Form 10-QSB -- Quarterly or Transitional Report

(Mark One)
   [X]             QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934
                For the quarterly period ended December 31, 1997

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

                        Commission File Number 2-6806-NY

                           CONCORD ENERGY INCORPORATED
        (Exact name of small business issuer as specified in its charter)

           Delaware                                       22-2670198
(State or other jurisdiction of                (IRS Employer Identification No.)
 incorporation or organization)

                    1515 Simmons Street, Jourdanton, TX 78026
                    (Address of principal executive offices)

                                 (210) 769-3955
                           (Issuer's telephone number)

 ______________________________________________________________________________
              (Former name, former address and former fiscal year,
                         if changed since last report)

      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___

      At December 31, 1997,  the  outstanding  common  equity of Concord  Energy
Incorporated comprised 6,045,745 shares of common stock, $.0001 par value.

<PAGE>

                          PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

      The following financial statements are filed as part of this report:

                                                                        Pages
                                                                        -----
Consolidated Balance Sheet (Unaudited),
   December 31, 1997 and 1996                                            F-1

Consolidated Statements of Operations and
   Accumulated Deficit (Unaudited)
   Three and Six Months Ended December 31, 1997, and 1996                F-2

Consolidated Statements of Cash Flows (Unaudited),
   Three and Six Months Ended December 31, 1997, and 1996                F-3

Notes to Consolidated Financial Statements                            F-4 - F-18



                                       2
<PAGE>

Item 2. Management's Discussion and Analysis or Plan of Operation.
General Operations

      In  May,   1993  the  Company   consummated   an  Agreement  and  Plan  of
Reorganization  ("Agreement")  pursuant  to  which  it  entered  the oil and gas
industry.  Under the Agreement,  the Company  changed its name to Concord Energy
Incorporated  (referred to herein as the  "Company") and became the parent of an
entity which manages and owns  interests in  approximately  75 oil and gas wells
primarily  located in East Texas and the Louisiana Gulf Coast. The Company's oil
and gas  subsidiary  had been  formed  in June  1991 in order  to  effectuate  a
consolidation of 166 oil and gas partnerships.

      In May,  1995,  the Company  acquired  Knight  Equipment  &  Manufacturing
Corporation ("KEMCO"),  which locates,  designs,  refurbishes,  and installs gas
processing plants for the natural gas industry.

      In  March,  1996,  the  Company  acquired  Integrated   Petroleum  Systems
Corporation  ("IPS"),  which  developed a unique,  proprietary  software used to
collect,  process  and  transmit  data  relative  to  petroleum  production  and
processing operations. 

Results of Operations

      The Company's  revenues are primarily derived through its KEMCO subsidiary
from the engineering, manufacturing,  construction and leasing of gas processing
equipment.  The Company also realizes  revenue  through the sale of oil and gas,
well operations and the sale of oil and gas data gathering software developed by
IPS.  During the six months ended  December 31, 1997 the Company  reported total
revenues of  $15,136,011.  Contract  revenues  during the six month  period were
$14,550,099.  Rental income for the six month period was $45,4478. The Company's
oil sales  during the six month  period were  $240,000  while gas sales  totaled
$160,000.  The 


                                       3
<PAGE>

Company  reported  revenue from  software  sales of $123,422 and well  operating
income of $17,044  during the six month  period  ended  December  31,  1997.  By
comparison,  during the six month  period  ended  December  31, 1996 the Company
reported  total  revenues  of  $7,818,478,   including   contract   revenues  of
$6,855,702,  rental  income  of  $77,370,  oil sales of  $443,306,  gas sales of
$326,131, software sales of $95,537 and well operating income of $20,432.

      Total  revenues  increased  by  $7,317,533  during  the six  months  ended
December 31, 1997 compared to the six month period ended December 31, 1996. This
increase is primarily due to the increase in contract revenues of $7,694,397.

      Total costs and operating  expenses  during the six months ended  December
31, 1997 were  $13,783,088,  an increase of $6,863,780 from the six month period
ended  December 31, 1996, and is primarily the result of an increase in the cost
of contract  revenue  associated  with the increase in contract  revenues.  This
substantial  increase  is the  result of the  Company's  obtaining  a variety of
larger contracts compared to contracts obtained in prior periods.

      Cost of  contract  revenue  during  the period  was  $12,086,598.  Cost of
contract revenue as a percentage of contract revenue was  approximately  83%. In
comparison,  during the six month period ended December 31, 1996 total costs and
operating  expenses were  $6,919,308,  costs of contract revenue were $4,681,950
and  cost  of  contract   revenue  as  a  percentage  of  contract  revenue  was
approximately  68%. The increase in cost of contract  revenue of  $7,404,648  is
primarily the result of the increase in contract revenues.

      During  the  six  month  period  ended   December  31,  1997  general  and
administrative  expenses  were  $980,712.  During  the six  month  period  ended
December 31, 1996, the Company's total general and administrative  expenses were
$1,538,898, which includes costs of $329,574 associated with the winding down of
the Company's New Jersey and Houston office's and staff.


                                       4
<PAGE>

      Depreciation,  depletion and  amortization  expenses  during the six month
period ended December 31, 1997 were $335,091.  During the six month period ended
December  31, 1996 these  expenses  were  $397,994.  The  decrease of $62,903 is
primarily due to the  elimination of  amortization of IPS' goodwill which in the
six month period ended December 31, 1996 totaled $88,440.

      Interest  expense for the six month  period  ended  December  31, 1997 was
$456,632.  During the six month period ended December 31, 1996 interest  expense
was $471,400.

      For the six month  period ended  December 31, 1997 the Company  reported a
net income of $911,465.  For the six month  period  ended  December 31, 1996 the
Company reported a net income of $447,736.  The increase of $463,729 for the six
months ended  December 31, 1997 as compared to the six months ended December 31,
1996, primarily resulted from the combination of the above described increase in
contract  revenue  partially  offset by the above  described  increased  cost of
contract revenue.

Liquidity and Capital Resources

      As of December 31, 1997 and 1996, the Company  reported working capital of
$446,584 and  $3,003,272,  respectively,  resulting in a decrease of $2,556,688.
This decrease in 1997 is the result of a decrease in current  assets of $399,169
and an increase in current  liabilities of  $2,137,519.  The decrease in current
assets  primarily  resulted from a combination of a decrease in cash,  costs and
estimated  earnings  in excess of billings on  uncompleted  contracts,  accounts
receivables, prepaid expenses and other assets of $1,104,570 partially offset by
an increase in  inventories  of $705,401.  The  increase in current  liabilities
primarily  resulted from an increase in


                                       5
<PAGE>

accounts  payable  and  accrued  expenses of  $2,627,032  partially  offset by a
decrease in the current portion of notes and taxes payable of $489,513.

