difficulty  in acquiring new
retail customers due to existing  relationships  between potential customers and
other propane distributors.  As of the date of this report, fuel oil and propane
are less  expensive  sources of energy than  electricity.  Natural gas, which is
currently  less  expensive  than  propane,  is not  readily  available  in Upper
Westchester  and Putnam Counties where all of the Company's  propane  operations
are conducted. Accordingly, the Company believes that an insignificant number of
its customers will switch from fuel oil or propane to alternative energy sources
at this time.

      HQ  Gasoline's  business  operations  are  sensitive  to price  and  brand
competition.  In order to compete with branded competitors who benefit from name
recognition  and  customer  loyalty,  the "ATI"  branded  service  stations  may
maintain a lower price than these competitors. The Gulf branded stations are not
as sensitive to price and therefore,  typically maintain a price consistent with
other brand name competitors.

Certain Licenses Relating to the Company's Business

     HQ  Propane's  principal  terminal  facility is  currently  operated by ATI
pending the approval of HQ Propane's  application with the State of New York for
terminal operator's and diesel motor fuel licenses. On October 6, 1995, New York
State  requested HQ Propane to post certain bonds as a prerequisite to obtaining
the foregoing  licenses.  On October 25, 1995,  these bonds were obtained by the
Company and the State  approved the same.  Management  believed at the time that
the Company had thereby completed substantially all steps necessary to receiving
such licenses.  However,  these licenses have not as of yet been granted.  There
can be no  assurance  about the  prospect  of  obtaining  the  approval  of such
licenses.  The $.02 per gallon fee  charged by ATI for these  services  would be
eliminated  simultaneously with the issuance of HQ Propane's terminal operator's
license and its diesel motor fuel licenses. See "LEGAL PROCEEDINGS"  and"Certain
Relationships and Related Transactions."

         On June 10, 1997, A. Tarricone,  Inc. ("ATI"), the former parent of the
Company's operating subsidiaries and divisions (ATI is wholly-owned by Claire E.
Tarricone, Anthony J. Tarricone and Joseph A. Tarricone, the Company's directors
and principal executive officers), filed a voluntary petition for reorganization
pursuant  to Chapter  11 of the  Bankruptcy  Code (the  "Code").  The  Company's
principal  terminal  facility  is  currently  being  operated by ATI pending the
approval of the Company's  application with the State of New York for a terminal
operator's  and diesel motor fuel license.  There can be no assurance  about the
prospect  of  obtaining  the  approval  of such  licenses.  The Company has been
advised by counsel that pending the conclusion of ATI's  bankruptcy  proceeding,
ATI will  continue  to  maintain  such  licenses  and  will be able to  continue
operating  the  Company's  terminal and diesel motor fuel  businesses.  However,
there can be no assurance  that at the  conclusion  of such  proceeding,  if the
result  were  a  liquidation  of ATI  (and  therefore,  a  termination  of  such
licenses), that the Company would by that time have received its own licenses or
would have been able to contract with another entity to operate such businesses.
The occurrence of any of these  circumstances  could have a material and adverse
effect on these businesses and on the Company.


Environmental/Governmental Regulation

     The  Company's  operating  divisions  are  subject to various  governmental
regulations.  New regulations  regarding  underground  storage tanks  ("UST's"),
including  those at service  stations,  have been  issued by the  United  States
Environmental  Protection Agency (the "EPA").  The regulations cover the design,
construction  and  installation  of new UST systems,  and require that  existing
systems meet certain EPA standards. The regulations require that owner/operators
of UST systems demonstrate financial responsibility for the cleanup of spills or
releases,  and/or to compensate  third parties for any  resulting  damages.  The
Company has  recently  upgraded its HQ Terminal  Facility and its other  storage
facilities to conform with applicable law and the Company has an ongoing program
for maintenance,  testing,  retrofitting,  or replacement of UST's. In addition,
the  Company  maintains  Pollution  Liability  Coverage on 11 of the 22 Gasoline
Stations  presently leased by the Company.  Three of the 25 stations operated by
the Company are supply contracts only, and therefore management does not believe
that the Company would be subject to any environmental  exposures.) In addition,
8 stations  are leased to a third party  distributor  which,  under the terms of
said lease,  is  responsible  for any  environmental  liability as of January 1,
1997. The Alexander  Street Terminal is also insured under a separate  Pollution
Legal Liability Policy.

      The Company  believes that its operating  divisions are in compliance with
all applicable  regulatory  requirements and have all governmental  licenses and
permits  (other  than those  described  above in  "BUSINESS  - Certain  Licenses
Relating to the  Company's  Business") required for their  business  operations,
except  where the failure to be in  compliance  or maintain  such  licenses  and
permits  would not have a material  adverse  effect on the  Company's  business.
Management knows of no pending or threatened proceedings or investigations under
Federal or State  environmental  laws which would have a material adverse effect
on the Company's  business.  Management cannot predict the impact on the Company
and its operating divisions of new governmental regulations and requirements.

     The Company will have to invest an  estimated  minimum of $283,000 in order
to meet EPA and State  regulations  for  underground  storage tanks by December,
1998.

Employees

      As of November 1, 1998, the Company had a total of 31 employees,  of which
20 are office,  clerical and customer service personnel,  4 were drivers, 3 were
mechanics,  and 4 were executive  officers of the Company.  All of the Company's
employees  are full time and one is  seasonally  employed.  Seven  employees are
represented by the International  Brotherhood of Teamsters and Chauffeurs Union,
Local 456 under a  contract  which  expires on  December  31,  2001.  Management
believes  that its  relations  with both its union and  nonunion  employees  are
satisfactory.

ITEM 2.    PROPERTIES

      The Company's principal place of business is located at 33 Hubbells Drive,
Mount  Kisco,  New York,  where HQ Propane  owns a block and brick  building  of
approximately 6,000 square feet on 1.03 acres.

      The Company also owns the following facilities:

      1. The HQ Terminal  facility located in Yonkers,  New York, which facility
      is situated  on 5.95 acres of land,  with  approximately  2.44 acres above
      water and 3.51 acres are  underwater.  Four block and brick  buildings  of
      3,000 square feet,  234 square feet,  225 square feet and 450 square feet,
      respectively  are  situated  on the  property.  The  terminal  also has 11
      storage tanks with capacities  ranging from 140,000 to 1,000,000  gallons,
      and an aggregate  capacity of 5,083,000  gallons;  a 300 foot dock;  three
      gasoline racks; five oil racks; and two diesel fuel racks.

      2. A terminal facility located in Haverstraw,  New York, which facility is
      situated on 1.30 acres of land. The property  houses one building of 2,432
      square  feet.  The  terminal  also has 14 storage  tanks  with  capacities
      ranging from 15,652 gallons to 508,000 gallons,  and an aggregate capacity
      of 2,509,545 gallons; and one loading rack.

      3. A gasoline  station  facility in Hartsdale,  New York which facility is
      situated on 16,700  square feet of land.  The property  houses a one story
      concrete  building of 1,827  square  feet with three bays and office.  The
      station is also improved with two islands, each with two pumps.

      As of November 1, 1998, HQ leased the following  stations  from ATI (See
     "Certain Relationships and Related Transactions"):


              Station Name and #                       Address

      (1)     Elmsford ATI #203                   153-162 E. Main Street
                                                  Elmsford, New York 10523

      (2)     Wingdale ATI #405                   Route 22 - Box 684
                                                  Wingdale, New York 12594

      (3)     Salt Point #414                     Route 44 & 82
                                                  Salt Point, New York 12578

      (4)     Congers ATI #112                    21 South Route 303
                                                  Congers, New York 10920

      (5)     Mt. Vernon Lincoln Ave. #205        25 W. Lincoln Avenue
                                                  Mt. Vernon, New York   10550

      (6)     Lakeside P.P. #219                  6 N. Lakeside Blvd.
                                                  Mahopac, New York 10541

      (7)     Raceway ATI #221                    535 Central Park Avenue
                                                  Yonkers, New York   10704

      (8)     West Hurley #315                    1105 Route 28
                                                  Kingston, New York 12401

      (9)     Pine Plains #411                    Route 199 - Box 421
                                                  Pine Plains, New York 12567

     Five of the above leases  expire on August 31,  2003,  two expire on August
31,  2018,  and the other two expire on November  28, 2006 with an option for an
additional ten year term expiring November 28, 2016. The aggregate annual rental
amount under these  leases was  $213,633  for the fiscal year ending  August 31,
1998.  For the five leases  expiring on August 31, 2003,  the  aggregate  rental
amount  will range from $125,633 in the fiscal  year  ending  August 31, 1999 to
$137,885   in the fiscal  year  ending  August 31,  2003.  For the four  leases
expiring  on August  31,  2018 or  November  28,  2006,  as the case may be, the
aggregate rental amount will range from $89,150 in the fiscal year ending August
31, 1999 to $88,000 in the fiscal year ending August 31, 2018.

ITEM 3.     LEGAL PROCEEDINGS

      In January 1994,  HQ Propane was served with a complaint  dated January 5,
1994 relating to an action entitled RAP Holding Corp. v. Halstead Quinn Fuel Co.
Inc.,  and A.  Tarricone,  Inc.  in the  Supreme  Court of New  York,  County of
Westchester.  The plaintiff is the owner of property in Westchester  County, New
York  which was  leased by HQ  Propane  from June 1, 1979 to May 31,  1989.  The
complaint  alleges that,  during the term of the lease,  the Company  discharged
petroleum products onto the property and seeks $106,173 damages for the costs of
clean up and removal of the  contaminated  soil and an  additional  $300,000 for
diminution of value.  The Company has retained outside counsel and is vigorously
defending  itself in this  lawsuit. As of November 1, 1998,  there has been no
further action in this case.

     On June 10, 1997,  A.  Tarricone,  Inc.  ("ATI"),  the former parent of the
Company's  operating  subsidiaries  and  divisions(ATI is wholly-owned by Claire
E.Tarricone, Anthony J.Tarricone and Joseph A.Tarricone, the Company's directors
and principal executive officers), filed a voluntary petition for reorganization
pursuant to Chapter 11 of the Bankruptcy Code (the "Code"). ATI has continued in
possession  of  its  property  and  in  the  management  of  its  affairs  as  a
debtor-in-possession  under the applicable provisions of the Code. In connection
with  the  bankruptcy  proceeding,   the  Company  has  asserted  (and  ATI  has
acknowledged)  pre-petition  claims  arising under a receivable  from ATI in the
amount of $3,877,563 and pre-petition liens on certain leasehold interests.  The
proceeding is before the United States  Bankruptcy  Court,  Southern District of
New York, and is referenced as "A. Tarricone,  Inc.,  97B21488." The Company has
determined  that its  asserted  pre-petition  liens may not have  been  properly
"perfected,"  in which case the Company  would be deemed an  unsecured  creditor
(rather  than a  secured  creditor)  in the  proceeding.  If it were  ultimately
determined by the court that the Company's  status in the  proceeding is that of
an  unsecured  creditor,  the  Company's  legal  basis  for  recovery  would  be
materially,  adversely affected. The Company is pursuing all appropriate avenues
to protect its interests in this regard. However, there can be no assurance that
the  indebtedness  and the liens asserted by the Company in this proceeding will
be  recognized  or given  full  effect,  that the same  will not be  challenged,
modified or reduced, that all or any portion of such indebtedness will be repaid
to the Company or that the Company will  otherwise be  successful  in protecting
its interests. In this regard, management elected to write-off, and has taken as
a charge  against  earnings as a bad debt expense,  in the fourth quarter of the
fiscal year ending August 31, 1997, the entire amount of the receivable due from
ATI at June 10, 1997,  i.e.,$3,877,563.  Additionally,  all executory  contracts
between ATI and the Company are  susceptible  to  rejection,  at the election of
ATI, under the  applicable  provisions of the Code.  Furthermore,  any transfers
from  ATI  to  the  Company  on  account  of  antecedent  debt  (of  ATI  to the
Company)during  the  one-year  period  prior  to the  date of  filing  of  ATI's
voluntary  petition may be subject to avoidance under the applicable  provisions
of the  Code.  The  occurrence  of any such  circumstances  may have a  material
adverse effect on the Company.

     The  Company is not a party to any other  material  litigation  and is not
aware of any threatened  litigation that would have a material adverse effect on
its business.


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

            None.

<PAGE>


                                PART II

ITEM 5.     MARKET FOR COMMON STOCK AND RELATED
                    STOCKHOLDER MATTERS

     Effective  at the close of  business on  November  9, 1998,  the  Company's
Common  Stock  became  delisted  from The  NASDAQ  SmallCap  Stock  Market  (see
discussion  below) and  became  listed in the Nasdaq  Bulletin  Board  under the
symbol  "HSNR." From March 13, 1995 through and including  November 9, 1998, the
Company's  Common Stock was listed on The NASDAQ SmallCap Stock Market under the
symbol "HSNR".  Prior to that date, the Company's Common Stock was listed in the
Nasdaq  Bulletin Board under the symbol "HSNR." On October 16, 1998, the Company
effected  a 1 for 2 reverse  stock  split,  and unless otherwise noted all share
and per share data have been restated herein accordingly.

     The following  table sets forth the presplit  range of high and low closing
bid prices for the  Company's  Common Stock from August 31, 1996 through  August
31, 1998, as reported by NASDAQ,  which bid prices reflect  inter-dealer prices,
without retail mark-ups,  markdowns or commissions and many not represent actual
transactions.

