<PAGE>   1
================================================================================


                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-K

[X]               ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934
                    FOR THE FISCAL YEAR ENDED JUNE 30, 1999
                                       OR
[ ]             TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934
          FOR THE TRANSITION PERIOD FROM _____________ TO _____________
                         COMMISSION FILE NUMBER 0-21179

                           QUEEN SAND RESOURCES, INC.
                           QUEEN SAND RESOURCES, INC./NV/
                            QUEEN SAND OPERATING CO.
                             CORRIDA RESOURCES, INC.
            (EXACT NAME OF REGISTRANTS AS SPECIFIED IN THEIR CHARTER)

                      DELAWARE                             75-2615565
                       NEVADA                              75-2564071
                       NEVADA                              75-2593510
                       NEVADA                              75-2691594
           (STATE OR OTHER JURISDICTION OF              (I.R.S. EMPLOYER
            INCORPORATION OR ORGANIZATION)              IDENTIFICATION NOS.)

             13760 NOEL RD., SUITE 1030
                   DALLAS, TEXAS                           75240-7336
      (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)             (ZIP CODE)

 (REGISTRANTS' TELEPHONE NUMBER, INCLUDING AREA CODE)    (972) 233-9906

        SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE

           SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
                    COMMON STOCK, PAR VALUE $0.0015 PER SHARE
                                (TITLE OF CLASS)

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

         INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR 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  [  ]

         INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO
ITEM 405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED,
TO THE BEST OF REGISTRANTS' KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION
STATEMENTS INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY
AMENDMENT OF THIS FORM 10-K.

         STATE THE AGGREGATE MARKET VALUE OF THE VOTING AND NON-VOTING COMMON
EQUITY HELD BY NON-AFFILIATES (ALL DIRECTORS, OFFICERS AND 5% OR MORE
SHAREHOLDERS ARE PRESUMED TO BE AFFILIATES) OF THE REGISTRANT ON SEPTEMBER 10,
1999, WAS $8,816,683 BASED ON THE CLOSING PRICE PER SHARE OF THE COMMON STOCK ON
SUCH DATE.

         THE NUMBER OF SHARES OF COMMON STOCK, PAR VALUE $0.0015 PER SHARE, OF
REGISTRANT OUTSTANDING ON SEPTEMBER 10, 1999 WAS 34,216,106.

                       DOCUMENTS INCORPORATED BY REFERENCE

         PORTIONS OF THE REGISTRANT'S PROXY STATEMENT FOR THE 1999 ANNUAL
MEETING OF STOCKHOLDERS, EXPECTED TO BE FILED ON OR PRIOR TO OCTOBER 28, 1999,
ARE INCORPORATED BY REFERENCE INTO PART III.



================================================================================

<PAGE>   2


                                TABLE OF CONTENTS


<TABLE>
<CAPTION>
                                                                                                               PAGE
                                                                                                               ----

<S>           <C>                                                                                              <C>
PART I............................................................................................................2
              Item 1.      Business...............................................................................2
              Item 2.      Properties............................................................................27
              Item 3.      Legal Proceedings.....................................................................28
              Item 4.      Submission of Matters to a Vote of Security Holders...................................28

PART II..........................................................................................................29
              Item 5.      Market for Registrant's Common Equity and Related Stockholder Matters.................29
              Item 6.      Selected Financial Data...............................................................30
              Item 7.      Management's Discussion and Analysis of Financial Condition and
                           Results of Operations.................................................................31
              Item 7A.     Quantitative and Qualitative Disclosure About Market Risk.............................45
              Item 8.      Financial Statements and Supplementary Data...........................................46
              Item 9.      Changes in and Disagreements with Accountants on Accounting
                            and Financial Disclosure.............................................................46

PART III.........................................................................................................47
              Item 10.     Directors and Executive Officers of the Registrant....................................47
              Item 11.     Executive Compensation................................................................47
              Item 12.     Security Ownership of Certain Beneficial Owners and Management........................47
              Item 13.     Certain Relationships and Related Transactions........................................47

PART IV..........................................................................................................48
              Item 14.     Exhibits, Financial Statement Schedules, and Reports on Form 8-K......................48

GLOSSARY.........................................................................................................55

SIGNATURE PAGE...................................................................................................58
</TABLE>



                                                                               1
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                           QUEEN SAND RESOURCES, INC.