      During the six months ended December 31, 1997,  cash provided in operating
activities  was  $128,874,  representing  an increase  of $646,650  from the six
months ended  December 31,  1996.  This  increase  primarily  resulted  from the
combination of the increased  accounts payable and accrued  expenses,  increased
inventories, increased net income and decrease in accounts receivables.

      Management  notes that the  accompanying  financial  statements  have been
prepared with the assumption  that the Company will continue as a going concern.
As discussed in Note 11 of the  financial  statements,  the Company has suffered
recurring  losses and negative  cash flows from  operations  in the prior fiscal
years, as well as significant debt maturing in the near future.

      The Company has obtained a third  extension  of maturity,  to February 28,
1998,  of its notes  payable  which were to mature on  December  31, 1997 in the
total  principal  amount of $2,920,000.  The Company is currently  attempting to
secure long-term  financing  secured by a portion of the Company's  inventory of
plants to replace the notes that mature on February 28, 1998,  however there are
no current commitments to refinance this indebtedness.

Capital Expenditures and Commitments

      During the six months  ended  December  31,  1997,  the  Company  incurred
capital expenditures of $72,089.  These capital expenditures primarily consisted
of equipment purchases by KEMCO.


                                       6
<PAGE>

Item 4. Submission of Matters to a vote of Security Holders 

      The Annual Meeting if  Sharesholders  of the Company was held November 14,
1997 for the  consideration  of the  following  items which were approved by the
number of votes set forth:

                                               Votes       Votes       Votes
                                                For       Against     Abstain
                                                ---       -------     -------
1)  To elect (4) directors of the Company
    until the next Annual Meeting of 
    shareholders and until their successors 
    are elected and qualified: 
    The following directors, constituting 
    the entire board of directors, were 
    elected:
 
    Deral Knight                              3,645,479       0       24,357
    Barry Laidlaw                             3,638,049       0       31,787
    Neal Glass                                3,644,471       0       25,365
    Gilbert Goldstein*                        3,637,449       0       32,387

2)  To approve the appointment of
    independent auditors for the 
    1998 fiscal year                          3,641,811     11,572    16,453

      *Gilbert  Goldstein  resigned as a director  immediately  after the Annual
Shareholders Meeting due to personnel commitments.

Item 6. Exhibits and Reports on Form 8-K

a) Exhibits

      Exhibits  marked  with an  asterisk  have been  previously  filed with the
Securities  and Exchange  Commission  by the Company,  and are  incorporated  by
reference,  as indicated.  Other  exhibits,  if not so designated are filed with
this Form 10-QSB.

      (3)*  -  Certificate  of   Incorporation  as  amended  and  by-laws,
      incorporated  herein  as an  exhibit  by  reference  to the  Current
      Report. Exhibit 3 therein under the Securities Exchange Act of 1934,
      filed by  Registrant  on Form 8-K with the  Securities  and Exchange
      Commission on May 18, 1993, SEC File No. 2-6806.

      (4)* - Indenture of Trust  Amendment  No. 2 between  Concord  Energy
      Incorporated  and First Union  National  Bank, as Successor  Trustee
      dated as of October 31, 1997.

b) Reports on Form 8-K

      No current reports on Form 8-K have been filed during the first quarter of
this fiscal year.

---------------------
*   Previously filed


                                       7
<PAGE>

                                   SIGNATURES

      In accordance  with the  requirements  of the Exchange Act, the Registrant
caused this Report to be signed on its behalf by the undersigned, thereunto duly
authorized.

                                       CONCORD ENERGY INCORPORATED
                                       (Registrant)

                                       s\Deral Knight
                                       -------------------------------
Dated: February 11, 1998               Deral Knight
                                       President, Chief Executive Officer
                                       and Chairman of the Board of Directors

Dated: February 11, 1998               s\Scott Kalish
                                       -------------------------------
                                       Scott Kalish
                                       Treasurer (Principal Accounting Officer)


                                       8
<PAGE>

Concord Energy Incorporated and Subsidiaries

Consolidated Balance Sheets
--------------------------------------------------------------------------------

                                                     (Unaudited)    (Unaudited)
                                                     December 31    December 31
                                                        1997           1996
                                                    ------------   ------------
Assets

Current assets
  Cash and cash equivalents                         $     51,910   $    306,403
  Costs and estimated earnings in excess
    of billings on uncompleted contracts, net            632,582      1,463,481
  Accounts receivable, net of allowance for
    doubtful accounts of $178,643 and $132,930         1,795,993      1,828,397
  Receivable due from Integrated, net                     54,033          7,853
  Inventories                                          6,594,308      5,888,907
  Prepaid expenses and other assets                       66,473         99,427
                                                    ------------   ------------
       Total current assets                            9,195,299      9,594,468

Property, plant and equipment, net                     7,780,519      8,316,827
Goodwill, net                                               --        2,505,808
Bond issuance costs, net                                 189,802        251,572
Other assets                                              35,000         50,000
                                                    ------------   ------------

       Total assets                                 $ 17,200,619   $ 20,718,675
                                                    ============   ============
Liabilities and Stockholders' Equity

Current liabilities
  Current portion of long-term debt                 $  3,552,553   $  3,985,028
  Current portion of capital lease obligations             2,132         15,160
  Accounts payable                                     3,404,355      1,349,513
  Accrued expenses                                     1,720,462      1,135,244
  Federal  income taxes payable                           49,213        106,251
                                                    ------------   ------------
       Total current liabilities                       8,728,715      6,591,196

Long term liabilities
  Notes payable                                        2,580,918      2,552,068
  Capital lease obligations                                    0         49,368
                                                    ------------   ------------
     Total long term liabilities                       2,580,918      2,601,436
                                                    ------------   ------------
Commitments and Contingencies