                                                 Presplit
                                                Bid Prices
                                                ----------  
                                        High                     Low
                                        ----                     ---
      Fiscal 1996
      First Quarter...................  6 19/32                  5
      Second Quarter................... 6 31/64                  4 5/16
      Third Quarter.................... 7                        4 5/16
      Fourth Quarter..................  6                        1 5/32

      Fiscal 1997
      First Quarter................... 1 5/16                      3/64
      Second Quarter..................   9/16                      5/64
      Third Quarter................... 1 5/64                      9/32
      Fourth Quarter.................. 1                           5/16

      Fiscal 1998
      First Quarter................... 2  1/16                   2 9/32
      Second Quarter.................. 1 13/16                     1/2
      Third Quarter................... 3  1/32                     7/16
      Fourth Quarter.................. 1                           1/2        

     As of  November 20, 1998,   there  were  173   holders  of  record  of  the
Company's  Common Stock.  However,  those shares being held at various  clearing
houses including the Depository Trust Company,  and Cede & Company have not been
broken down.  Accordingly,  the Company  believes there are numerous  beneficial
owners of the  Company's  common stock whose  shares are held in "street  name",
including the  Depository  Trust Company and Cede & Company have not been broken
down.

      The Company does not pay dividends on its Common Stock. It is management's
intention not to declare or pay dividends on the Company's Commons Stock, but to
retain  earnings,  if any, for the  operation  and  expansion  of the  Company's
business.  In any  event,  until  such  time  as all  accrued  dividends  on the
Company's  Series A Preferred Stock and Series B Preferred Stock have been paid,
the Company is restricted, pursuant to the instruments/documents authorizing the
issuance of such preferred stock, from paying any dividends on its Common Stock.
Any dividends that may be declared in the future will be determined by the Board
of Directors based on the Company's financial condition,  results of operations,
market conditions and other factors that the Board deems relevant.

     The  Company's  Common Stock was delisted from The Nasdaq Small Cap Market,
Inc. ("Nasdaq"), effective as of the close of business on November 9, 1998, as a
result of Nasdaq's determination that the Company failed to satisfy the terms of
a Nasdaq  qualifications  exception  which was  granted  on  September  8, 1998.
Although  the  Company  intends  to  challenge  the  delisting,  there can be no
assurance that the Company's  common stock will be re-listed on The Nasdaq Small
Cap Market after completion of the review process.  If the Company's  securities
are  excluded  from The Nasdaq  Small Cap Market,  it may  adversely  affect the
prices of such securities and the ability of holders to sell them.

     In  the  event   that  the   Company   is  unable   to   satisfy   Nasdaq's
re-listing/maintenance  requirements,  trading  would be  conducted in the "pink
sheets" or on the NASD's  Electronic  Bulletin Board. If the Common Stock is not
quoted  on The  Nasdaq  SmallCap  Market,  and  if the  Company  does  not  have
$2,000,000 in net tangible assets,  trading in the Common Stock would be covered
by rules  promulgated  under the Exchange Act for  non-Nasdaq  and  non-exchange
listed  securities.   Under  such  rules,   broker/dealers  who  recommend  such
securities to persons other than established  customers and accredited investors
must make a special  written  suitability  determination  for the  purchaser and
receive  the  purchaser's  written  agreement  to a  transaction  prior to sale.
Consequently,  the rule would affect the ability of holders of the Common Stock,
including  purchasers  in this  offering,  to sell  their  Common  Stock  in the
secondary market.  Securities are exempt from these rules if the market price is
at least $5.00 per share.

     The SEC has adopted  regulations  that generally define a penny stock to be
any  equity  security  that has a market  price of less than  $5.00  per  share,
subject to certain exceptions. Such exceptions include an equity security listed
on The Nasdaq  SmallCap  Market and an equity  security issued by an issuer that
has (i) net tangible assets of at least  $2,000,000,  if such issuer has been in
continuous  operation  for three  years,  (ii) net  tangible  assets of at least
$5,000,000 if such issuer has been in  continuous  operation for less than three
years, or (iii) average  revenue of at least  $6,000,000 for the preceding three
years.  Unless an exception is available,  the regulations require the delivery,
prior to any  transaction  involving a penny  stock,  of a  disclosure  schedule
explaining the penny stock market and the risks associated therewith.

     If the  Company's  Common  Stock were to be subject to the  regulations  on
penny  stocks,  the market  liquidity  for the Common  Stock  would be  severely
affected by the more limited ability of  broker/dealers to sell the Common Stock
in the public  market.  There is no  assurance  that  trading  in the  Company's
securities  will  not be  subject  to  these or  other  regulations  that  would
adversely affect the market for such securities.

     As a result of delisting, an investor may find it more difficult to dispose
of, or to obtain  accurate  quotations  as to the price of,  the  Common  Stock.
Delisting  from The  Nasdaq  SmallCap  Market  may also cause a decline in share
price,  loss of  news  coverage  of the  Company  and  difficulty  in  obtaining
subsequent financing.
    
ITEM 6.      MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
               RESULTS OF OPERATION 

Results of Operations

      Year ended August 31, 1998 Compared to Year Ended August 31, 1997.

     Revenues  for the year ended August 31, 1998,  decreased by  $5,394,141  to
$13,272,991 from $18,667,132 for the year ended August 31, 1997. The decrease is
primarily  due to a 50%  decline in the Dino Oil  commercial  gasoline  business
which has  experienced  strong price  undercutting.  Revenues also suffered as a
result of lower selling prices which followed declining custs of product. Retail
gasoline product increased due to higher revenue gallon sales.  Propane revenues
were flat year to year.

     Cost of Revenues for the year ended August 31, 1998 decreased by $4,633,188
to $10,044,192.  This decrease is due to the lower cost of product and the other
factors mentioned above.

     Gross profit was 24.3% of revenue at August 31, 1998, an increase over the
21.4% at August 31, 1997.

     Selling,  General and Administrative Expenses for the year ended August 31,
1998 increased to $4,216,569 from $4,122,861 for the year ended August 31, 1997,
due to professional fees.  Selling,  general and administrative  expenses mainly
represent fixed costs.

     Depreciation  and Amortization for the year ended August 31, 1998 decreased
to $1,269,608  from  $1,319,443 for the year ended August 31, 1997. The decrease
is primarily attributable to certain fixed asset being fully depreciated.

     Bad debt  expense for the year ended  August 31, 1998  decreased to $12,562
from  $4,694,998  for the year ended August 31, 1997.  The bad debt  expenses in
1997 primarily  resulted from the ATI bankruptcy  and  management's  decision to
write-off the entire  pre-petition note receivable due from ATI of $3,877,563 in
addition to the other write-offs of $817,435.

     Interest  Expense  net for the year ended  August  31,  1998  increased  to
$664,459  from $402,518 for the year ended August 31, 1997 due to an increase in
certain indebtedness of the Company as compared to the same period last year.

     Net Rental Income for the year ended August 31, 1998 increased by $125,643.
The increase was due to increased gasoline station and other rental income.

     Gain on the sale of asset for the years ended  August 31, 1998 and 1997 was
$200,000 and 175,667,  respectively.  The gain was due to the sale of the retail
fuel oil customer list of Rockland Fuel Oil, Inc., a wholly-owned  subsidiary of
HQ Propane ("Rockland"). to an independent third party distributor.

Factors  That May  Affect  Future  Results

     This report contains various forward-looking  statements within the meaning
of the Private Securities  Litigation Reform Act of 1995,  including  financial,
operating and other projections. These statements are based on current plans and
expectations of the Company and involve risks and uncertainties that could cause
actual future  activities  and results of operations to be materially  different
from those set forth in the forward-looking statements.

     Important factors that could cause actual results to differ include,  among
others,  risks associated with acquisitions and achieving  targeted cost savings
levels,  fluctuations in operating  results because of acquisitions,  changes in
applicable  government  regulations  (environmental  and  other) the  impact of
litigation,  competition,  changes in prices for petroleum-based  products. As a
result  of  these  factors,   the  Company's  revenues  and  income  could  vary
significantly from quarter to quarter, and past financial performance should not
be considered a reliable indicator of future performance.

Liquidity and Capital Resources

     Management  has seen a recent  decline in the cost of  petroleum  products
which has resulted in decreased sales  revenues.  While the Company has achieved
increased efficiencies in its core businesses,  the Company is not in a position
to meet its working capital,  capital  expenditure and acquisition  requirements
through operations. Without additional financing, there can be no assurance that
the  Company  will be able to meet its  cash  requirements  for the next  twelve
months. In this regard, management believes that its underlying assets have been
significantly  underutilized  for quite some time due to the  Company's  lack of
success in obtaining the desired  level of financing.  The Company will continue
to pursue  additional  financing  from a lending  facility or an offering of its
securities to enable the Company to meet the above-referenced cash requirements.
There can be no assurance  that the financing will occur or that the Company can
find suitable acquisitions in the foreseeable future.

     HQ  Gasoline  will have  to invest a minimum of  approximately $283,000 by
the end of December 1998 in order to meet Federal EPA and State  Regulations for
underground storage tanks.  Through August 31, 1998, the mandatory  requirements
for 5 of the Company's locations have been completed.

     In addition,  the Company plans to rebuild 13 of 25 gasoline stations which
will  generally  require  $20,000 to $750,000  per  location for an aggregate of
$2,500,000  (inclusive of the  environmental  upgrades  referenced  above).  The
rebuilds will be phased in over two years in order to minimize volume losses due
to "downtime" encountered while each station location is under construction.

     Capital  expenditures  for the year ended  August 31,  1998 were  $270,797.
Included  in this  amount were  expenditures  for  propane and other  equipment,
improvement to gas stations and the terminal facility,  and improvements  and/or
purchases of trucks and auto.
      
     On June 8, 1995 the  Company  acquired  all of the  capital  stock of White
Plains  Fuel,  Inc. in exchange  for Company  stock  valued at  $1,008,120.  The
shareholders of White Plains Fuel, Inc. received 168,020 shares of newly created
Series  A -  7.5%  Cumulative  Convertible  Redeemable  Preferred  Stock  of the
Company.  For the fiscal  year ended  August 31,  1998,  the  Company  declared
dividends on the Series A Preferred  Stock totaling  $75,609.  The Company sold
the  customer  list and  certain  other  assets of White  Plains  Fuel,  Inc. in
October 1998 (to the third party that had operated such business  since June
1995) for a purchase price of $361,000.

     On January 10,  1996,  a total of 325,000  shares of the  Company's  common
stock was  reserved for the 1996 stock  option  incentive  plan for officers and
employees.  Common stock which had been granted  under such plan through  August
31,  1998 was  242,000  (all of which are five year  options  granted  in either
November 1996, August 1997 or July 1998), at exercise prices ranging from $.6250
per share to $1.26 per  share,  leaving a balance  of 83,000  options in reserve
under  such plan as of August  31,  1998.  Additionally,  certain  officers  and
employees of the Company  were granted five year options  (outside of such plan)
to purchase a total of 600,000 shares of the Company's  common stock in November
1996, at an exercise  price of $.6250 per share  (500,000 of which were assigned
to Infinity (as  described  below) in March 1998),  and five year options  (also
outside of such plan) to purchase 60,000 shares of the Company's common stock in
July 1998 at an exercise price of $1.06 per share.

     During the year  ended  August  31,  1998,  the  Company  granted  ten year
options,  in partial  payment of the purchase price for a propane  customer list
and certain other assets acquired in April 1998, to acquire 10,000 shares of the
Company's  common stock at an exercise price of $1.12 per share.  Prior thereto,
the Company issued, for certain consulting  services,  50,000 five year warrants
(5,000 in  November  1996 and 45,000 in February  1997) at an exercise  price of
$.6250 per share, and 9,773 five year warrants (in November 1996) at an exercise
price of $1.534 per share.

    On December 31, 1996 the Company  entered  into an  agreement  with a third
party  distributor  pursuant  to which it is leasing to such  distributor  eight
gasoline  stations for a period of 10 years with an option for  renewal.  In the
second year of the lease,  the  distributor  prepaid the rent to the Company.The
Company is carrying $138,413 as deferred income at August 31, 1998.

     On May 16, 1997 the Company  entered into an agreement  for the sale of its
retail fuel oil customer list to an  independent  third party  distributor.  The
terms of the sale were $200,000 at closing,  $200,000 on the first  anniversary,
and $127,000 on the second anniversary with interest on outstanding amounts at a
rate of 6% per annum.  The  Company  is  recording  this sale on an  installment
basis. In connection with this sale, since the related receivable is collectible
over an  extended  period of time and  collectibility  is  uncertain,  profit is
recognized  under the  installment  method as the  receivable is collected.  The
Company will recognize profit when payments are received.

     On June 9, 1997, the Company obtained a one-year  revolving credit facility
in the  maximum  principal  amount of  $1,000,000.  The  maturity  date has been
extended to September 4, 1998, and thereafter,  such  indebtedness is payable on
demand.  Interest accrues on outstanding balances at the prime rate plus 10% per
annum,  subject to a minimum of 17% per annum until June 1, 1998,  at which time
the  minimum  increased  to 20% per annum.  The credit  facility is secured by a
security  interest  in  all  of  the  Company's  accounts  receivables,  general
intangibles,  contract  rights and  inventory,  as well as by the  guarantees of
Claire E. Tarricone, Joseph A. Tarricone, and Anthony J. Tarricone. As of August
31, 1998 the outstanding principal balance was $797,500.

     The Company has advanced  funds to A.  Tarricone,  Inc.  ("ATI") its former
parent and brother-sister  corporation with the same majority shareholders,  for
necessary and ordinary gasoline and diesel purchases. ATI is currently operating
under Chapter 11 of the Federal  Bankruptcy  Laws.Such advances are secured by a
first lien of 50% of all of the ATI's post-petition  assets and a second lien on
the balance of ATI's post petition  assets.In  addition,  the Company reimburses
ATI, under a management agreement which expired on August 31, 1998, which is now
month to month, for clerical,  administrative,  payroll and other costs incurred
by ATI. Such management fee is accrued monthly and is recorded as a reduction of
the amount due to ATI. For each of the years ended August 31, 1998 and 1997, the
Company was charged $360,000 in connection with such expenses. 
 
     During the year  ending  August  31,  1998,  the  Company  made  additional
advances to ATI of $550,117 of which $360,000 was repaid. At August 31, 1998 the
Company was owed $768,965.