                                     PART I


A WARNING ABOUT FORWARD-LOOKING STATEMENTS

     We have made forward-looking statements in this Form 10-K that are subject
to risks and uncertainties. These forward-looking statements include information
about possible or assumed future results of our operations. Also, when we use
any of the words 'may,' 'plan,' 'seek,' 'estimate,' 'continue,' 'believes,'
'expects,' 'intends,' 'anticipates' or similar expressions, we are making
forward-looking statements. All statements other than statements of historical
fact included in this Form 10-K, including without limitation, statements
regarding our financial position, liquidity or outlook, the volume or discounted
present value of our oil and gas reserves, our ability to service our
indebtedness, and our strategic plans are forward-looking statements. You should
understand that the following important factors, in addition to those discussed
elsewhere in this Form 10-K, could affect our future financial results and
performance and cause our results or performance to differ materially from those
expressed in our forward-looking statements:

     o   the timing and extent of changes in prices for oil and natural gas;
     o   the need to acquire, develop and replace reserves;
     o   our ability to obtain financing to fund our business strategy;
     o   environmental risks;
     o   drilling and operating risks;
     o   risks related to exploitation and development projects;
     o   uncertainties about the estimates of reserves;
     o   competition;
     o   government regulation; and
     o   our ability to meet our stated business goals.

     For these statements, we claim the protection of the safe harbor for
forward-looking statements contained in the Private Securities Litigation Reform
Act of 1995.

     You should consider these risks and the risks discussed in "Business--Risk
Factors" beginning on page 16 before investing in our common stock.

SUBSIDIARY REGISTRANTS

     Due to requirements of the Securities and Exchange Commission, certain
subsidiaries of the parent company are also shown as co-registrants on this Form
10-K. Unless otherwise stated, the information provided in the Form 10-K
describes the business, assets, financial condition and financial results of the
parent company and the consolidated subsidiaries as if they were one entity. As
used herein, references to "Queen Sand Resources, Inc." are to Queen Sand
Resources, Inc., a Delaware corporation, and its consolidated subsidiaries.

BUSINESS

GENERAL

     We are an independent energy company engaged in the acquisition,
development and exploitation of oil and natural gas reserves. We focus on
acquiring and developing on-shore oil and natural gas properties located in the
United States. Since August 1994 we have grown primarily through 19 acquisitions
of oil and natural gas properties for aggregate consideration of approximately
$166.7 million. As a result of our acquisitions, we own a diverse property base
with



                                                                               2
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operations in several different oil and natural gas fields and many different
producing formations. We expect long-lived production from our reserves. For the
year ended June 30, 1999, we had revenues of $28.3 million and earnings before
interest, taxes, depreciation, depletion and amortization ('EBITDA') of $21.5
million. As of September 10, 1999, on a fully diluted basis, our officers and
directors collectively own a beneficial interest in or hold a proxy for
approximately 15.1% of our voting capital stock. Joint Energy Development
Investments Limited Partnership ('JEDI'), an affiliate of Enron Corp. ('Enron'),
beneficially owned approximately 27.9% of our voting capital stock as of
September 10, 1999.

     Our goal is to increase our reserves, production, net asset value, cash
flow and net income by acquiring, developing and exploiting oil and natural gas
reserves with stable production and operating features. We evaluate acquisition
properties based on their potential contribution to our portfolio of reserves.
For example, we have purchased proved developed producing reserves that provide
stable cash flow to help fund the development of our existing non-producing
reserves. We look for transactions that provide low reserve replacement costs,
long reserve life, an inventory of attractive development and exploration
projects, and the potential for reserve and production growth. We also focus on
increasing our existing production through development and exploitation
activities. Currently, we have identified over 184 potential development
locations and exploitation projects on our properties. We have budgeted to spend
approximately $8.7 million through June 30, 2000 to further develop and exploit
our existing properties.

     Our properties are diversified across 20 asset areas located principally in
the southwestern United States. Our interests in the Gilmer Field in East Texas,
the J.C. Martin and the Lopeno/Volpe Fields in South Texas, the Meade Field in
Kentucky and the Caprock Field in New Mexico represent approximately 70% of our
proved reserves (on a SEC PV-10 basis) at June 30, 1999. In addition, we own
substantial properties in Oklahoma and Louisiana. At June 30, 1999, we held
interests in leases covering approximately 190,000 gross (38,000 net) acres.

     At June 30, 1999, we had interests in 552 wells (inclusive of 14 service
wells), proved reserves of 138 Bcf of natural gas and 4.6 MMBbls of oil
(aggregating approximately 165 Bcfe ) with a SEC PV-10 of $131 million, and a
reserve life index of 10 years. Approximately 65% of our reserves was classified
as proved developed and approximately 83% of our total proved reserves was
natural gas. Our average daily net production was 37.5 MMcfe basis for the month
of June, 1999.