Stockholders' equity
  Preferred Stock, $.01 par value, 1,000  shares
   authorized, 0 shares issued and outstanding              --             --
  Common stock, $.0001 par value,  20,000,000
   shares authorized, 6,045,717 and 5,965,061
   (post-split) shares issued and outstanding                605            596
  Paid-In capital                                     22,812,110     22,666,965
  Accumulated deficit                                (16,441,162)   (10,660,952)
                                                    ------------   ------------
                                                       6,371,553     12,006,609
Cost of Treasury Stock                                  (480,566)      (480,566)
                                                    ------------   ------------
       Total stockholders' equity                      5,890,987     11,526,043
                                                    ------------   ------------
       Total liabilities and stockholders' equity   $ 17,200,619   $ 20,718,675
                                                    ============   ============

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


                                      F - 1

<PAGE>

Concord Energy Incorporated and Subsidiaries

Consolidated Statements of Operations
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                           (Unaudited)    (Unaudited)    (Unaudited)    (Unaudited)
                                          Quarter Ended   Six-Months    Quarter Ended   Six-Months
                                           December 31    December 31    December 31    December 31
                                               1997           1997           1996           1996
                                           ------------   ------------   ------------   ------------
<S>                                        <C>            <C>            <C>            <C>         
Revenue:
 Oil sales                                 $    120,000   $    240,000   $    201,952   $    443,306
 Gas sales                                       80,000        160,000        147,652        326,131
                                           ------------   ------------   ------------   ------------
    Total oil and gas sales                     200,000        400,000        349,604        769,437

 Contract revenue                             3,894,798     14,550,099      2,877,350      6,855,702
 Well operating income                            8,522         17,044          9,712         20,432
 Rental income                                   23,389         45,447         40,003         77,370
 Software Sales                                 112,417        123,422         45,051         95,537
                                           ------------   ------------   ------------   ------------
    Total revenue                             4,239,125     15,136,011      3,321,720      7,818,478
                                           ------------   ------------   ------------   ------------
Costs and Operating Expenses:
 Lease operating                                180,344        380,687        132,528        300,466
 Cost of contract revenue                     2,858,027     12,086,598      1,759,110      4,681,950
 General and administrative:                    454,652        980,712        787,617      1,538,898
 Depreciation, depletion and amortization       167,020        335,091        190,881        397,994
                                           ------------   ------------   ------------   ------------
     Total costs and operating expenses       3,660,044     13,783,088      2,870,136      6,919,308
                                           ------------   ------------   ------------   ------------
    Income from Operations                      579,082      1,352,924        451,584        899,170
                                           ------------   ------------   ------------   ------------
Other income (expense):
 Other  income                                   12,455         15,174         14,796         19,966
 Interest expense                              (222,066)      (456,632)      (227,788)      (471,400)
                                           ------------   ------------   ------------   ------------
    Total other income (expense)               (209,611)      (441,458)      (212,992)      (451,434)
                                           ------------   ------------   ------------   ------------
    Income before income taxes                  369,471        911,465        238,592        447,736
                                           ------------   ------------   ------------   ------------
         Income tax benefit                        --             --             --             --
                                           ------------   ------------   ------------   ------------
    Net Income                             $    369,471   $    911,465   $    238,592   $    447,736
                                           ============   ============   ============   ============
Accumulated deficit, beginning of period    (16,810,633)   (17,352,628)   (10,899,544)   (11,108,688)
                                           ============   ============   ============   ============
Accumulated deficit, end of period         $(16,441,163)  $(16,441,163)  $(10,660,952)  $(10,660,952)
                                           ============   ============   ============   ============
    Net Income per share                   $       0.06   $       0.15   $       0.04   $       0.08
                                           ============   ============   ============   ============
</TABLE>

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


                                      F - 2

<PAGE>

Concord Energy Incorporated and Subsidiaries

Consolidated Statements of Cash Flows
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                              (Unaudited)       (Unaudited)      (Unaudited)      (Unaudited)
                                                             Quarter Ended   Six-Months Ended   Quarter Ended  Six-Months Ended
                                                               December 31      December 31      December 31      December 31
                                                                  1997             1997             1996             1996     
                                                               ----------       ----------       ----------       ----------
<S>                                                            <C>                 <C>           <C>                 <C>    
Cash flows from operating activities                                                                             
 Net Income (loss)                                             $  369,471          911,465       $  238,592          447,736
 Adjustments to reconcile net income/loss to net cash                                                            
   (used in) provided by operating activities:                                                                   
   Depreciation, depletion and amortization                       167,020          335,091          190,881          397,994
   Other noncash transactions                                      12,051           24,104          103,080          235,563
   Decrease (Increase)  in assets:                                                                               
      Accounts receivable                                         395,402       (1,084,137)         362,496         (568,613)
      Costs and estimated earning in excess                                                                      
           of billings on uncompleted contracts                     1,434         (226,345)          52,336       (1,346,386)
      Inventories                                                (248,253)        (868,466)        (413,008)         193,066
      Other assets and liabilities                                  3,900          (15,957)          11,837          (79,163)
   (Decrease)  Increase  in liabilities                                                                          
      Accounts payable                                            (20,297)       1,265,231         (423,100)          17,122
      Accrued expenses                                           (839,408)        (181,688)        (364,735)         (51,990)
      Federal income tax payable                                    8,333           16,666            8,333            8,333
      Receivable due from/payable due to Integrated, net          (29,279)         (47,090)         189,512          228,562
                                                               ----------       ----------       ----------       ----------
       Net cash provided by (used in) operating activities       (179,626)         128,874          (43,776)        (517,776)
                                                               ----------       ----------       ----------       ----------
Cash flows from investing activities                                                                             
  Purchases of equipment, well workovers and recompletions        (43,260)         (72,089)         (29,951)        (103,833)
                                                               ----------       ----------       ----------       ----------
       Net cash (used in) provided by investing activities        (43,260)         (72,089)         (29,951)        (103,833)
                                                               ----------       ----------       ----------       ----------
Cash flows from financing activities                                                                             
    Net proceeds from note payable                                 25,000           39,414             --               --
    Net proceeds from issuance of common stock                       --               --               --            856,665
    Principal payments on notes payable and capital 
     lease obligations                                             (5,182)         (86,229)        (381,799)        (826,736)
                                                               ----------       ----------       ----------       ----------
      Net cash flows provided by (used in)                                                                       
         financing activities                                      19,818          (46,815)        (381,799)          29,929
                                                               ----------       ----------       ----------       ----------
Net increase (decrease) in cash and cash equivalents             (203,068)           9,970         (455,526)        (591,680)
                                                               ----------       ----------       ----------       ----------
Cash and cash equivalents at beginning of period                  254,978           41,939          761,929          898,083
                                                               ----------       ----------       ----------       ----------
Cash and cash equivalents at end of period                     $   51,910           51,910       $  306,403          306,403
                                                               ==========       ==========       ==========       ==========
</TABLE>