     On  September  24,  1997,  the  Company,  Claire E.  Tarricone,  Anthony J.
Tarricone and Joseph A. Tarricone and Infinity  Investors  Limited  ("Infinity")
entered into a certain Restructuring Agreement (the "Restructuring  Agreement").
Under the terms of the  Restructuring  Agreement,  Infinity  agreed to  exchange
6,960 shares of Series B Preferred Stock in the Company,  all accrued and unpaid
dividends  on  the   outstanding   shares  of  Series  B  Preferred   Stock  and
appriximately  $78,000  of  indebtedness  owing to  Infinity  for the  Company's
Subordinated  Promissory Note in the principal  amount of $600,000 (the "Note").
The  Note  accrues  interest  at 12%  per  annum  compounded  quarterly  through
September 24, 1999 and accrues simple  interest at 12% per annum after September
24,  1999.  The note  matures on  September  24,  2002,  although the Company is
required to make mandatory prepayment upon the occurrence of certain events. The
terms of the balance of the 560,125 shares of Series B Preferred  Stock owned by
Infinity were amended to provide, among other things, for (i) a fixed conversion
price of $4.00  per share of  Series B  Preferred  Stock,  (ii) the  removal  of
certain  limitations on the rights of holders of the Series B Preferred Stock to
convert  those shares into the  Company's  Common  Stock( which the Company also
agreed to register),  and (iii) an increase in the dividend rate of the Series B
Preferred  Stock  to 12%  from 8% per  annum.  In March  1998,  pursuant  to the
applicable  provisions  of the  Restructuring  Agreement,  Infinity  elected  to
further  amend the terms of the  Series B  Preferred  Stock to the  effect  that
dividends would cease accuring (i.e.,  the dividend rate would decrease from 12%
per annum to 0% per annum),  and in connection  therewith,  Infinity  elected to
cause certain of the Company's  officers/directors  to transfer to Infinity five
year  options to acquire  500,000  shares of the  Company's  common  stock at an
exercise price of $.6250 per share (as referenced above).

     At August 31, 1998,  certain  parties were owed an aggregate of $623,276 by
the Company, which are non-interest bearing, payable on demand at any time on or
after September 1, 1998. In October 1998,  approximately $290,000 of this amount
was exchanged for common stock in the company.

     The Company had a working capital  deficiency of  approximately  $3,219,551
and a ratio of current  assets to current  liabilities of  approximately  41% or
1:2.44 as at August 31, 1998.
     
     
Inflation

      There was no significant impact on the Company's operations as a result of
inflation during fiscal 1997 and fiscal 1998.

Year 2000 Computer Software Conversions

     The  Company  relies  on  numerous  computer  programs  in  its  day to day
business.  Older computer programs use only two digits to identify a year in its
date field.  As a result,  when the Company has to identify  the year 2000,  the
computer  will think it means the year 1900 and the  operation  attempting to be
performed may fail or crash thus resulting in the potential  interference in the
operations  of the  Company's  business.  The  Company has  formulated  plans to
safeguard   against  the  Year  2000  conversion   problem.   The  cost  of  the
implementation  of the Year 2000 safeguards will not be material to the Company.
The Company has completed a portion of the Year 2000  conversion.  The remainder
of the  conversion  is expected by March 1999.  The cost for this portion of the
Conversion has been minimal.

Recent Accounting Pronouncements

     In June 1997, the Financial  Accounting  Standards  Board  ("FASB")  issued
Statement No. 130, "Reporting  Comprehensive Income" ("SFAS 130"), effective for
periods  beginning  after December 15, 1997.  SFAS 130, which will be adopted in
the first quarter of the year ending August 31, 1999,  establishes standards for
reporting and displaying comprehensive income and its components.  Comprehensive
income is defined as the change in equity during a period from  transactions and
other events and  circumstances  from non-owner sources and includes all changes
in  equity  during a period  except  those  resulting  from  investments  by and
distributions to owners.  Adoption of this standard will not require  additional
financial statement disclosures.

     In June 1997, FASB issued Statement No. 131, "Disclosures About Segments of
an  Enterprise  and Related  Information"  ("SFAS  131"),  effective for periods
beginning  after December 15, 1997. SFAS 131, which will be adopted as of August
31, 1999, establishes standards for the reporting by public business enterprises
of  information  about  operating  segments  in  interim  and  annual  financial
statements.  The  Company  is  currently  evaluating  the  impact,  if any,  the
implementation of this standard will have on the disclosures in the consolidated
financial statements.

ITEM 7.     FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

      The consolidated financial statements of the Company,  including the notes
thereto, together with the independent auditors' report, are presented beginning
on page F-2.

<PAGE>


                               PART III

ITEM 9.     DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND
                   CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a)
              OF THE EXCHANGE ACT.

                              MANAGEMENT

The names and ages of the directors and executive officers of the Company are as
follows:

Name                     Age            Position with the Company
----                     ---            -------------------------

Claire E. Tarricone      42             President and Director

Anthony J. Tarricone     37             Vice President, Secretary and Director

Joseph A. Tarricone      36             Vice President, Treasurer and Director

Edwin Goldwasser         66             Director

Joseph Gatti             68             Director 

     Claire E.  Tarricone  has been the  President and a Director of the Company
since July 27,  1993.  Ms.  Tarricone  has also  served as the  President  and a
Director of HQ Propane and Rockland Fuel since 1992. In June 1995 Ms.  Tarricone
also became  Director  of White  Plains  Fuel,  Inc.  From 1991 until 1992,  Ms.
Tarricone  served as Vice  President/General  Manager of HQ Propane in charge of
its operating  divisions.  Ms.  Tarricone has been President and Director of ATI
since November 1992, and Vice President for at least three years prior thereto.

      Anthony J. Tarricone has been Vice President,  Secretary and a Director of
the  Company  since  July 27,  1993.  Mr.  Tarricone  has been  Vice  President,
Secretary and a Director of HQ Propane and Rockland  Fuel since 1992.  From 1991
until the present,  Mr. Tarricone has served as ATI's gasoline  division manager
and has served in similar capacity with HQ Gasoline since September 1993.

      Joseph A.  Tarricone has been Vice  President,Treasurer  and a Director of
the Company since July 27, 1993. Mr. Tarricone has been Vice President,Treasurer
and a Director of HQ Propane and Rockland Fuel since  November  1992.  From 1990
until 1992, Mr. Tarricone was sales manager for HQ Propane and ATI,  responsible
for the development of commercial gasoline and diesel fuel sales for HQ Terminal
and ATI.  From  1988 to 1993,  Mr.  Tarricone  served  as  President  of  Energy
Technology Services, Inc., an energy use and planning consulting firm.

      Edwin  Goldwasser  has been a Director of the Company since July 27, 1993.
From April 1992 to the present, Mr. Goldwasser has served as a consultant to the
Company.  For at least the five years prior to that,  Mr.  Goldwasser  served as
Vice  President  of  Administration  and  Finance  in charge  of all  financial,
accounting and legal affairs for ATI.

     Joseph Gatti has been a director of the Company since February 1998. He has
been  Managing  Director - Corporate Finance at Spencer Trask  Securities,  Inc.
since May 1996.  He was a Vice  President  -  Corporate  Finance at Robert  Todd
Securities from  January 1984 to  December  1994 and Vice  President - Corporate
Finance at Reich & Company from April 1990 through December 1993.

      Claire Tarricone, Anthony Tarricone and Joseph Tarricone are
siblings.

      All  Directors   hold  office  until  the  next  annual   meeting  of  the
shareholders and the election and qualification of their  successors.  Directors
currently receive no regular compensation for serving on the Board of Directors,
though Mr. Gatti received certain stock options in connectin therewith. See 
"SECURITIES OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT." No Director
received any cash compensation for serving as a Director of the Company during
the past fiscal year.  Officers of the Company are appointed  annually by the
Board of Directors.

      As permitted  under Nevada law, the  Company's  Articles of  Incorporation
eliminates the personal  liability of the Directors to the Company or any of its
shareholders for damages for breaches of their fiduciary duty as Directors. As a
result of such provisions, shareholders may be unable to recover damages against
Directors  for  actions  taken  by them  which  constitute  negligence  or gross
negligence or that are in violation of their  fiduciary  duty.  The inclusion of
this  provision  in the  Company's  Articles  of  Incorporation  may  reduce the
likelihood  of  derivative  litigation  against  directors  and  other  types of
shareholder litigation.

      The directors and executive officers of the Company and the owners of more
than ten percent (10%) of the Company's outstanding Common Stock are required to
file  reports  with the  Securities  and  Exchange  Commission  and with  NASDAQ
reporting  changes  in the  number  of  shares  of the  Company's  Common  Stock
beneficially owned by them. Such persons are required by Securities and Exchange
Commission  regulation  to furnish the Company with copies of all Section  16(a)
forms  they  file.  Based  solely  on its  review of the  copies  of such  forms
furnished to the Company and written representations from the executive officers
and directors,  the Company believes that all Section 16(a) filing  requirements
were met during  fiscal 1997 and 1998,  except that  Claire  Tarricone,  Anthony
Tarricone  and Joseph  Tarricone  filed one report after the  applicable  filing
deadline.

ITEM 10.     EXECUTIVE COMPENSATION

Summary Compensation

      The following table shows,  as to the Chief Executive  Officer and each of
the  other  executive  officers  whose  salary  plus  bonus  exceeded  $100,000,
information  concerning  compensation  paid for  service  to the  Company in all
capacities  during the  fiscal  year ended  August  31,  1998,  as well as total
compensation  paid to each such individual for the Company's two previous fiscal
years (to the extent that such person was the Chief Executive officers and/or an
executive officer, as the case may be, during any part of such fiscal year):

                           Summary Compensation Table
                         --------------------------
                                                            Long Term
                               Annual Compensation      Compensation Awards
                               -------------------      -------------------
Name and Principal             Fiscal      Other Annual   Restricted  Options
Position (1)           Year  Salary/Bonus Compensation(2) Stock Awards SARs(#)
                       ----  ------------ --------------- ----------- -------
Claire E. Tarricone    
President              1998   $  54,600      $ 9,257                  15,000 (3)
                       1997   $  54,600      $ 9,297                 210,000 (3)
                       1996   $  54,600      $15,034                  50,000 (3)
 
     (1) The Company does not have any executive  officers  whose  compensation
      exceeded $100,000 during the applicable fiscal periods.

     (2) Represents amount payable under Ms. Tarricone's  employment  agreement
      with the Company for certain  insurance  premiums and for taxes  resulting
      from such additional compensation.

     (3) Reflects the grant of options under the Company's 1996 Stock Incentive 
     Plan (as described below), which options are not  intended  to  qualify  as
     "incentive  stock options" under Section 422 of the United States  Internal
     Revenue Code of 1986,  as amended and which options are  exercisable  for a
     price of $9.00 per share of the company's common stock, par value $.001 per
     share.  The 50,000  options were canceled on November 14, 1996 in favor of
     the grant of 200,000 new options to Ms.  Tarricone,  which options (a) were
     not granted  under the aforesaid  plan,  (b) are not intended to qualify as
     "incentive  stock options" under Section 422 of the United States  Internal
     Revenue Code of 1986, as amended,  and (c) are  exercisable  for a price of
     $.6250 per share of the Company's  common stock, par value $.001 per share.
     In addition,  on August 12, 1997, Ms.  Tarricone was granted 10,000 options
     under the plan with an exercise price of $1.26 per share, and on July 31,
     1998, Ms.Tarricone  was  granted  15,000  options outside of such plan with
     an exercise price of $1.06 her share.

      The Board of Directors of the Company  voted to adopt the  Company's  1996
Stock  Incentive  Plan (the "Plan") on January 10, 1996,  subject to shareholder
approval.  The  shareholders  of the  Company  approved of the Plan on April 22,
1996. The Plan was amended by the Board of Directors  effective December 1,1996.
The Plan gives the Company the flexibility to enable it to obtain and retain the
continued  services of the personnel  necessary for its growth and  development.
The Plan provides, among other things, for the granting of options to acquire up
to 325,000 shares of the Company's common stock, $.001 per value per share. Such
options  may  qualify as  "incentive  stock  options"  under  Section 422 of the
Internal Revenue Code of 1986, as amended, or as non-qualified options.

      The Company  does not  presently  maintain any other stock option or other
stock or long-term compensatory plan for its employees.

Employee Agreements

      The Company has entered into five year Employment  Agreements with each of
Claire E.  Tarricone,  Anthony  Tarricone and Joseph  Tarricone.  The Employment
Agreements  automatically  extend for an additional  one year at the end of each
year of the term  unless  either  party  notifies  the other of his,  her or its
election  not to so further  extend the term.  The  employment  contracts  which
became  effective  on  August 5,  1993,  provide  for  annual  salaries  to such
individuals  of (i)  $100,000,  $75,000  and  $75,000  in  years  one  and  two,
respectively,  (ii)  $125,000,  $100,000  and  $100,000 in years three and four,
respectively, (iii) $150,000 , $125,000 and $125,000 in year five, respectively.
Each of the Tarricone's has waived her or his rights (as the case may be) to any
unpaid annual salary (in excess of $54,600,  $60,000 and $60,000,  respectively)
attributable to the fiscal years ending August 31, 1994, August 31, 1995, August
31,  1996,  August  31,  1997 and  August  31,  1998.  After the fifth  year the
Employment  Agreements  provide  that the base salary of such  individuals  will
increase  by an amount  equal to the  greater  of 15% or the  annual  percentage
increase if any, in the Consumer  Price Index  distributed  by the United States
Department of Labor.  Under such  Employment  Agreements,  each of the foregoing
persons  must  devote  substantially  all of his or  her  time  to the  Company;
provided,  however, that such person is entitled to be engaged as an employee by
ATI. The  Employment  Agreements are terminated by the Company on 60 days notice
for "cause" or if any of the Tarricone's have become so incapacitated  that they
are unable to resume,within  the ensuing 540 days,  their respective  employment
with the Company by reasons of physical or mental  illness or injury,  or is any
shall not have substantially  performed their duties for 540 consecutive days by
reason of any such physical or mental illness.

     Each of the Tarricone's will be entitled to terminate his or her employment
and  receive a severance  payment  equal to 2.99 times his or her base salary at
the time of  termination  upon (i) the  acquisition of securities of the Company
representing  50% or more of the  combined  voting power of the  Company's  then
outstanding securities in a transaction to which any of the Tarricone's does not
consent.  (ii) the future disposition by the Company of all or substantially all
of its business  and/or assets in a transaction to which any of the  Tarricone's
does not  consent,  (iii)  the  occurrence  of any  circumstance  which,  in the
reasonable  judgment of any of the Tarricone's  has the effect of  significantly
reducing  their  duties or  authority,  (iv) the  breach by the  Company  of its
material  obligations  under the Employment  Agreement or (v) the termination of
the  Employment  Agreement by the Company for any reason other than for cause or
by mutual  agreement  of the Company and any of the  Tarricone's.  Additionally,
upon termination, each of the Tarricone's would receive (a) the estimated amount
which would have been payable to each pursuant to any bonus pool  established by
the  Company for the fiscal year during  which such  termination  occurred;  (b)
health,  accident, life and disability insurance for the longer of one (10) year
term or the balance of the  Employment  Agreement;  and (c) immediate  rights to
exercise  any stock  options  granted,  regardless  of whether such options were
exercisable at the time of termination.

      Each of the  Employee  Agreements  contains a covenant not to compete with
the Company or solicit its  customers or employees  for a period of one (1) year
after the employment of any of the Tarricone's is terminated, provided that such
person is entitled to be engaged as an employee by ATI. 

Indemnification of Directors and Officers/Liability of Directors and Officers

      Under the Nevada General Corporation Law, as amended, a director, officer,
employee or agent of a Nevada  corporation may be entitled to indemnification by
the corporation under certain circumstances against expenses,  judgments,  fines
and amounts paid in settlement of claims brought  against them by a third person
or by or in right of the corporation.

      The Company is obligated under its Articles of  Incorporation to indemnify
any of its present or former directors who served at the Company's  request as a
director, officer or member of another organization against expenses, judgments,
fines and amounts paid in settlement of claims  brought  against them by a third
person or by or in right of the corporation if such director acted in good faith
or in a manner such  director  reasonably  believed to be in, or not opposed to,
the best  interests of the Company and,  with respect to any criminal  action or
proceeding,  if such  director  had no reason to believe  his or her conduct was
unlawful.  However with respect to any action by or in the right of the Company,
the Articles of Incorporation prohibit  indemnification in respect of any claim,
issue or matter as to which such director is adjudged  liable for  negligence or
misconduct  in the  performance  is his or her  duties  to the  Company,  unless
otherwise ordered by the relevant court. The Company's Articles of Incorporation
also permit it to indemnify  other persons  except  against gross  negligence or
willful misconduct.

      The Company is  obligated  under its bylaws to  indemnify  its  directors,
officers and other persons who have acted as a representatives of the Company at
its request to the fullest extent  permitted by applicable law as in effect from
time to time,  except for costs,  expenses or payments in relation to any matter
as to which  such  officer,  director  or  representative  is  finally  adjudged
derelict  in the  performance  of his or her  duties,  unless  the  Company  has
received  an  opinion  from  independent  counsel  that such  person  was not so
derelict.

      In addition,  pursuant to indemnification  agreements that the Company has
entered into with each of its  directors,  the Company is obligated to indemnify
its directors to the fullest  extent  permitted by applicable  corporate law and
its Articles of Incorporation. The indemnification agreements also provide that,
upon the request of a director and provided  that  director  undertakes to repay
amounts  that turn out not to be  reimbursable,  that  director  is  entitled to
reimbursement of litigation  expenses in advance of the final disposition of the
legal proceeding.

      The Nevada General Corporation Law, as amended, also permits a corporation
to limit the  personal  liability of its  officers  and  directors  for monetary
damages  resulting from a breach of their  fiduciary duty to the corporation and
its  stockholders.  The  Company's  Articles  of  Incorporation  limit  director
liability to the maximum extent permitted by the Nevada General Corporation Law,
which  presently  permits  limitation  of  director  liability  except (i) for a
director's  acts or omissions that involve  intentional  misconduct,  fraud or a
knowing violation of law and (ii) for a director's  willful or grossly negligent
violation of a Nevada  statutory  provision that imposes  personal  liability on
directors  for  improper  distributions  to  stockholders.  As a  result  of the
inclusion in the Company's  Articles of  Incorporation  of this  provision,  the
Company's  stockholders  may be  unable  to  recover  monetary  damages  against
directors as a result of their breach of their fiduciary duty to the Company and
its stockholders.  This provision does not, however,  affect the availability of
equitable  remedies,  such as injunctions  or rescission  based upon a breach of
fiduciary duty by a director.

      The  Company  currently  maintains  liability  insurance  in the amount of
$1,000,000 for the benefit of its officers and directors.

      The  foregoing  indemnification  obligations  are  broad  enough to permit
indemnification  with respect to liabilities  arising under the Securities  Act.
Insofar as the Company may  otherwise be permitted to indemnify  its  directors,
officers  and  controlling   persons  against   liabilities  arising  under  the
Securities Act or otherwise, the Company has been advised that in the opinion of
the Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable.


ITEM 11.   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
                    AND MANAGEMENT

Principal Stockholders

      The  following  table sets forth  information  regarding  ownership of the
Company's  voting  securities as of November 1, 1998 by (a) each person known by
the Company to beneficially  own more than five percent (5%) of any class of the
Company's  voting  securities,  (b) each  Director  of the  Company  and (c) all
Directors and Officers of the Company as a group. Except as otherwise indicated,
the named  person has sole  voting  and  investment  power with  respect to such
person's shares.

Name and Address of     Title of     No.of Shares   Percentage of   General
Beneficial Owner         Class          Owned      Class Owned (1) Voting Power
------------------      --------     ------------  --------------- ------------
Claire E. Tarricone   Common Stock     358,046(3)     11.7%(3)       11.4%(3)
33 Hubbells Drive                                    
Mt. Kisco, NY 10549

Anthony J. Tarricone  Common Stock     408,046(4)     13.3%(4)       12.9%(4)
33 Hubbells Drive                                                        
Mt. Kisco, NY 10549

Joseph A.Tarricone    Common Stock     408,046(5)     13.3%(5)       12.9%(5)
33 Hubbells Drive                                                        
Mt. Kisco, NY 10549

Alan Cianflone        Series A          84,010       50.0%            1.4%
42 Virginia Lane      Cumulative                                     
Thornwood, NY 10549   Convertible
                      Redeemable
                      Preferred Stock

Jack Troccoli         Series A          84,010       50.0%            1.4%
40 Reservoir Court    Cumulative
Carmel, NY 10512      Convertible
                      Redeemable
                      Preferred Stock

Infinity Investors, Ltd. Series B      560,125(6)   100.0%           35.3%(6)
27 Wellington Road    Cumulative                                          
Cork, Ireland         Convertible
                      Redeemable
                      Preferred Stock

                      Common Stock     567,285(6)    16.1%

Laurence Hughes       Common Stock     225,000        7.2%            6.9%(7)
49 Mountain Road                                                          
Pleasantville, NY 10570

Edwin Goldwasser      Common Stock         -0-             (8)            (8)
7616 Mansfield Hollow Drive
Delray Beach, Florida 33446

Joseph Gatti           Common Stock     20,000             (9)            (9)
535 Madison Avenue
New York, NY 10022
     
All Executive Officers and
Directors as a group(5 persons)       1,194,138      36.89%           35.96%
                                                                          
      (1) Based upon 3,013,750 shares of Common Stock outstanding as of November
      1, 1998.

      (2) Based on 3,013,750 common and 168,020 Series A Cumulative  Convertible
      Redeemable Preferred Shares outstanding as of November 1, 1998.  Each of
      the 168,020 shares of Series A Cumulative Convertible Redeemable Preferred
      Stock is entitled  to vote,  together  with the  holders of the  Company's
      Common  stock,  based upon the number of shares of Common Stock into which
      such shares are convertible.

      (3) Includes 25,000 shares of Common Stock that may be purchased pursuant
      to presently exercisable stock options and 128,274 shares of Common Stock
      that may be purchased by ATI pursuant to certain  warrants held by ATI and
      as to which Ms. Tarricone has an indirect  beneficial interest through her
      ownership  of  one  third  of  ATI.  Ms.  Tarricone  disclaims  beneficial
      ownership as to two-thirds of such 128,274 shares, which disclaimed amount
      correlates to the aggregate ownership percentage in ATI held by Anthony J.
      Tarricone and Joseph A. Tarricone.

      (4) Includes 25,000 shares of Common Stock that may be purchased pursuant
      to presently exercisable stock options and 128,274 shares of Common Stock
      that may be purchased by ATI pursuant to certain  warrants held by ATI and
      as to which Mr. Tarricone has an indirect  beneficial interest through his
      ownership  of  one  third  of  ATI.  Mr.  Tarricone  disclaims  beneficial
      ownership as to two-thirds of such 128,274 shares, which disclaimed amount
      correlates to the aggregate ownership percentage in ATI held by Anthony J.
      Tarricone and Claire E.Tarricone.

      (5) Includes 25,000 shares of Common Stock that may be purchased pursuant
      to presently exercisable stock options and 128,274 shares of Common Stock
      that may be purchased by ATI pursuant to certain  warrants held by ATI and
      as to which Mr. Tarricone has an indirect  beneficial interest through his
      ownership  of  one  third  of  ATI.  Mr.  Tarricone  disclaims  beneficial
      ownership as to two-thirds of such 128,274 shares, which disclaimed amount
      correlates to the aggregate ownership percentage in ATI held by Joseph A.
      Tarricone and Claire E. Tarricone.

      (6) The Series B  Cumulative  Convertible  Redeemable  Preferred  Stock is
      convertible into 1,085,244 shares of Common Stock.  Additionally, Infinity
      has the right to acquire an additional 500,000 shares of Common Stock upon
      the exercise of options previously held by the Tarricones.          
                                
      (7) Includes 125,000 shares of Common Stock that may be purchased pursuant
      to presently exercisable stock options.

      (8) Less than one percent.

      (9) Less than one percent; and includes presently exercisable stock
      options to purchase 20,000 shares of Common Stock.
----------------------------------------

      As of July 16, 1998, 984,248 shares of Common Stock  (approximately 33% of
the  outstanding  Common  Stock) were owned of record by Cede & Co., a nominee
of the Depository Trust Company. The Company has been advised by each of
the firms which Cede & Co.  indicates own more than 5% of the Common Stock that,
except as set forth above, as of the most recent  practical date it did not hold
more than 5% of the  Company's  outstanding  voting  securities  for any  single
person or, to its knowledge, any group.

ITEM 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

      On  December  7, 1992,  ATI  distributed  all of the  capital  stock of HQ
Propane to its sole  shareholders  Claire E.  Tarricone,  Anthony  Tarricone and
Joseph  Tarricone.  Simultaneously  with the  distribution,  ATI transferred the
assets of the HQ Terminal  division and all of the outstanding  capital stock of
Rockland  to HQ Propane  in partial  satisfaction  of ATI's  indebtedness  to HQ
Propane of  $4,200,000  previously  incurred by ATI in order to provide  certain
capital  improvements and additional working capital.  The appraised fair market
value of the assets  transferred by ATI to HQ Propane was  $2,200,000.  However,
the transaction was recorded at ATI's book value.

     ATI's  indebtedness  to the Company is evidenced by a 6%  Promissory  Note,
dated August 31, 1993,  with accrued  interest and  principal  due on August 31,
1998 (the "ATI Note"),  the balance of which  aggregated to $3,877,563 on August
31, 1997 (see immediately succeeding  paragraph).  On February 28, 1995 and July
31, 1995, ATI granted/transferred 8 station leaseholds and 1 fee property having
an appraised  fair market value of  $5,760,000  and 2 station  leaseholds  and 2
twenty year station  leasehold  extensions for $985,000  respectively as partial
satisfaction  of the ATI note. The fee property was  granted/transferred  to the
company  subject  to two  mortgages  payable  in the  amounts  of  $140,999  and
$496,177.  A former  director of one of the  entities  holding a  mortgage,  Don
Guarnieri,  was  formerly a director of the  Company.  On November  30, 1995 and
March 22, 1996, ATI granted/transferred 2 station leaseholds having an appraised
fair market value of  $1,365,000  in partial  satisfaction  of the ATI Note.  On
November 29, 1996 and February 28, 1997,  ATI  granted/transferred  4 additional
leaseholds  having  an  appraised  fair  market  value of  $690,000  in  partial
satisfaction of the ATI Note. See "LEGAL PROCEEDINGS."

     On June 10, 1997,  A.  Tarricone,  Inc.  ("ATI"),  the former parent of the
Company's  operating  subsidiaries  and divisions (ATI is wholly-owned by Claire
E.Tarricone, Anthony J.Tarricone and Joseph A.Tarricone, the Company's directors
and principal executive officers), filed a voluntary petition for reorganization
pursuant to Chapter 11 of the Bankruptcy Code (the "Code"). ATI has continued in
possession  of  its  property  and  in  the  management  of  its  affairs  as  a
debtor-in-possession  under the applicable provisions of the Code. In connection
with  the  bankruptcy  proceeding,   the  Company  has  asserted  (and  ATI  has
acknowledged)  pre-petition  claims  arising under a receivable  from ATI in the
amount of $3,877,563 and pre-petition liens on certain leasehold interests.  The
proceeding is before the United States  Bankruptcy  Court,  Southern District of
New York, and is referenced as "A. Tarricone,  Inc.,  97B21488." The Company has
determined  that its  asserted  pre-petition  liens may not have  been  properly
"perfected,"  in which case the Company  would be deemed an  unsecured  creditor
(rather than a secured  creditor) in the proceeding  (see "LEGAL PROCEEDINGS").
Additionally,   all  executory   contracts  between  ATI  and  the  Company  are
susceptible  to  rejection,  at  the  election  of  ATI,  under  the  applicable
provisions of the Code.  Furthermore,  any transfers  from ATI to the Company on
account of antecedent  debt (of ATI to the  Company)during  the one-year  period
prior to the date of  filing  of ATI's  voluntary  petition  may be  subject  to
avoidance under the applicable provisions of the Code.