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

           
                                      F - 3

<PAGE>

Concord Energy Incorporated and Subsidiaries

Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------

1. Organization, Recapitalization, and Operations

Concord Energy  Incorporated  (the  "Company") is an oil and gas exploration and
production  company which also locates,  designs,  refurbishes  and installs gas
plants and gas  processing  equipment for customers in the natural gas industry.
The Company also provides rentals of gas plants and gas processing equipment and
provides services such as engineering, procurement,  dismantling,  reapplication
and relocation of complete gas processing  facilities.  In addition, the Company
has developed unique,  proprietary  software which is used to collect,  process,
and transmit data relative to petroleum  production and  processing  operations.
The Company is headquartered in Jourdanton,  Texas with substantially all of its
oil and gas operations in East Texas and the Louisiana Gulf Coast. The Company's
wholly-owned  subsidiaries,   Concord  Energy,  Inc.,  Concord  Operating,  Inc.
("COI"), and Knight Equipment & Manufacturing  Corporation ("KEMCO") are located
in Jourdanton,  Texas, and Integrated  Petroleum Systems  Corporation ("IPS") is
located in Denver, Colorado.

Concord  Energy,  Inc.,  (the  Company's  name  prior  to  the  recapitalization
described  below) was formed in June 1991 for the purpose of  combining  the net
assets and operations of 166  previously  independent  oil and gas  partnerships
(the  "Partnerships")  and the net  assets  and  operations  of COI  through  an
exchange of Partnership  and COI net assets for common stock in Concord  Energy,
Inc. The exchange was accounted for at historical cost. Certain limited partners
in the Partnerships which did not participate in the exchange were allocated net
working  interests  in  the  properties  previously  held  by  their  respective
Partnerships.

Prior to the exchange,  the Partnerships were managed by Integrated Energy, Inc.
("Integrated") and Tucker Financial,  Inc. ("Tucker") which were in the business
of establishing and managing oil and gas limited partnerships. Subsequent to the
exchange  and through  June 30, 1996,  Integrated  continued to provide  certain
management and  administrative  services to the Company pursuant to a management
agreement between the Company and Integrated, which terminated on June 30, 1996.
COI manages the production of Company-owned oil and gas properties.

On May 19, 1993, Monoclonal International Technology, Inc. ("MITI") acquired all
of the outstanding common stock of Concord Energy, Inc. For accounting purposes,
the acquisition was treated as a  recapitalization  of Concord Energy Inc., with
MITI as the acquirer  (i.e.,  a reverse  acquisition).  In  connection  with the
acquisition,  MITI  later  changed  its  name to  Concord  Energy  Incorporated,
approved a 1 for 230 reverse split of its 127,784,100 shares of common stock and
issued 10,556,077 shares of its common stock in exchange for all the outstanding
common stock of Concord Energy, Inc.

In  December  1995,  the  company  effectuated  a 1 for 5  reverse  split of its
outstanding  stock.  Historical  stockholders'  equity  and net loss  per  share
information  has been  retroactively  restated for all periods  presented in the
accompanying  consolidated  financial  statements to reflect this reverse split.


                                     F - 4
<PAGE>

Concord Energy Incorporated and Subsidiaries

Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------

2. Summary of Significant Accounting Policies

Principles of consolidation

The  consolidated  financial  statements  are  comprised  of the Company and its
wholly-owned subsidiaries, Concord Energy, Inc., Concord Operating, Inc., Knight
Equipment & Manufacturing  Corporation and its  wholly-owned  subsidiary,  K & S
Engineering, Inc. and Integrated Petroleum Systems. All significant intercompany
accounts and transactions are eliminated in consolidation.

Estimates

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

Cash equivalents

Cash and cash  equivalents  include all cash and highly liquid  investments with
original maturities of three months or less.

Inventories

Inventories  are  stated  at the  lower of cost or  market  using  the  first-in
first-out method.  Inventory  consists  principally of gas plants,  compressors,
separators,  supplies  and repair parts  utilized by the Company in  conjunction
with its design and refurbishing of gas plants and gas processing equipment.

Property, plant and equipment

Property,  plant and equipment is stated at cost less accumulated  depreciation,
depletion and amortization.

The Company  accounts for its oil and gas properties  under the full cost method
of  accounting.  Under the full cost method,  all costs  incurred in  acquiring,
exploring and developing  oil and gas reserves are  capitalized to the full cost
pool.  When oil and gas properties are sold,  retired or otherwise  disposed of,
any applicable proceeds are credited to the full cost pool, with no gain or loss
recognized,  unless the sale would have a significant impact on the relationship
between  capitalized  costs and  proved  reserves.  Since all of its oil and gas
operations are within the United States,  the Company  utilizes one cost pool to
account for its oil and gas properties. Depreciation, depletion and amortization
of oil and gas properties is computed based on the unit-of-production method for
the cost  pool,  based on  estimates  of proved  reserves  as  determined  by an
independent reserve engineer.


                                     F - 5
<PAGE>

Concord Energy Incorporated and Subsidiaries

Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------

Other  property,  plant and  equipment  is  recorded  at cost  less  accumulated
depreciation. Repairs and maintenance costs which do not extend the useful lives
of the assets are  expensed as  incurred.  Depreciation  is provided  for on the
straight-line  method over the estimated  useful lives of the assets which range
from three to seven  years,  except for  buildings  and  improvements  which are
depreciated over estimated useful lives ranging from 20 to 30 years.

Goodwill

Goodwill  recorded as a result of the  acquisition  of IPS was being  amortized,
straight-line  over  it's  originally  estimated  useful  life  of 15  years  in
accordance  with  Generally  Accepted  Accounting  Principles.  At June 30, 1997
management  determined  that the  remaining  unamortized  goodwill had no future
benefit  and the  balance  was  written-off  as a  charge  against  income  from
operations.

Other Assets

Other assets of the Company, which include the drawings and blue prints of amine
units  manufactured  and  serviced  by  Perry  Gas  Processors,  Inc.,  is being
amortized,  straight-line  over  it's  estimated  useful  life  of  5  years  in
accordance with Generally Accepted Accounting Principles.