      The Company has advanced funds to A.  arricone,  Inc.  ("ATI") its former
parent and brother-sister  corporation with the same majority shareholders,  for
necessary and ordinary gasoline and diesel purchases. ATI is currently operating
under Chapter 11 of the Federal  Bankruptcy  Laws.Such advances are secured by a
first lien of 50% of all of the ATI's post-petition  assets and a second lien on
the balance of ATI's post petition  assets.In  addition,  the Company reimburses
ATI, under a management agreement which expired on August 31, 1998, which is now
month to month, for clerical,  administrative,  payroll and other costs incurred
by ATI. Such management fee is accrued monthly and is recorded as a reduction of
the amount due to ATI. For each of the years ended August 31, 1998 and 1997, the
Company was charged $360,000 in connection with such expenses. 
 
     During the year  ending  August  31,  1998,  the  Company  made  additional
advances to ATI of $550,117 of which $360,000 was repaid. At August 31, 1998 the
Company owed $768,965.

     In December 1992, HQ Propane  entered into a management  agreement with ATI
pursuant to which ATI furnishes clerical,  administrative,  accounting,  payroll
and  insurance  services to HQ Propane.  ATI receives a fee of $30,000 per month
for  its  services.   The  term  of  the  management   agreement  extends  on  a
month-to-month  basis. Further HQ Propane entered into agreements with ATI under
which it  leased  the 21 of the  service  stations  comprising  its HQ  Gasoline
Division  from ATI until August 31, 1998 and paid rent for the service  stations
in the  approximate  amount of $54,000 per month.  Additionally,  until March 5,
1996 the  Company was paying to ATI a license fee of $.01 per gallon of gasoline
and diesel  fuel sold for the rights to use the "ATI"  trademark.  

     On March 5, 1996, the Company issued warrants to purchase 148,563 shares of
the  Company's  common stock to a related  party in exchange  for the  Company's
exclusive right to use the "ATI"  trademark.  The exercise price of the warrants
is equal to the  lessor  of $8.60  per share or a 40%  discount  to the  average
closing bid price.  The average  closing  bid price is  calculated  based on the
average of the closing bid prices of the  Company's  Common Stock as reported by
the  NASDAQ  Small  Cap  stock  market  for the five  trading  days  immediately
preceding  the date of the  exercise of the warrant.  The warrants  provide that
59,425 were immediately  vested on March 5, 1996, an additional 29,713 vested on
March  5,  1997,   and  the  balance   become  vested  in  three  equal  annual
installments. The market price at issuance was $8.60 per share. In consideration
of the issuance of such warrants,  the Company is no longer  required to pay the
license fee of $.01 per gallon for gasoline station sales.

     HQ Propane cannot operate its principal  terminal  facility until such time
as the pending applications for a terminal operator's license and diesel license
from the State of New York have been approved. Accordingly, ATI has continued to
operate the terminal facility on behalf of HQ Propane. Upon the issuance of such
licenses, HQ Propane will assume operations of its facilities directly. ATI also
supplies the Company's  operating  divisions  with fuel oil and diesel fuel, and
previously supplied the Company with gasoline, at ATI's cost plus one quarter of
one cent ($.0025) per gallon  purchased,  which  aggregated  $22,500  during the
fiscal year ended  August 31,  1997;  and  $13,669  during the fiscal year ended
August 31, 1998.

     The Company  has  outstanding  certain  promissory  notes in the  aggregate
principal  amount of $307,000 issued in connection  with a private  placement of
825,000 shares of Common Stock of the Company ("Bridge Notes").  Interest on the
Bridge  Notes  payable  quarterly  at a rate of 8% per  annum,  and  payment  of
principal  thereof  was  tied  to the  exercise  of the  Company's  Class  A and
1,600,000 Class B Redeemable  Warrants (the "Warrants")  which were issued,  and
subsequently  redeemed,  by the Company. In light of the Company's redemption of
its  outstanding  Warrants,  it is unclear when its obligation to make principal
payments on the  outstanding  Bridge Notes will come due.  However,  the Company
acknowledges  an obligation to make  principal  payments on the Bridge Notes and
continues to maintain such  obligation on its balance sheet.  Don  Guarnieri,  a
former  Director of the  Company,  purchased  one unit in  connection  with such
private  placement,  which unit was comprised of a $25,000  promissory note from
the Company and 4,125 shares of the Company's common stock.

      Claire,  Anthony  and  Joseph  Tarricone  are also  parties  to a Buy/Sell
Agreement  pursuant to which,  upon the death or disability of any of them,  the
non-deceased or non-disabled shareholders are required to purchase the shares of
the Company owned by the deceased or disabled  shareholder  for a price equal to
the fair market value of such shares. Each of the Tarricone's holds a $3,000,000
insurance  policy on the life of the others to partially  fund the buyout of the
shares upon death. In addition,  the  Tarricone's  have $1,000,000 of disability
buyout  insurance  which  will fund the  buyout  of such  shares in the event of
permanent disability.  In the event that the proceeds of such insurance policies
are  insufficient  to pay the full  price for such  shares,  the  balance of the
purchase price for the shares will be paid over a ten year period.

     At August 31, 1998,  certain  parties were owed an aggregate of $623,276 by
the Company, which is non interest bearing,  payable on demand at any time on or
after September 1, 1998. In October 1998,  approximately $290,000 of this amount
was exchanged for common stock of the company.

     See   "Executive   Compensation--Employment   Contracts,   Termination   of
Employment  and  Change  in  Control  Arrangements"  for a  description  of  the
Employment  Agreements  between the Company and Claire E. Tarricone,  Anthony J.
Tarricone and Joseph A. Tarricone.

     See "Executive Compensation--Indemnification of Directors and Officers" for
a description of indemnification  agreements between the Company and each of its
executive officers.


<PAGE>


              INDEX TO CONSOLIDATED FINANCIAL STATEMENTS



PAGE(S)
Halstead Energy Corp. and Subsidiaries


      Independent Auditors'Report...............................F-2 

      Consolidated Financial Statements:

          Consolidated Balance Sheet as of
             August 31, 1998....................................F-3 - F4

          Consolidated Statements of Operations for
             the years ended August 31, 1998 and
             1997...............................................F-5

          Consolidated Statements of Stockholders'
             Equity for the years ended August 31,
             1998 and 1997......................................F-6 - F-7

          Consolidated Statements of Cash Flows for
             the years ended August 31, 1998 and
             1997...............................................F-8

          Notes to the Consolidated Financial
             Statements.........................................F-9 - F-17













                                  F-1

<PAGE>

                          REPORT OF INDEPENDENT ACCOUNTANTS 



TO The Stockholders and 
Board of Directors of
Halstead Energy Corp.
 and Subsidiaries

     We have audited the  accompanying  consolidated  balance  sheet of Halstead
Energy  Corp.  and   subsidiaries  as  of  August  31,  1998,  and  the  related
consolidated statements of operations,  stockholders' equity, and cash flows for
the years ended August 31, 1998 and 1997.  These  financial  statements  are the
responsibility of the Company's management.  Our responsibility is to express an
opinion on these financial statements based on our audits.

     We conducted  our audits in accordance  with  generally  accepted  auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable  assurance about whether the  consolidated  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 Halstead
Energy Corp.  and  Subsidiaries  as of August 31, 1998, and the results of their
operations and their cash flows for the years ended August 31, 1998 and 1997, in
conformity with generally accepted accounting principles.

     The  accompanying  consolidated  financial  statements  have been  prepared
assuming that the Company will continue as a going concern. As discussed in Note
1(C) to the financial  statements,  the Company has sustained substantial losses
in the years ended August 31, 1998 and 1997,  has  experienced  a deficiency  in
cash flows from  operations  in the year ended August 31, 1998 and has a working
capital  deficiency at August 31, 1998 that raises  substantial  doubt about the
Company's ability to continue as a going concern.  Management's  plans in regard
to  these  matters  are  also  described  in  Note  1(C)  to  the   accompanying
consolidated financial statements.  The consolidated financial statements do not
include any adjustments that might result from the outcome of this uncertainly.

      
                                    MAHONEY COHEN & COMPANY, CPA, P.C.


New York, New York
November 9, 1998




                                   F-2


<PAGE>

                HALSTEAD ENERGY CORP. AND SUBSIDIARIES
                      CONSOLIDATED BALANCE SHEET
                            August 31, 1998
<TABLE>
<CAPTION>
                              A S S E T S
<S>                                                        <C>
CURRENT ASSETS
      
      Accounts  Receivable - Trade,  Net of Allowance
        for Doubtful  Accounts of $67,000 ............... $   753,928
      Inventories  ......................................     195,324
      Notes Receivable ..................................     170,055
      Notes Receivable - Related Party ..................     768,965 
      Prepaid Expenses and Other Current Assets .........     314,144
      Deferred Tax Asset.................................      27,000 
                                                            ---------
           TOTAL CURRENT ASSETS..........................   2,229,416


PROPERTY, PLANT AND EQUIPMENT - NET                        11,558,110

OTHER ASSETS
      Deferred Tax Asset ................................     355,000
      Intangible Assets - Net ...........................   1,321,113
                                                           ----------
           TOTAL OTHER ASSETS............................   1,676,113
                                                           ----------
           TOTAL ASSETS.................................. $15,463,639
                                                          ===========


<FN>

        See Accompanying Notes. 
</FN>
</TABLE>




                                  F-3


<PAGE>


                HALSTEAD ENERGY CORP. AND SUBSIDIARIES
                      CONSOLIDATED BALANCE SHEET (Continued)
                            AUGUST 31,1998
<TABLE>
<CAPTION>

                 LIABILITIES AND STOCKHOLDERS' EQUITY
<S>                                                        <C>
CURRENT LIABILITIES
      Accounts Payable -Trade........................       $ 2,426,112
      Notes Payable - Related Party..................           330,282
      Current Portion of Long-Term Debt .............         1,927,546
      Deferred Revenue...............................           247,558
      Accrued Expenses and Other Current Liabilities.           517,469
                                                            -----------
      TOTAL CURRENT LIABILITIES......................         5,448,967


Long-Term Debt - Net of Current Portion .............         2,406,768

Notes Payable Related Party - Net of Current Portion.           292,994

Security Deposits Payable............................           229,110
Deferred Revenue.....................................           111,084
                                                            -----------
      TOTAL LIABILITIES..............................         8,488,923

Preferred Stock, $.001 Par Value, 168,020 Shares
    Authorized-Series A 7.5% Cumulative Convertible
    Redeemable 168,020 Shares Issued and Outstanding
    ($1,008,120 aggregate liquidation preference)                   168
Paid-In Capital:Preferred Stock .....................         1,064,001
                                                            -----------
                                                              1,064,169
                                                            
COMMITMENTS AND CONTINGENCIES 

STOCKHOLDERS' EQUITY
     Prefeferred Stock,$.001  Par  Value,
       580,646 Shares Authorized Series B
       8.0%  Cumulative Convertible 560,125
       Shares Issued and  Outstanding
       ($4,338,580 aggregate iquidation
       preference) ...................................              560
     Common Stock, $.001 Par Value, 25,000,000 Shares
     Authorized, 2,524,081 Issued and Outstanding.....            2,524
     Paid-in Capital:Preferred Stock..................        3,614,800
                     Common Stock ....................        6,475,411
     Accumulated Deficit..............................       (4,082,748)
     Subscription Receivable..........................         (100,000)
                                                             -----------
     TOTAL STOCKHOLDERS' EQUITY                               5,910,547
                                                            -----------
     TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY             $15,463,639
                                                            ===========
 <FN>
           See Accompanying Notes. 
</FN>
</TABLE>
                                   F-4

<PAGE>


                     HALSTEAD ENERGY CORP. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                          For The Years Ended August 31,

<TABLE>
<CAPTION>
                                              
                                                   

                                                    1998         1997
                                               -------------   ----------
<S>                                           <C>             <C>
Sales........................................ $  13,272,991   $18,667,132

Cost of Sales................................    10,044,192    14,677,380
                                              -------------    ----------

GROSS PROFIT.................................     3,228,799     3,989,752

OPERATING EXPENSES
  Selling, General and Administrative Expenses    4,216,569     4,122,861
  Management Fee, Related Party ..............      360,000       360,000
  Net Rental Income ..........................     (742,513)     (616,870)
  Gain on Sale of Asset.......................     (200,000)     (175,667)
  Depreciation and Amortization...............    1,269,608     1,319,443
  Bad Debt Expense ...........................       12,562     4,694,998
                                               ------------    ----------
      TOTAL OPERATING EXPENSES                    4,916,226     9,704,765
                                               ------------    ----------

      LOSS FROM OPERATIONS....................   (1,687,427)   (5,715,013)

INTEREST EXPENSE, NET.........................      664,459       402,518
                                               ------------    ---------- 
LOSS BEFORE PROVISION FOR INCOME TAX..........   (2,351,886)   (6,117,531)

PROVISION FOR INCOME TAX .....................       44,394             0
                                               -------------   ----------
Net Loss                                         (2,396,280)   (6,117,531)
Preferred Stock Dividends                          (812,490)     (429,393)
                                               -------------   -----------
Net Loss Applicable to Common Shares           $ (3,208,770)  $(6,546,924)
                                               =============   ===========

Basic and Diluted Loss Per Share.............. $      (1.38)     $  (3.32)
                                               =============   ===========

Weighted Average Number of Common
      Shares Outstanding......................    2,328,713     1,974,740
                                               ============    ===========


<FN>
          See Accompanying Notes. 
</FN>
</TABLE>
                                   F-5



<PAGE>

               HALSTEAD ENERGY CORP. AND SUBSIDIARIES
          CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
           For The Years Ended August 31, 1998 and 1997
<TABLE>

<CAPTION>
                                                    Retained
        Preferred Stock, Common Stock,     Paid     Earnings   Stock
           $.001 Par      $.001 Par        In     (Accumulated   Sub.  Total
         Issued Amount  Issued  Amount    Capital   Deficit)     Rec.  Equity
         ------ ------  ------  ------    -------  ---------   ------- ------

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


 
Balance   
 at August 31,
 1996     572,246 $572    1,745,670  $1,746 $9,174,671 $5,320,634 $0 $14,497,623

Private
 Placement
 Costs      0       0             0       0     (5,151)        0   0     (5,151)


Cash
 Dividends
 Declared
 Preferred
 Series A   0       0             0       0          0   (75,610)  0   (75,610)

Cash
 Dividends
 Declared:
 Preferred,
 Series B   0       0             0       0          0    (1,471)  0    (1,471)

Common Shares
 issued to
 employees  0       0         7,500       8      8,567        0    0     8,575

Common
 Shares
 issued for
 acquisition of
 customer
 list       0       0       100,000     100    249,900        0    0   250,000

Conversion
 of Preferred
 Shares and
 Unpaid
 Dividend
 to Common
 Shares (5,161)    (5)       81,131      81      1,395        0    0     1,471

Common Shares
 issued to
 employee   0       0       100,000     100     99,900        0(100,000)     0

Common Shares
 issued on
 Conversion of
 Options    0       0        25,000      25     15,975       0     0    16,000

Net Loss 
 August 31,
 1997       0       0             0       0        0   (6,117,531) 0 (6,117,531)
        -----    ------      -------  -------  -------  --------  --- ---------
Balance
 at August 31,
 1997 567,085    567 2,059,301  2,060  9,545,257  (873,978) (100,000) 8,573,906
      
Dividends
 Declared:
 Preferred 
 Series A  0        0              0       0        0    (75,609)  0    (75,609)

                                   F-6

Dividends
 Declared:
 Preferred
 Series B  0        0              0       0        0   (467,814)  0   (467,814)

Common Shares
 Issued on
 Conversion of
 Options   0        0         200,000    200   163,800         0   0    164,000

Common Shares
 Issued to
 Consultant for
 Services
 Rendered  0        0         172,495    172   232,761         0   0    232,933

Conversion of 
 Series B Preferred
 Stock to Debt
        (6,960)    (7)              0      0   (56,261)        0   0    (56,268)

Restructuring of
 Series B Preferred
 Stock       0      0               0      0   (75,881)        0   0    (75,881)

Exercise of 
 Warrants   0       0         25,000      25    11,535         0   0     11,560

Common Shares
 Issued in Exchange
 for Dividends 0    0         67,285      67   269,000  (269,067)  0          0

Net Loss -
 August 31, 
 1998       0       0              0       0         0 (2,396,280) 0 (2,396,280)
          ----    ----       ------- -------   ------- ---------- --  ---------  
Balances at
 August 31,
 1998  560,125 $560 2,524,081 $2,524 $10,090,211($4,082,748)($100,000)$5,910,547              
       ======= ==== ========= ====== ==========  ==========  ======== ========== 








<FN>
       See Accompanying Notes. 
</FN>
</TABLE>
                                  F-7

<PAGE>



                HALSTEAD ENERGY CORP. AND SUBSIDIARIES
                 CONSOLIDATED STATEMENTS OF CASH FLOW
                     For the Years Ended August 31,

<TABLE>
<CAPTION>
                    
                                                         1998           1997
                                                      ----------      ----------
<S>                                                  <C>           <C>
Cash Flows From Operating Activities:

      Net Loss.....................................   $(2,396,280)  $(6,117,531)

      Adjustments to Reconcile Net Loss
       to Net Cash provided by (used in)Operating Activities:
      Non-Employee Compensation Expense from Common
       Stock issued during the year................       232,933             0
      Depreciation and Amortization................     1,269,608     1,319,443
      Deferred Revenue.............................             0       661,386
      Deferred Rent................................       111,084             0
      Gain on the Sale of Customer List............      (200,000)     (175,667)
      Bad Debt Expense ............................        12,562     4,694,998
      Deferred Income Tax Expense..................             0       230,406
      Change in Operating Assets and Liabilities:
        Accounts Receivable........................       281,974       (82,646)
        Inventory..................................       (26,394)       82,520 
        Prepaid Expenses and other Curent Assets...       303,724      (286,609)
        Accounts Payable, Accrued Expenses and Other
        Current Liabilities........................       346,714     1,278,538
                                                        ---------   -----------

      Net Cash Provided by (used in)
       Operating Activities........................       (64,075)    1,604,838

Cash Flows From Investing Activities:

      Net Proceeds From the Sale of Customer List..       200,000       175,667
      Acquisition of Intangible Assets.............      (108,894)      (72,067)
      Acquisition of Property and Equipment........      (270,797)     (263,907)
      Note Receivable..............................       397,710      (487,765)
      Advances to ATI..............................      (550,117)   (4,306,018)
      Repaymet of Notes Receivable ATI.............       360,000       360,000
      Security Deposits Payable....................        (8,696)      (21,752)
                                                       ----------    -----------
      Net Cash Provided by (used in) Investing
        Activities                                         19,206    (4,615,842)

Cash Flows From Financing Activities:

                                                       
      Increase (Decrease)in Cash Overdraft..........      (98,475)       98,475 
      Net Proceeds from the Issuance of Common Stock      164,000        19,424
      Proceed from Short Term Borrowings............       82,500       715,000
      Proceeds from Long Term Debt Borrowing........      407,752       265,000
      Net Borrowing from Related Parties............      263,996       359,280
      Repayment of Long Term Debt...................     (686,709)     (288,744)
      Repayment of Stockholder's Loan...............            0       (80,000)
      Preferred Stock Dividends.....................     ( 75,609)      (75,610)
      Cost of Restructuring Series B Preferred Stock     ( 75,881)         ----
                                                       ----------     ---------
                                       
      Net Cash Provided by (used in) Financing
       Activities...................................      (18,426)    1,012,825

      Net Decrease In Cash and Cash Equivilents.....      (63,295)   (1,998,179)


      Cash and Cash Equivelents at Beginning of Year       63,295     2,061,474
                                                       ----------     ---------
      Cash at End of Year...........................   $        0  $     63,295
                                                       ----------     ---------
Supplemental Disclosure - Cash Paid During the Year For:
      Interest Expense..............................   $  516,644  $    407,969
                                                       ----------     ---------
      Income Taxes..................................   $   44,394  $      6,597
                                                       ----------     ---------

                                   F-7
</TABLE>


Supplemental Schedule of Non-cash Investing and Financing Activities:

<TABLE>
<CAPTION>
                                                      1998            1997
                                                      ----            ----

      <S>                                         <C>            <C>
      Acquisition of Leaseholds in Exchange for
        Repayment of Note Receivable ATI          $  ----        $   690,000
                                                  ----------     -----------
      Acquisition of Customer List in Exchange
        for Common Stock                          $  ----        $   250,000
                                                  ----------     -----------
      Common Stock Issued in Exchange for Note
        Receivable                                $  ----        $   100,000
                                                  ----------     -----------
      Acquisition of Customer List and Equipment
        in Exchange for Note Payable              $  155,000     $   260,124
                                                  ----------     -----------
      Note Payable Issued for Unpaid Preferred
        Series B Dividends                        $  524,119         ------
                                                  ----------     -----------

      Exercise of Warrants in Exchange for Debt   $   11,560         ------
                                                  ----------     -----------
      Common Stock Issued in Exchange for
        Unpaid Dividends                          $  269,067     $     1,471
                                                  ----------     -----------


<FN>
        See Accompanying Notes. 
</FN>
</TABLE>




                                    F-8


<PAGE>


NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(A)   Organization

      The Company is engaged in the retail sale of propane,  propane  equipment,
      gasoline and diesel fuel. Fuel oil, gasoline and diesel fuel are also sold
      to wholesalers. The Company also services propane, heating equipment and
      appliances.

(B)   Principles of Consolidation

      The  consolidated  financial  statements  include the accounts of Halstead
      Energy  Corp.(the  "Company")  and its  wholly-owned  subsidiaries,  White
      Plains Fuel, Inc.,and Halstead Quinn Propane,Inc.("HQP"),and Rockland Fuel
      Oil, Inc.,a wholly-owned  subsidiary of HQP (together the "Company"). All
      inter-company accounts have been eliminated.

(C)   Basis of Presentation

      The accompanying financial statements have been prepared in conformity
      with generally accepted accounting principles which contemplate the
      continuation of the Company as a going  concern.  However,  the  Company
      has sustained substantial losses in the last two years and has experienced
      a deficiency in cash flows from operations in the fiscal year ended August
      31, 1998. The Company had a working capital deficiency of $3,219,551 as of
      August 31, 1998. While the Company has achieved increased efficiencies in
      its core business, the Company is not in a position to meet its working
      capital, capital expenditure and acquisition requirements through
      operations.  Without additional financing there can be no assurance that
      the Company will be able to meet its cash requirements for the next twelve
      months.  In this regard, management believes that its underlying assets
      have been significantly underutilized for quite some time due to the
      Company's lack of success in obtaining the desired level of financing.
      Management is reviewing its alternatives of raising additional capital.
      It is presently working with several financial and strategic partners to
      refinance existing  debt obligations of the Company. This financing is
      intended to extend the terms of its present debt obligations, and make
      available additional funds necessary to allow the Company to increase its
      purchasing  power thereby reducing  product cost and take advantage of the
      opportunities in the gasoline division to increase the number of stations
      in the chain and more appropriately utilize its underlying assets.

      Certain prior year amounts were reclassified to conform to this years
      presentation.

(D)   Use of Estimates  

      The preparation of the accompanying consolidated 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 consolidated financial statements and the
      reported amounts of revenue and expenses during the period. Actual results
      could differ from those estimates.
    
(E)   Inventories

      Inventories,  primarily  finished  petroleum  products,  are stated at the
      lower  cost or  market.  A  monthly  moving  average  method  is used  for
      determining  petroleum  product  costs.  Other  materials and supplies are
      valued at average cost.

(F)   Property Plant & Equipment

      Property Plant & Equipment are recorded at cost.  Assets recorded under
      Leaseholds are amortized on the straight-line method over the  shorter of
      the  term of the  lease  or the  useful  life of the related assets.
      Depreciation of property plant and equipment is computed by use of the
      straight line method over their estimated useful lives. The useful lives
      are as follows:

      Buildings and improvements                10-30 years
      Equipment                                  3-20 years
      Furniture and fixtures                     3-10 years
      Vehicles                                   3-10 years

                                   F-9


(G)   Impairment of Long-Lived Assets

      The Company  periodically  assesses  the  recoverability  of the  carrying
      amount  of  long-lived  assets,  including  intangible  assets.  A loss is
      recognized  when  expected  future  cash flows  (undiscounted  and without
      interest) are less than the carrying  amount of the asset.  The impairment
      loss is determined as the  difference by which the carrying  amount of the
      asset exceeds it fair value. Any resulting writedown is charged to
      expense.

(H)   Intangible Assets

      Intangible assets, consisting of customer lists and a trademark, are being
      amortized  on a  straight-line  basis  over 4 - 15 years,  the  period the
      Company  expects  to receive  benefits.  At August  31,  1998,  intangible
      assets, net of accumulated amortization of $853,951, was $1,321,113.

(I)   Customer Credit Balances

      Customer credit balances,  which is included in accrued expenses and other
      current  liabilities,  represent payments received from customers pursuant
      to a budget  payment plan (whereby  customers pay their  estimated  annual
      fuel  charges  on a fixed  monthly  basis) in excess of actual  deliveries
      billed.

(J)   Income Taxes

      Deferred  income  taxes are  provided  for the  effect of items  which are
      reported for income tax purposes in years different from that in which
      they are recorded for financial statement purposes. Future tax benefits,
      such as net operating  loss carry forwards, are recognized to the extent
      that realization of such benefits are more likely than not.

(K)   Revenue Recognition

      Revenue is recognized at the time the products are shipped to and accepted
      by the  customer  either  directly  from the Company or a vendor,  on drop
      shipments or from pick-up at the companies facilities. Retail revenue is
      recognized when delivered to the customer. In connection with certain 
      sales, when the related  receivables are collectible over extended periods
      of time and collectibility  is uncertain,  profit is recognized  under the
      installment method as receivables are collected.

(L)   Concentration of Credit Risk

      1.    Geographic Area

      Substantially   all  of  the  Company's   customers  are  located  in  the
      Westchester, Rockland, Putnam, Orange, Dutchess and Bronx Counties.

      2.     Major Vendors

      The  Company  purchased a  majority  of its  gasoline for its operations
      from three and five vendors (including ATI) for the years ended August 31,
      1998 and 1997, respectively. Those vendors represent approximately 100%
      and 98% of total  purchases for years ended August 31, 1998 and 1997. At
      August 31, 1998, these three vendors represented approximately 18% of the
      accounts payable balance.

      3.     Accounts Receivable

      The Company  performs  ongoing  credit  evaluations  of its  customers and
      records reserves for potentially  uncollectible accounts  receivable,which
      are declared credit risks as determined by management.

      4.    Cash

      The Company maintains its cash in bank deposit accounts at high credit
      quality  financial  institutions.  These  amounts  are  insured  up to the
      federally insured limits.

(M)   Environmental Costs

      The Company expenses,  on a current basis,  costs associated with managing
      hazardous substances and pollution in ongoing operations. The Company also
      accrues  for  costs  associated  with  the  remediation  of  environmental
      pollution when it becomes  probable that a liability has been incurred and
      the amount can be reasonably estimated.

                                   F-10

(N)   Earnings (Loss)Per Share

      On October 16, 1998 the Company effected a 1 for 2 reverse stock split.
      All share and per share data have been restated.  

      During the year ended August 31, 1998, the Company adopted Statement of
      Financial Accounting Standard No. 128 (SFAS 128) "Earnings Per Share."
      This statement requires the presentation of basic and diluted earnings per
      share ("EPS"). Basic EPS excludes dilution and is computed by dividing 
      income (loss) less preferred dividends by the weighted average number of 
      common shares outstanding for the period. Diluted EPS gives effect to all
      dilutive potential common shares that were outstanding during the period.
      The effect on loss per share of the Company's outstanding stock options
      and convertible warrants is anti dilutive for all periods presented and 
      accordingly not included in the calculation of the weighted average number
      of common shares outstanding.