Leases

Leases  which meet  certain  criteria  evidencing  substantive  ownership by the
Company are capitalized  and the related capital lease  obligations are included
in  liabilities.  Amortization  and interest  are charged to expense,  with rent
payments  being treated as payments of the capital lease  obligation.  All other
leases are accounted for as operating  leases,  with rent payments being charged
to expense as incurred.

Deferred financing and bond issuance costs

Costs  incurred  in  conjunction  with  obtaining  financing   (including  costs
associated  with the issuance of bonds) are  amortized  using the  straight-line
method over the term of the related  financing  agreement or bond. Bond issuance
costs at December 31, 1997 and 1996 are stated net of  accumulated  amortization
of $402,121 and $269,189, respectively.

Revenue recognition

Oil and gas sales

Revenues from oil and gas sales are accrued as earned based on production volume
statements and joint interest billings obtained from the well operator.


                                     F - 6
<PAGE>

Concord Energy Incorporated and Subsidiaries

Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------

Contract revenue

Revenues from  construction  contracts are recognized based on the percentage of
completion method,  measured on the basis of costs incurred to date to estimated
total costs for each contract.  Contract  costs include all direct  material and
labor costs, including those indirect labor and repair costs related to contract
performance. Selling, general and administrative costs are charged to expense as
incurred.  Provisions for estimated losses on uncompleted  contracts are made in
the period in which such losses are determined.  Changes in job performance, job
conditions, estimated profitability and final contract settlements are monitored
on a periodic  basis in order to  determine  if revisions to the income and cost
estimates are necessary as a result of such changes. Revisions to the income and
cost estimates, if any, are recognized in the period in which such revisions are
determined  to be  necessary.  Costs  and  earnings  in excess  of  billings  on
uncompleted  contracts represent an asset based on revenues recognized in excess
of amounts  billed to  customers.  Billings  in excess of costs and  earnings on
uncompleted  contracts are recorded as a liability  and represent  contracts for
which  billings  to date  exceed  cumulative  revenues  recognized  based on the
percentage of completion method.

Syndication sales

Under an agreement  between the Company and  Integrated  (see Note 10) which was
terminated on June 30, 1996, the Company was entitled to receive a percentage of
the proceeds of all sales made by Integrated of syndicated retail  partnerships.
This revenue was recognized when earned.

Well operating income

The  Company,  through its wholly  owned  subsidiary  COI,  manages and operates
wells. The revenue generated from these services is recognized when earned.

Rental revenue

The Company leases  certain gas plants and  separators to customers  under short
term leases which are  accounted for as operating  leases.  At December 31, 1997
and 1996,  there are no significant  future minimum rentals to be received under
these noncancelable operating leases.

Software sales

The  Company,  through its wholly  owned  subsidiary  IPS,  sells,  installs and
maintains its proprietary software. The revenue generated from these services is
recognized when earned.

Income taxes

The Company  accounts  for income  taxes under the asset and  liability  method.
Under the asset and liability  method,  deferred tax assets and  liabilities are
recognized  based upon  differences  arising from the carrying of amounts of the
Company's assets and liabilities for tax and financial  reporting purposes using
enacted tax rates in effect for the year in which the  differences  are expected
to reverse. The effect on deferred tax assets and liabilities of a change in tax
rates is  recognized  in income in the  period  when the  change in tax rates is
enacted. 


                                     F - 7
<PAGE>

Concord Energy Incorporated and Subsidiaries

Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------

Net loss per share

Net loss per share of common stock is based upon the weighted  average number of
shares of common stock outstanding (5,904,086 and 5,823,430 at December 31, 1997
and 1996, respectively).  The Company's common stock equivalents,  which consist
of  outstanding  warrants  to  purchase  the  Company's  common  stock,  are not
considered  in the net  income  per  share  calculation  since  their  effect is
anti-dilutive.

3. Business Combinations

KEMCO - On May 7, 1995, the Company  acquired all of the issued and  outstanding
shares of the common  stock of KEMCO for  $7,000,000  in a business  combination
accounted  for under the purchase  method of  accounting.  The  acquisition  was
financed by the  issuance of 400,000  shares of the  Company's  common stock and
payment of  $4,500,000  in cash.  Financing for the cash portion of the purchase
price was  obtained  primarily  through  the net  proceeds  from debt  financing
totaling approximately  $3,700,000 and the net proceeds from the sale of 260,000
shares of the Company's common stock totaling approximately $800,000.

IPS - On March 1, 1996 the Company  acquired  all of the issued and  outstanding
shares of the common  stock of IPS for 600,000  shares of the  Company's  common
stock, valued at $1,800,000,  in a business combination  accounted for under the
purchase  method of  accounting.  The results of operations of IPS subsequent to
March 1, 1996, are included in these consolidated financial statements.

At the time of purchase,  IPS'  liabilities  exceeded the value of its assets by
$853,208,  which when added to the  $1,800,000  value  assigned to the shares of
common stock issued resulted in goodwill of $2,653,208 being recorded.  Based on
the  results  of  operations  for IPS  since  its  acquisition,  management  has
determined that the  unamortized  goodwill at June 30, 1997 of $2,417,368 had no
future  benefit.  Accordingly,  at June 30, 1997 the balance of the  unamortized
goodwill  was   written-off  as  a  charge   against  income  from   operations.
Amortization of goodwill of $147,400 is recorded as of December 31, 1996.

4. Accounts Receivable and Concentration of Credit Risk

Accounts receivable  represent amounts due from customers who are in the oil and
gas  business  throughout  North  and  South  America.  Fluctuations  in  market
conditions impact the credit worthiness of these customers.  The Company reviews
the financial  condition of purchasers and joint interest  participants prior to
signing sales or joint  interest  agreements.  Payment terms are on a short-term
basis and in accordance with industry standards.

The  Company  maintains  account  balances  at several  financial  institutions.
Accounts  are  insured  by  the  Federal  Deposit  Insurance  Corporation  up to
$100,000. In the course of business,  the Company may maintain account balances,
which are  generally  transient in nature,  in excess of the  federally  insured
limits.


                                     F - 8
<PAGE>

Concord Energy Incorporated and Subsidiaries

Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------

5. Inventory - Lower of Cost or Market Adjustment

Based on a comparison  of the estimated  potential  sales prices to the recorded
carrying  costs of the  inventory of plants  acquired in the KEMCO  acquisition,
management has determined that the recorded cost of the inventory of such plants
was in excess of the market  value of the plants  which would allow a reasonable
profit  margin on the sale of the plants.  The recorded cost of the inventory of
such plants had been determined  based on an appraisal  obtained and relied upon
to establish the value of the plants at the time KEMCO was acquired.  Management
subsequently  determined  that  the  values  assigned  to the  plants  were  the
appraiser's  estimated  retail sales price of the plants rather than a wholesale
market  value that would allow a  reasonable  profit  margin on the sales of the
plants.

To adjust the carrying cost of the plants to their  estimated  wholesale  market
value,  an adjustment  of  $3,043,055  was charged to expense for the year ended
June 30, 1996.

6. Property, Plant and Equipment, Net

Significant  components comprising property,  plant and equipment at December 31
include the following:

                                        1997           1996
                                    ------------   ------------
Oil & gas properties:
    Leasehold costs                 $  7,495,916   $  7,495,916
    Lease well & equipment             1,845,508      1,845.508
    Intangibles                        1,904,925      1,904,925
    Property, plant & equipment          484,181        484,181
    Other                                 80,632         80,632
                                    ------------   ------------
                                      11,811,162     11,811,162
                                    ------------   ------------
Other property, plant & equipment
    Land                                 185,413        185,413
    Buildings & improvements             362,747        360,019
    Machinery & equipment                347,785        327,135
    Vehicles                             176,335        237,896
    Furniture, fixtures & software       200,287        200,010
                                    ------------   ------------
                                       1,272,567      1,310,473
                                    ------------   ------------
Accumulated depreciation,
depletion and amortization            (5,303,210)    (4,804,807)
                                    ------------   ------------
Property, plant and equipment, net  $  7,780,519   $  8,316,827
                                    ============   ============


                                     F - 9
<PAGE>

Concord Energy Incorporated and Subsidiaries

Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------

Depreciation,  depletion  and  amortization  of  oil  and  gas  properties,  and
depreciation  of other  property,  plant and  equipment  for the  periods  ended
December 31 are as follows:

                                        1997           1996
                                    ------------   ------------

Oil and gas properties              $    256,800   $    232,416
Other property, plant and equipment       73,291         77,138
                                    ------------   ------------
                                    $    330,091   $    309,554
                                    ============   ============

7. Debt and Capital Lease Obligations

Debt

Notes payable and long-term debt includes the following at December 31:

                                                      1997              1996
                                                   ----------        ----------
Bond payable, dated May 1995, with interest
at 10% per annum, requiring semi-annual
interest payments through maturity on
February 28, 1998. The bond is secured by the
assets of KEMCO. As incentive to the note
holders for extending the original maturity
date of the note from May 1, 1997, interest
was increased by 4% per annum from May 1,
1997 through maturity.                             $2,920,000        $2,920,000


Secured notes payable, dated December 1994,
with a face value of $2,500,000 issued at
$750,000 discount. The notes bear interest at
9% per annum with an effective interest rate
of 15% per annum. Semi-annual interest
payments of $112,500 are required through
maturity in January 2010. The notes are
secured by certain gas plants and equipment
and a guarantee of the Company.                     1,803,851         1,784,351


                                     F - 10
<PAGE>

Concord Energy Incorporated and Subsidiaries

Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------

                                                      1997              1996 
                                                   ----------        ----------
Secured notes payable, dated
September 1994, with a face value of
$1,400,000 issued at a $699,500 discount. The
notes bear interest at 6% per annum payable
semi-annually with an effective interest rate
of 14.02% per annum. Annual principal
payments of $140,000 are required beginning
in August 2005 through maturity in August
2009. The notes are secured by certain oil
and gas properties owned by the Company.              751,468           732,764


12% convertible notes, dated October 1994,
convertible at maturity into shares of the
Company's common stock at $5.00 per share.
During 1995, $125,000 of these notes matured
and were converted into 25,000 shares of the
Company's common stock. Upon the conversion,
an additional 3,000 shares of the Company's
common stock was issued as consideration for
accrued interest expense through the date of
conversion totaling $15,000. The remainder of
the notes and accrued interest totaling
$20,542 were converted into 80,656 shares of
common stock in March 1997. The notes were
secured by certain oil and gas properties
owned by the Company.                                    --             125,000

Secured note payable dated January 1996, with
interest at 9% per annum. Interest and
principal of $1,271 are due monthly through
January 2000. The note is secured with
certain equipment owned by the Company.                28,174            40,925

Unsecured non-interest bearing note payable
dated March 1996 payable in monthly
installments of $43,599 through maturity on
December 15, 1996. Subsequent to its maturity
the note bears interest at 10% per annum.             174,000           174,000


                                     F - 11
<PAGE>

Concord Energy Incorporated and Subsidiaries

Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------

                                                      1997              1996
                                                   ----------        ----------
Secured note payable dated February 1996,
with interest at 12% per annum from inception
through February 1, 1997. From February 2,
1997 through August 31, 1997, interest
charged increased to 18% per annum. Interest
from September 1, 1997 to maturity is at 12%
per annum Principal and interest are due at
maturity on February 1, 1998. The note is
secured by a certain gas plant owned by the
Company.                                              275,000           600,000

Secured note payable dated September 1997,
with interest at 8.5% per annum. Interest and
principal of $356 are due monthly through
September 2001. The note is secured with
certain equipment owned by the Company.                113,478             --

Various unsecured notes payable, bearing
interest of 4.5% to 12% per annum. The
interest and principal are due at various
maturity dates through May 1997 (see Note 8)
and July 1998.                                        167,500           160,056
                                                   ----------        ----------
Total debt outstanding                              6,133,471         6,537,096

Less: current portion                               3,552,553         3,985,028
                                                   ----------        ----------
Long-term debt                                     $2,580,918        $2,552,068
                                                   ==========        ==========

As of December 31, 1997,  maturities  and  scheduled  payments for the next five
years and thereafter are:  $3,552,553 in 1998,  $17,541 in 1999, $8,732 in 2000,
$4,074 in 2001, and the remainder after year 2001.


                                     F - 12
<PAGE>

Concord Energy Incorporated and Subsidiaries

Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------

Capital Lease Obligations

In conjunction  with its  acquisition  of KEMCO,  the Company  acquired  certain
leased  equipment  which  is  accounted  for as  capital  leases.  Prior  to the
acquisition,  the leases were prepaid at inception.  Capital  lease  obligations
recorded in the accompanying  consolidated  financial  statements  represent the
present value of the lease purchase  options which are exercisable at the end of
the lease term in December  1997,  discounted at an interest rate of 16% and the
future payments due on a lease of a yard facility  discounted at 12%. The leases
for two vehicles were  terminated  during 1997 without  exercising the option to
purchase the vehicles.