          
Note 3 - PREPAID EXPENSES AND OTHER CURRENT ASSETS 

     
      Prepaid Expenses and other current assets consist of the following:
      
      Due from Employee                 $  30,401
      Due from Officers                    72,320
      Finance Costs                        23,212                               
      Prepaid Real Estate Taxes            99,098
      Prepaid Insurance                    16,158 
      Miscellaneous                        72,955
                                        ---------

                TOTAL                   $ 314,144
                                        =========
                                               

Note 4 - PROPERTY, PLANT AND EQUIPMENT 

       
      Property,  plant  and  equipment  is stated  at cost and  consists  of the
      following:

      Land                             $    944,000
      Gas Station Leaseholds              8,813,000
      Building and Improvements           2,513,820
      Equipment                           2,071,309
      Furniture and Fixtures                 83,587
      Vehicles                            1,425,555
                                       ------------

                TOTAL                    15,851,271


      Less: Accumulated Depreciation     (4,293,161)
                                        -----------
            NET                         $11,558,110
                                        ===========
                                                
NOTE 5 - NOTES RECEIVABLE

     Notes  receivable  consist of various notes relating to the sale of certain
     equipment,  customer  lists and issuance of common stock.  These notes have
     interest  rates ranging from 6% to 9% and are payable in monthly and annual
     installments.  

NOTE 6 RELATED PARTY
     TRANSACTIONS

     (A) The Company has advanced funds to A. Tarricone, Inc. ("ATI") its former
     parent and brother-sister  corporation with the same majority shareholders,
     for necessary and ordinary gasoline and diesel purchases.  ATI is currently
     operating under Chapter 11 of the Federal Bankruptcy Laws.Such advances are
     secured by a first lien of 50% of all of the ATI's post-petition assets and
     a second lien on the balance of ATI's post petition assets.In addition, the
     Company  reimburses  ATI,  under a management  agreement  which  expired on
     August 31, 1998, which is now month to month, for clerical, administrative,
     payroll and other costs  incurred by ATI.  Such  management  fee is accrued
     monthly and is recorded as a reduction  of the amount due to ATI.  For each
     of the years  ended  August 31,  1998 and 1997,  the  Company  was  charged
     $360,000 in connection with such expenses.

                                    F-11

     (B) Notes payable to stockholders and affiliated  entities are non-interest
     bearing and are payable on demand at anytime on or after September 1, 1998.
     In October 1998, approximately $290,000 was exchanged for common stock of
     the company.

     (C) During the year ending  August 31, 1998,  the Company made  additional
     advances to ATI of $550,117 of which $360,000 was repaid. At August 31, 
     1998 the Company was owed $768,965.

     (D)  The Company leases several gasoline stations and storage space from
     related parties and at August 31, 1998, the Company has recorded in
     accounts payable $159,750 for rents due. 

     (E)  During the fiscal year ended August 31, 1998, the Company purchased 
     for and resold to ATI approximately $1,600,000  of gasoline.  

Note 7- DEBT

      Long-term debt consists of the following:

          $1,000,000 revolving line of credit with a bank
          originally due 6/8/98,which was extended to
          September 4, 1998 and is now payable upon demand
          with interest at 18.5% (A)                                  $ 797,500 
                      
          Unsecured notes payable principal due on 9/24/02 
           with interest at 12%                                         688,811

          Mortgage Payable with interest at 12.5% payable 
           in monthly payments of $3,487 and matures 3/1/03
           secured by a customer list with a book value of
           $151,556.                                                    145,440

          Mortgage  payable  with  interest  at 9% and monthly
           principal  and interest  payments  of $5,038 with a
           balloon  payment of $378,359 due 1/16/01 (D)                 431,457
                          
          Mortgage  payable  with  interest at 9.5% (1% above
           prime) and monthly principal  payments of $2,800 with
           a balloon  payment of $334,800 due 10/01/00 (C)              407,600

          Mortgage payable with interest at 8.5% and monthly
          principal payments of $2,778 with a balloon payment
          of $333,333 due 5/17/99 (B)                                   364,290

          Mortgage payable with interest at 11% and monthly 
          principal payments of $2,778 with a balloon payment
          of $475,364 due 12/28/98 (B)                                  483,701

          Notes  payable with interest at 8%, each note was to
          be repaid in full with accrued  interest  within ten
          days of the Company  effectuating a warrant conversion
          resulting in gross proceeds of at least $1,000,000.
          The warrant  conversion  never took place and,
          accordingly, there is no payment date and terms on the
          notes                                                         307,000

          Mortgage  with  interest at 12.5% and monthly  principal 
          and interest payments of $1,704, with a balloon payment
          of $116,913 due 1/15/01 (D)                                   128,672 

          Mortgage due 12/01/99 with interest at 9.5% (1% above
          prime) and monthly principal payments of $3,300 (C)            61,235

          Vehicle and Equipment Notes:
          Notes payable for equipment  payable in various monthly
          principal and interest  payments with interest  ranging
          from 7.95%, to 12.3% and due dates ranging from 3/1/98
          to 7/1/02, collateralized by equipment with a market
          value of approximately $650,000                               518,608
                                                                     ----------
      Total                                                           4,334,314
      Less: Current Portion                                           1,927,546
                                                                     ----------
      Total Long-Term Debt                                           $2,406,768
                                                                     ----------
                                                                     ----------
                                     F-12   
               
A) The loan is secured by the Company's  accounts  receivable,  inventories  and
intangible  assets.  Certain officers of the Company have personally  guaranteed
the loan.

(B) The loan is secured by a first  mortgage on the Company's  headquarters  and
terminal  facility at  Alexander  Street.  Certain  officers of the Company have
personally guaranteed the loan.

(C) The loan is secured by a second mortgage on the property noted in (B).

(D) Secured by a gas station with a book value of $680,000.

Aggregate  principal  payments for each of the next five years  relating to long
term debt are as follows:
                                   Year Ending
                                   August 31,
                                ------------
                                    1999        $ 1,927,546
                                    2000            256,114
                                    2001          1,004,406
                                    2002             93,270
                                    2003          1,052,978
                                               ------------
                                                $ 4,334,314
                                               ============
                                               

     
NOTE 8 - INCOME TAXES

      The  following  is a  reconciliation  of the expected  federal  income tax
provision (benefit) and the actual provision (benefit) for income taxes:

                                                       1998            1997
                                                       ----            ----
      Expected tax (benefit) at statutory federal
         income tax rate of 34%                   ($  799,641)     ($2,079,961)

      State taxes, net of federal benefit            (139,702)        (363,256)

      Net operating loss carry back                                    241,000

      Valuation Allowance                             939,343        2,128,000

      Other                                            44,394           74,217
                                                    ---------        ---------
                                                   $   44,394        $     -0-
                                                    =========        =========

      Deferred income taxes are provided for the temporary  differences  between
      the  financial  statement  and  tax  bases  of the  company's  assets  and
      liabilities .  Income tax expense for the year ended August 31, 1998, is a
      result of New York State tax calculated on the Company's capital base.

                                   
      The components of deferred tax assets are as follows:

                                                               1998
                                                           -----------
      Deferred Tax Assets:
        Current:
          Allowance for Doubtful Accounts                   $   27,000
                                                            ==========


        Non Current:
          Property Plant and Equipment                      $  657,000
          Net Operating Loss Carry forward                   3,250,000
          Valuation Allowance                               (3,552,000)
                                                           -----------
          Total Non Current Deferred Asset                  $  355,000
                                                           ===========

     The Company has a net operating  loss carry  forward of  approximately
     $7,500,000  for federal and New York State tax purposes,  which will expire
     at various times through August 31, 2013. A valuation allowance has been
     recorded for the full amount of the operating loss carry forward and for
     $302,000 for the property plant and equipment. The valuation allowance
     increased by $1,424,000 during the year ended August 31, 1998.

                                   F-13

NOTE 9 - FINANCIAL INSTRUMENTS

     The Company's  financial  instruments consist of cash, notes receivable and
     debt  instruments.  The carrying amount of cash and short-term  instruments
     approximates  their fair values because of the  relatively  short period of
     time  between  the  origination  of  the  instruments  and  their  expected
     realization.  The fair value of the Company's  debt is based on the current
     market  interest rates being paid, and as a result,  it  approximates  fair
     value.  The Company cannot estimate the fair value of the notes  receivable
     and payable from its related parties due to the repayment terms.

NOTE 10 - OPERATING LEASES

     The Company leases gas stations and equipment under operating  leases which
     expire at various dates through  August 2013.  The Company also  sub-leases
     the above gas stations under operating leases which expire at various dates
     through January 2007.

      Minimum future rental payments and receipts under the operating  leases as
      at August 31, 1998 are as follows:

      For the Year Ending         Lease           Sublease
            August 31,           Payments         Receipts              Net
      -------------------     -----------      -----------        ----------
            1999                 862,041          889,960            (27,919)
            2000                 863,449          923,890            (60,441)
            2001                 827,836          921,373            (93,537)
            2002                 720,676          898,593           (177,917)
            2003                 715,576          807,499            (91,923)
          Thereafter           3,357,216        3,507,803           (150,587)
                              ----------       -----------        ----------
                              $7,346,794       $7,949,118        $  (602,324)
                              ==========       ===========       ===========

     The rental  payments  under the leases are subject to annual cost of living
     increases.  Net rental income  credited to  operations  for the years ended
     August 31, 1998 and 1997 amounted to $742,513 and  $616,870,  respectively,
     inclusive of $288,000 of income  relating to the rental of a customer  list
     to a third party in each year.
                                   
NOTE 11 - COMMITMENTS AND CONTINGENCIES

     (A)  Employment Agreements

     The Company has entered into employment  agreements with its officers for a
     five  year  term  ending  on  August  31,  2004 (with automatic one year
     extension each year unless prior notice not to further extend is delivered
     ninety (90)days before each year end).  

     (B)  Licenses Pending

     HQP's  principal  terminal  facility is  currently  operated by ATI pending
     approval  of HQP's  application  with the State of New York for a  terminal
     operator's  and diesel motor fuel  license,  and the  application  of White
     Plains Fuel,  Inc.("WPF") for their respective  diesel motor fuel licenses.
     Management  believes  the Company  has  substantially  completed  all steps
     necessary to receive such  licenses.  However,  these licenses have not yet
     been granted.  Management is awaiting approval of these licenses,  although
     there can be no assurances in this regard.

     (C) Litigation

     The Company has pending  certain legal  actions and claims  incurred in the
     normal course of business and is actively pursuing the defense thereof.  In
     the opinion of management these actions and claims are either without merit
     or are covered by insurance and will not have a material  adverse effect on
     the Company's financial position.

                                   F-14

     (D) Environmental Compliance

     The  Company's  operating  divisions  are  subject to various  governmental
     regulations. New regulations regarding underground storage tanks ("UST's"),
     including those at service stations, have been issued by the United  States
     Environmental Protection Agency (the "EPA"). The regulations cover the
     design, construction and installation of new UST systems, and require that
     existing systems meet certain EPA standards. The regulations require that
     owner/operators of UST systems demonstrate financial responsibility for the
     cleanup of spills or releases, and/or to compensate  third parties for any
     resulting damages. The Company has recently upgraded its HQ Terminal
     Facility and its other  storage facilities to conform with applicable law
     and the Company has an ongoing program for maintenance,  testing,
     retrofitting,  or replacement of UST's. In addition, the Company maintains
     Pollution  Liability  Coverage on 11 of the 22 Gasoline Stations presently 
     leased by the Company.  Three of the 25 stations operated by the Company
     are supply contracts only, and therefore management does not believe that
     the Company would be subject to any environmental exposures. In addition,
     8 stations  are leased to a third party distributor which, under the terms
     of said lease,  is  responsible  for any  environmental  liability as of
     January 1, 1997. The Alexander  Street Terminal is also insured under a 
     separate  Pollution Legal Liability Policy.

     The Company will have to invest an  estimated  minimum of $283,000 in order
     to meet EPA and State  regulations  for  underground  storage tanks by
     December, 1998.

NOTE 12 - CAPITAL STOCK  

     PREFERRED 
     A) The Company has 5,000,000  shares of Authorized  Preferred  Stock with a
     par value of $.001.

     B) The Company has issued Series A 7.5% Cumulative  Convertible  Redeemable
     Preferred Stock, $0.001 par value ("Series A Preferred Stock"). The holders
     of the  outstanding  shares of Series A Preferred Stock are entitled to the
     following:

          The Preferred Stock bears a cumulative cash dividend rate of $0.45 per
          annum,  payable  quarterly,  when,  and if  declared  by the  Board of
          Directors of the Company.  The  Preferred  Stock  becomes  convertible
          after June 8, 1998 into shares of Common Stock at a conversion rate of
          one share of Common Stock for each share of Preferred Stock subject to
          adjustment in certain events.

          The Preferred  Stock is  redeemable  at the option of the Company,  in
          whole  or in  part,  at any time at a  redemption  price of $6.00  per
          share, plus accrued and unpaid dividends.

          Holders of Preferred  Stock may request to have their shares  redeemed
          by the  Company at $6.00 per share at any time  commencing  on June 8,
          2000 and ending June 7, 2004.

          The Company shall not be required to redeem from any holder during any
          twelve (12) month period a number of shares of Preferred Stock greater
          than twenty  percent (20%) of the shares of Preferred  Stock then held
          by the  applicable  holder and the  Company  shall not be  required to
          redeem shares of Preferred Stock from any holder more than once during
          any twelve (12) month period.