Capital lease obligations as of December 31 consist of the following:

                                           1997       1996
                                         --------  ---------

Total future minimum lease payments      $   --    $ 73,352
Less:  amounts representing interest         --       8,824
                                         --------  ---------
Present value of minimum lease payments  $   --    $ 64,528
                                         ========  =========
                                                   
The obligations under capital lease mature as follows: $0 in fiscal 1998.

8. Commitments and Contingencies

Minimum Rental Commitments

The Company has several noncancelable  operating leases,  primarily for yard and
office equipment,  that expire over the next five years.  These leases generally
are for periods  ranging from three to five years and require the Company to pay
all executory costs such as maintenance and insurance.

Legal Matters

As of December 31, 1997, the Company was involved in various  litigation matters
which it  considers to be in the normal  course of  business.  In the opinion of
management,  based upon consultation with legal counsel,  the claims either lack
merit,  or the potential  liability,  if any, upon the ultimate  disposition  of
these  lawsuits  will not have a  material  effect  on the  Company's  financial
position or results of operations.

The Company, together with Integrated, Jerry Swon and Bruce Deichl, was named as
a  defendant  in a  lawsuit  commenced  by  three  investors  in two oil and gas
partnerships  sponsored by Integrated.  Management has determined that the costs
of defending this suit combined with the potential cost if the plaintiff's  were
successful,  dictated that a settlement be  negotiated.  A verbal  agreement has
been reached to settle this cause of action for 350,000  shares of the Company's
common  stock and a warrant to  purchase  an  additional  350,000  shares of the
Company's common


                                     F - 13
<PAGE>

Concord Energy Incorporated and Subsidiaries

Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------

stock at $1.00  per  share.  At  December  31,  1997 the  Company  has a reserve
recorded in the amount of $175,000 for the cost of this settlement.

On August 8, 1997,  the Company filed suit against Mark T.  Shipley,  Richard D.
Barden, June Barden, Jerry Swon and Fallon and Fallon. The litigation relates to
the  Company's  acquisition  of IPS.  The  petition  alleges that members of the
Company's former management,  former IPS management and other interested persons
committed  fraudulent acts and/or  omissions in connection with the acquisition.
The specific  damages sought are monetary damages in an unspecified  amount,  as
well as relief from certain  related  debt,  wages and  agreements.  Some of the
defendants  have filed suit against the Company seeking payment of debts related
to IPS.

In October  1997 the Company  filed suit  against one of its  customers  for the
collection of outstanding  receivables due the Company.  As of February 10, 1998
the  uncollected  balance was  $870,079.  The customer  has filed a  declaratory
judgment action on this matter.

9. Outstanding Warrants

Warrants  outstanding  as of December 31, 1997 entitling the holders to purchase
shares of the Company's common stock are summarized as follows:

Date of Issuance   Number of Shares     Exercise Price/Share     Expiration Date
----------------   ----------------     --------------------     ---------------

June 1995                50,000                 2.90              February 1998
November 1995            20,000                 5.00              November 1998
February 1996            25,000                 4.00               January 1999
May 1996                 20,000                 3.75                 June 1998
May 1996                100,000                 3.75                 June 1999
May 1996                 15,000                 4.00               January 1998
May 1996                100,000                 4.50                March 2001
May 1996                200,000                 2.625                July 1999

The Company has sufficient shares authorized but not issued for use in the event
these warrants are exercised.

10. Transactions with Related Parties

Related Party Ownership Interests

A director of the Company,  together with its present  chairman of the board own
or control 6.07% of the Company's common stock as of December 31, 1997.


                                     F - 14
<PAGE>

Concord Energy Incorporated and Subsidiaries

Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------

Receivables from Related Parties/Affiliated Company

Integrated  and the Company  previously had an agreement by which the associated
receivables  and payables were permitted to be netted.  At December 31, 1997 and
1996,  the  Company  has a net  receivable  due from  Integrated  of $54,033 and
$7,853, respectively.

As part  of its  ongoing  operations,  KEMCO  conducts  business  with  Atascosa
Electric Services ("AES"), an entity which is owned and controlled by the family
of Deral  Knight,  CEO,  who is also  Chairman of the Board of  Directors  and a
stockholder  of the Company.  At December 31, 1997 and 1996 the Company owed AES
$30,603 and $39,698, respectively, which is included in accounts payable.

At  December  31,  1997 and 1996,  respectively,  there was  $51,485 and $43,531
payable due to Deral Knight.  These amounts  represent  unreimbursed  travel and
other  business  expenses  incurred in the normal course of business and include
$13,193 of accrued interest payable at December 31, 1997 and 1996.

Under the  provisions  of the  agreement  whereby  the  Company  acquired  Deral
Knight's  stock in KEMCO,  Deral  Knight  has  agreed to return to the  Company,
Concord Energy Incorporated common stock valued at $6.25 per share to the extent
that Deral  Knight owed money to the Company at June 30, 1995.  Accordingly,  in
liquidation  of the  receivable  balance,  17,130 shares of Company common stock
issued to Deral  Knight  as part of the  purchase  price of his KEMCO  stock are
reflected  as having been  returned to the Company and are  recorded as treasury
stock at December 31, 1997 and 1996.

Other Payables to Related Parties

At December 31, 1997 and 1996, $269,733 and $262,240, respectively, is reflected
as owed to Richard D.  Barden,  the former  president  of IPS, and his wife June
Barden (see Note 8). The balance generally consists of accrued  compensation and
expense  reimbursements  due to them and is included in accrued  expenses in the
accompanying balance sheet.

Notes Payable to Stockholders

At December 31, 1996, Notes Payable to  stockholders,  which bear interest of 6%
per annum,  were payable to Deral  Knight.  Interest  expense  incurred on notes
which  matured and were paid in October 1996  totaled  $4,120 for the six months
ended December 31, 1996. At December 31, 1997 a new note payable to Deral Knight
in the amount of $25,000 is included in short term debt.

Additionally,  the additional  $142,500  recorded as various  unsecured notes at
Note 7 as of December  31, 1997 and the $160,056  recorded as various  unsecured
notes at December 31, 1996 represent notes payable to former stockholders of IPS
who became stockholders of the Company when the Company acquired IPS.


                                     F - 15
<PAGE>

Concord Energy Incorporated and Subsidiaries

Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------

In August 1996 various  notes which  totaled  $87,696  were  converted to 14,616
shares of the Company's common stock. Upon conversion,  an additional 560 shares
of the Company's common stock was issued as  consideration  for accrued interest
expense  through  the date of the  conversion  totaling  $3,362.  This stock was
converted  under  agreements  that  require  the  Company to pay the  difference
between  the  price  the of the  Company's  stock on July 1,  1997 and $6.00 per
share.  The value of the  Company's  common stock at the time of  conversion  of
$3.00 per share or $45,528 was recorded as paid in capital,  and $3.00 per share
or  $45,528  as an accrued  liability  in the  accompanying  balance  sheet.  An
additional  accrued  liability  of $22,764  is  recorded  as an expense  for the
difference in the price of the Company's  common stock at the time of conversion
of $3.00 per share  and the  price at July 1,  1997 of $1.50 per  share,  in the
accompanying  statement of operations  for fiscal 1997. The total amount of this
accrued   liability  of  $68,292,   is  included  in  accrued  expenses  in  the
accompanying balance sheet.

Acquisition of IPS

In March  1996,  the  Company  acquired  IPS.  Included  among  the  individuals
acquiring  Company  shares,  in connection  with the acquisition of IPS, are ten
individuals  who received 45% of the Concord stock issued as  consideration  for
IPS.  Of these  individuals,  eight have made  investments  in the past in other
ventures in which Mr. Swon, Tucker, Integrated and/or KEMCO had an interest, and
eight of which had owned stock in the Company.  Included with the acquisition of
IPS was a $300,000 liability from IPS to Tucker,  for funds previously  advanced
to IPS from  Tucker.  This  $300,000  was applied to, and is included in the net
receivable  balance due from Integrated to the Company at December 31, 1996 (see
Note 8).

Management Agreement

The Company  and  Integrated  had entered  into an  agreement  (the  "Management
Agreement")   that   required   Integrated   to  provide   certain   management,
administrative and accounting  services to the Company and certain  subsidiaries
for  $116,000  per month,  which  agreement  terminated  on June 30,  1996.  The
Management  Agreement had been provided for under the terms of the consolidation
of  Partnerships,  the assets of which were exchanged for Concord  Energy,  Inc.
stock (see Note 1). The services provided by Integrated  included the receipt of
cash for oil and gas sales and the payment of operating and capital expenditures
on behalf of the Company.

In accordance with the provisions of the Management  Agreement,  the Company was
also entitled to a percentage of all syndicated  retail  partnership gross sales
made by  Integrated.  For the six months  ended  December  31,  1996 the Company
recorded $0 of syndication income from Integrated.


                                     F - 16
<PAGE>

Concord Energy Incorporated and Subsidiaries

Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------

Employment Agreements

On November 1, 1991 IPS entered  into an  employment  agreement  with its former
president,  Richard D.  Barden.  The  agreement  as  modified on October 4, 1994
provides  for him to receive an annual  base  salary of  $96,200  per year.  The
agreement  also  provides  for certain  fringe  benefits and bonuses and expires
December 31, 2000. The agreement  terminated  upon the resignation of Mr. Barden
in July 1997.

On November 9, 1994 KEMCO entered into an employment  agreement  with its former
president, Deral Knight. The agreement provides for him to receive a base salary
of $125,000 per annum plus a bonus  consisting of ten percent of KEMCO's pre-tax
net profits from  $1,500,000  to $2,000,000  and fifteen  percent of pre-tax net
profits which exceed $2,000,000.  The agreement also provides for certain fringe
benefits and expires May 7, 2000.

Royalty Agreement

In March,  1992 IPS entered into a royalty  agreement with its former president,
Richard D. Barden, for any related oil and gas industry  applications  developed
from the original idea of  developing a set of  proprietary  software  programs.
Royalties  under this  agreement  are  calculated  as  follows:  1% of the first
$1,500,000 of gross revenue, and 5% of gross revenue thereafter. Royalty expense
under the terms of this  agreement were $1,234 and $955 for the six months ended
December 31, 1997 and 1996,  respectively.  The agreement  expires  December 31,
2015.

Other Related Party Transactions

In June 1996 the Company  accepted  124,500 shares of the Company's common stock
from  Integrated,  at a value  of $3.00  per  share  as a  reduction  of the net
receivable  balance  due from  Integrated  as of June 30,  1996.  This  stock is
included in the accompanying  consolidated financial statement as Treasury stock
in stockholders' equity.

On December 5, 1996 KEMCO entered into a lease agreement with Deral Knight, CEO,
and Chairman of the board of directors  and a  stockholder  of the Company.  The
lease is for 2.42 acres of land located  adjacent to property  which KEMCO owns,
and includes a 3,200 square ft. shop building and office  trailer.  The lease is
for a term of five years at a cost of $975 per month.

11. Going Concern

For the fiscal  years ended June 30, 1997 and 1996,  the  Company  incurred  net
losses and  negative  cash flow from  operations.  In October  1997 the  Company
become involved in a dispute over the completion of a significant contract which
has delayed  collection of a significant  account  receivable (see Note 8). As a
result of these conditions, the Company has had difficulties


                                     F - 17
<PAGE>

Concord Energy Incorporated and Subsidiaries

Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------

meeting its current obligations as they come due. Additionally,  the Company has
notes  payable of  $2,920,000  maturing on February 28, 1998,  for which it must
either  negotiate  an  extension  or  secure  other  long-term  debt  or  equity
financing.  These factors create an uncertainty  about the Company's  ability to
continue  as a going  concern.  The  financial  statements  do not  include  any
adjustments  that might be  necessary  if the Company is unable to continue as a
going concern.

Management is currently  attempting to secure long-term  financing  secured by a
portion of the Company's inventory of plants to replace the notes that mature on
February  28, 1998.  During the six months  ended  December 31, 1997 the Company
reported  net income of  $911,466  and  positive  cash flow from  operations  of
$128,876.  Additionally,  at December  31, 1997 KEMCO had work in progress  with
$1,795,154 in revenues  remaining to be earned.  Through February 10, 1998 KEMCO
had  obtained  commitments  for  additional  contracts  with future  revenues of
$1,042,000 for a total backlog at February 10, 1998 of $2,837,154. The Company's
ability to continue as a going concern is dependent on its  obtaining  financing
to replace its maturing  debt,  meeting its profit  estimates  on contracts  and
achieving   profitable   operations  and  sufficient  positive  cash  flow  from
operations to meet its obligations.


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