          Each share of Preferred  Stock shall entitle its holder to a number of
          votes  equal to the  number  of  shares  of  Common  Stock  (including
          fractional  shares) that such share would be converted into,if it were
          so converted, as of the close of business on the day immediately prior
          to the date of such vote,  and with respect to such votes, a holder of
          shares of  Preferred  Stock shall have full  voting  rights and powers
          equal to the voting  rights and powers of a holder of shares of Common
          Stock, and shall be entitled to a notice of any stockholders'  meeting
          in accordance  with the Bylaws of the Company and shall be entitled to
          vote with holders of Common Stock together as a single class.

                      
          C) On September 24, 1997, the Company, Claire E. Tarricone, Anthony J.
     Tarricone  and  Joseph  A.   Tarricone  and  Infinity   Investors   Limited
     ("Infinity")   entered  into  a  certain   Restructuring   Agreement   (the
     "Restructuring Agreement"). Under the terms of the Restructuring Agreement,
     Infinity agreed to exchange 6,960 shares of Series B Preferred Stock in the
     Company,  all accrued and unpaid  dividends  on the  outstanding  shares of
     Series B Preferred Stock and approximately $78,000 of indebtedness owing to
     Infinity for the Company's  Subordinated  Promissory  Note in the principal
     amount of $600,000 (the "Note"). The Note accrues interest at 12% per annum
     compounded quarterly through September 24, 1998 and accrues simple interest
     at 12% per annum after  September  24, 1999.  The note matures on September
     24,  2002,  although the Company is required to make  mandatory  prepayment
     upon the occurrence of certain events. The

                                   F-15

terms of the balance of the 560,125 shares of Series B Preferred  Stock owned by
Infinity were amended to provide, among other things, for (i) a fixed conversion
price of $4.00  per share of  Series B  Preferred  Stock,  (ii) the  removal  of
certain  limitations on the rights of holders of the Series B Preferred Stock to
convert  those shares into the  Company's  Common  Stock( which the Company also
agreed to register), and (iii) an increase in the dividend  rate of the Series B
Preferred  Stock  to 12%  from 8% per  annum.  In March  1998,  pursuant  to the
applicable  provisions  of the  Restructuring  Agreement,  Infinity  elected  to
further  amend the terms of the  Series B  Preferred  Stock to the  effect  that
dividends would cease accuring (i.e.,  the dividend rate would decrease from 12%
per annum to 0% per annum),  and in connection  therewith,  Infinity  elected to
cause certain of the Company's  officers/directors  to transfer to Infinity five
year options to acquire 500,000  shares of the  Company's  common  stock  at an
exercise price of $.6250 per share).

           The  Preferred  Stock bears a cumulative  cash  dividend  rate of 
     $0.93 per annum, payable quarterly,  when, as and if declared by the Board
     of Directors of the Company.

          The Preferred  Stock is  redeemable  at the option of the Company,  in
     whole or in part,  at any time at a  redemption  price of $10.00 per share,
     plus accrued and unpaid dividends.

          Except as required  by  applicable  law,  shares of Series B Preferred
     Stock shall not entitle  the holder to any voting  rights,  but such holder
     shall be entitled  to a notice of any  stockholder  meetings in  accordance
     with the bylaws of the Company.

          Common Stock

          On October 16, 1998,  the Company  recorded a  two-for-one  reverse
stock split of its common stock.  Accordingly,  all  references to the number of
shares  outstanding  have been  adjusted  for all the periods  presented to give
effect to the aforementioned stock split.

During the period  September 1997 to November 1997, the holder of options issued
for  payment of  consulting  expenses,  exercised  200,000  options to  purchase
200,000 shars of common stock at an exercise price at $.82 per share.

During the fiscal year ended August 31, 1998,  the Company issued 172,495 shares
of common stock in exchange for consulting services valued at $232,933.

During the fiscal year ended August 31, 1998,  unpaid  preferred stock dividends
in the amount of $269,067 were converted at  approximately  $4.00 per share into
67,285 shares of common stock.

On July 30, 1998,  25,000  warrants were exercised into 25,000 shares of common
stock at the market price of $.46 per share.

NOTE 13 - STOCK OPTIONS

     During the year ended August 31, 1997, the Company  granted 257,500 options
     to consulting  firms to purchase common stock at an average  exercise price
     of $.82  per  share,  in  connection  with  the  Restructuring  Transaction
     disclosed in Note 12(c). The options are exercisable for a period of 5
     years beginning on the grant date, 200,000  options expire on February 27,
     2000 with the remaining 57,500 options expiring November 2001.

     During the year ended  August  31,  1997,  the  Company  granted  817,000 
     options to employees at an average  exercise  price of $.35 per share.  The
     options  are  exercisable  for a period of 5 years  beginning  on the grant
     date. 712,500 options expire November 13, 2001 with the remaining 104,500
     options expiring on August 12, 2002. 

     The following summarizes the stock options for the two years ended August
     31, 1998;

                                                               Weighted Average
                                             Number of          Exercise Price
                                              Options              Per Share
                                             ---------         ----------------

          Outstanding at September 1, 1996           0
           Granted                             217,000                $  .23
                                               -------                ------
                                                                      ------
          Outstanding at August 31, 1997       217,000
           Granted                              25,000                   .23
                                               -------                ------
                                                                      ------ 
          Outstanding at August 31, 1998       242,000                   .27
                                               -------                ------
                                               -------                ------
          Weighted average fair value of
           options granted during the year.                 $.56
                                                            ----
                                                            ----                
          Weighted average remaining life 
           of options granted during the year               5 Years

     During the year ended August 31, 1998, the Company granted 85,000 options
     to employees at an average exercise price of $1.06 per share.  The options
     are exercisable for a period of five (5) years beginning on the grant date.
     The Company accounts for stock based compensation for employees  using the
     intrinsic value-based method provided in APB Opinion 25, "Accounting for
     Stock issued to Employees."  The Company has adopted the  disclosure-only
     provisions of SFAS  123,  "Accounting  for Stock  Based  Compensation."
     Accordingly, no compensation cost for employees has been recognized for the
     year ended August 31, 1998.  Had compensation cost been determined based on
     the fair value method on the date of grant, the Company's net loss and loss
     per common share would have increased by approximately $75,599 and $.03, 
     respectively.

     The  weighted  average  fair  value at the date of grant for the year ended
     August 31, 1998 was approximately  $.96 per option.  The fair value of each
     option granted was estimated using the Black- Scholes  option-pricing model
     based on the following assumptions: expected dividend yield of 0%, expected
     volatility of 120%,a risk-free interest rate of 6.0%, and expected lives of
     5 years.  The  compensation  cost as  generated  by this  method may not be
     indicative  of the future  benefit,  if any,  that will be  received by the
     option holder.

     Additionally, certain officers and employees of the Company were granted
     five year options (outside of such plan) to purchase a total of 600,000
     shares of the Company's common stock in November 1996.  At an exercise
     price of $.6250 per share (500,000 which were assigned to Infinity in March
     1998), and five year options (also outside of such plan) to purchase 60,000
     shares of the Company's common stock in July 1998 at an exercise price of
     $1.06 per share.

NOTE 14 - EMPLOYEE BENEFIT PLANS

     The  Company  maintains a qualified  401(k)  plan for  non-union  employees
     meeting  certain   requirements.   Under  the  plan,  annual  discretionary
     contributions  to the plan are  determined  by the Board of  Directors  and
     employees may make voluntary contributions.  For the years ended August 31,
     1998 and 1997, the Company did not make any contributions to the plan.

     The  Company  contributes,   along  with  many  other  employers,   to  the
     International  Brotherhood of Teamsters and Chauffeurs Union,  Local 456, a
     multi-employer  defined  benefit  plan.  The Pension Plan  Amendment Act of
     1980,  imposes certain  liabilities  upon employers who are contributors to
     multi-employer plans in the extent that employers withdraw from such a
     plan.

NOTE 15 - SUBSEQUENT EVENTS

     (a)  Company's Common Stock was delisted from The Nasdaq Small Cap Market, 
     Inc. ("Nasdaq"), effective as of the close of business on November 9, 1998,
     as a result of Nasdaq's determination that the Company  failed to  satisfy 
     the terms of a Nasdaq  qualifications  exception  which  was  granted  on
     September 8, 1998. Although the Company intends to challenge the delisting,
     there can be no assurance that the Comany's common stock will be re-listed
     on The Nasdaq  Small Cap Market after  completion  of the review  process.
     If the Company's  securities are excluded from The Nasdaq Small Cap Market,
     it may adversely  affect the prices of such  securities and the ability of
     holders to sell them.

     (b)  The Company sold the customer list and certain other assets of its 
     wholly-owned subsidiary, White Plains Fuel, Inc., in October 1998, to the
     third party that had operated such business since June 1995, for a purchase
     price of $361,000. 
    

NOTE 16 -  RECENT ACCOUNTING DEVELOPMENTS

     In June 1997, the Financial Accounting Standards Board ("FASB") issued 
     Statement No. 130, "Reporting Comprehensive Income," ("SFAS 130"),
     effective for periods beginning after December 15, 1997, SFAS 130, which
     will be adopted in the first quarter of the year ending August 31, 1999,
     establishes standards for reporting and displaying comprehensive income and
     its components.  Comprehensive income is defined as the change in equity
     during a period from transactions and other events and circumstances from
     non-owner sources and includes all changes in equity during a period except
     those resulting from financial statement disclosures.

                                   F-16

     In June 1997, FASB issued Statement No. 131, "Disclosures About Segments of
     an Enterprise and Related Information," ("SFAS 131"), effective for periods
     beginning  after December 15, 1997.  SFAS 131, which will be adopted in the
     first quarter of the year ending August 31, 1999, establishes standards for
     the reporting by public business enterprises of information about operating
     segments in  interim  and  annual  financial  statements.  The  Company is 
     currently  evaluating  the impact,  if any,  the  implementation  of  this 
     standard  will  have  on the  disclosures  in  the  consolidated financial 
     statements. 

NOTE 17 - SEGMENT INFORMATION

     The Company's revenue and income are derived from one industry segment 
     which includes the sale of propane, propane equipment, fuel oil, gasoline
     and diesel fuel.
                                 
ITEM 13.    EXHIBITS LIST AND REPORTS ON FORM 8-K

(a)   Exhibits

3.1   Articles of Incorporation of the Company, as amended.*

3.2   By-laws of the Company.*

3.3   Certificate to set forth Designations, Voting Powers, Preferences,
      Limitations, Restrictions and Relative Rights of Series A 7.5%
      Cumulative Convertible Redeemable Preferred Stock.**

3.4   Certificate  of Amendment  and  Restatement  to  Certificate  to Set Forth
      Designations,  Voting Powers, Preferences,  Limitations,  Restrictions and
      Relative Rights of Series B 8% Cumulative Convertible Redeemable Preferred
      Stock, $.001 Par Value.*****

4.1   Specimen Common Stock Certificate.*

4.2   Specimen Series A Preferred Stock Certificate.**

4.3   Specimen Series B Preferred Stock Certificate.***

4.4   Halstead Energy Corp. Amended and Restated 1996 Stock Option Plan. ****

10.1  Agreement and Plan of Reorganization dated as of July 5, 1993 between
      Halstead Quinn Propane, Inc. and the Company.*

10.2  Lease Agreement between HQ Propane and ATI.*

10.3  Management Agreement by and between HQ Propane and ATI.*

10.4  Form of Employment Agreement by and between the Company and Claire E.
      Tarricone.*

10.5  Form of Employment Agreement by and between the Company and Anthony
      Tarricone.*

10.6  Form of Employment Agreement by and between the Company and Joseph
      Tarricone.*

10.7 Promissory Note, dated August 31, 1993, of ATI in favor of HQ Propane.*

10.8  ATI Purchase Agreements.**

10.9  Agreement and Plan of Reorganization by and among Halstead Energy
      Corp., Allan Cianflone and Jack Troccoli.**

10.10 Consulting and Warrant Compensation Agreement between the Company
      and Boulder Financial Group. ****

10.11 Restructuring  Agreement,  dated  September  24,  1997,  by and  among the
      Company, Infinity Investors Limited, Claire E. Tarricone, Anthony J.
      Tarricone and Joseph A.Tarricone. *****

10.12 12%  Subordinated  Promissory  Note of the  Company  dated  September  24,
      1997.*****

21.1  Subsidiaries of the Small Business Issuer.**

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

*     Incorporated by reference to the Company's  Registration Statement on Form
      SB-2 filed with the SEC on November 19, 1993.

**    Incorporated  by reference to the  Company's  Annual Report on Form 10-KSB
      filed with the SEC on December 14, 1996.

                                   F-17

***   Incorporated by reference to the Company  Quarterly  Report on Form 10-QSB
      filed with the SEC on July 15, 1996.

****  Incorporated by reference to the Company's  Registration Statement on Form
      S-8 filed with the SEC on September 10, 1997.

***** Incorporated  by reference to the Company's  Registration  on Form SB-21/A
      filed with the SEC on December 1, 1997.


(b)   Reports on Form 8-K - None

                                   F-18

<PAGE>


      In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
has duly  caused  this  report to be signed  on its  behalf by the  undersigned,
thereunto duly authorized.

Dated:  November 25, 1998     Halstead Energy Corp.

                           By: s/s Claire E. Tarricone
                                    President

      Pursuant to the requirements of the Securities  Exchange Act of 1934, this
report  has  been  signed  below  by the  following  persons  on  behalf  of the
Registrant and in the capacities and on the dates indicated.

           Signature           Title            Date

PRINCIPAL EXECUTIVE
 OFFICER:

/s/ Claire E. Tarricone       President        November 30, 1998
Claire E. Tarricone

PRINCIPAL FINANCIAL
 AND ACCOUNTING OFFICER:

/s/ Joseph A. Tarricone       Vice President   November 30, 1998
Joseph A. Tarricone           and Treasurer

DIRECTORS:

/s/ Claire E. Tarricone       Director         November 30, 1998
Claire E. Tarricone

/s/ Anthony J. Tarricone      Director         November 30, 1998
Anthony J. Tarricone

/s/ Joseph A. Tarricone       Director         November 30, 1998
Joseph A. Tarricone

Edwin Goldwasser              Director         November 30, 1998

Joseph Gatti                  Director         November 30, 1998