     We were incorporated under the laws of Delaware in 1989. The parent company
is principally a holding company, holding the stock of its subsidiaries which
hold our assets and conduct our operations. Our principal executive offices and
mailing address are 13760 Noel Road, Suite 1030, Dallas, Texas 75240-7336 and
our telephone number at that address is (972) 233-9906.

BUSINESS STRATEGY

     Our goals are to expand our reserves, production, net asset value, cash
flow and net income and to generate an attractive return on capital. We
emphasize the following elements in our strategy to achieve these goals:

     o   strategic acquisitions of oil and natural gas properties in a
         disciplined manner;
     o   developing, exploiting and exploring our properties;
     o   maintaining low operating costs; and
     o   maintaining financial flexibility.

     Strategic acquisitions. We continuously evaluate oil and natural gas
acquisition properties based on their potential impact on our existing portfolio
of reserves. Since we began operations in August 1994, we have purchased oil and
natural gas properties with an estimated 257.4 Bcfe of proved reserves for an
aggregate price of $166.7 million or $0.65 per Mcfe. In deciding whether to
purchase oil and natural gas properties, we focus on properties with:

     o   identified development and exploitation potential;
     o   controlled-risk exploration potential;
     o   historically low operating expenses, or the opportunity to reduce
         operating expenses; and



                                                                               3
<PAGE>   5

     o   geological, geophysical and other technical and operating
         characteristics which we are familiar with.

     We apply strict economic and reserve risk criteria in reviewing potential
acquisitions.

     Development, exploitation and exploration. We seek to maximize the value
and cash flow of our oil and natural gas properties and increase our existing
production through:

     o   evaluating opportunities for infill drilling on our producing
         properties;
     o   developing undeveloped acreage in our producing properties;
     o   workovers of existing completed wells to achieve improved production;
     o   recompletions of existing completed wells to try to obtain production
         from other horizons which the well has penetrated; and
     o   secondary recovery operations such as water flood injections to
         increase production flows from wells where natural production rates
         have declined.

     Currently, we have identified over 184 potential development locations and
exploitation projects on our properties. We have budgeted to spend approximately
$8.3 million to drill approximately 61 wells through June 30, 2000. We also
continually evaluate exploitation opportunities, including workover and
recompletion projects. We expect to spend approximately $0.4 million on these
exploitation projects through June 30, 2000. Although we could increase our
exploration drilling activity in the future, our current strategy includes only
limited investments in exploratory projects.

     Low operating costs. Our goal is to spend less than our competitors on a
per unit (Mcfe) basis to produce oil and natural gas. We emphasize controlling
our field operating expenses and acquiring properties with historically low
operating costs. We also attempt to increase production from our existing
properties through targeted workover and well maintenance programs. Through
these efforts, we have reduced lease operating expenses from $1.07 per Mcfe
during the year ended June 30, 1998 to $0.49 per Mcfe for the year ended June
30, 1999.

     Financial flexibility. We are committed to maintaining financial
flexibility, which we believe is important for the successful implementation of
our growth strategy. We finance our acquisitions using a mixture of debt and
equity. Consistent with this financial strategy, we raised an aggregate of
approximately $65.2 million in equity capital from August 9, 1994 through June
30, 1999. As of September 10, 1999, we had no funds available under our credit
agreement and approximately $3.2 million available under our revolving credit
facility with Enron Capital & Trade Resources Corp. ('ECT'). In general, we try
to balance our assets and liabilities by buying reserves that will provide cash
flow to pay for the costs of operations, service of indebtedness and contribute
to the cost of replacing reserves. We also hedge against changes in the prices
of oil and natural gas.



                                                                               4
<PAGE>   6

PRINCIPAL OIL AND NATURAL GAS PROPERTIES

     The following table summarizes certain information with respect to each of
the Company's principal areas of operation at June 30, 1999.

<TABLE>
<CAPTION>
                                 TOTAL                                 TOTAL     PERCENT OF               PERCENT OF
                                 GROSS         OIL      NATURAL        PROVED      TOTAL      SEC PV-10     TOTAL
                                OIL &GAS     (MBBLS)       GAS        RESERVES     PROVED      ($000S)    SEC PV-10
                                 WELLS                    (MMCF)       (BCFE)     RESERVES

<S>                             <C>          <C>        <C>          <C>        <C>              <C>      <C>
   East Texas
     Gilmer Field                   40         373       48,572          50.8        31%        $47,866         37%
                                  ----      ------      -------         -----       ---        --------       ----
   South Texas
     J.C. Martin Field              51          --       11,720          11.7         7          12,806         10
     Lopeno and Volpe Fields        14           2       16,800          16.8        10          12,517         10
     Other                         126         238        2,679           4.1         3           3,321          2
                                  ----      ------      -------         -----       ---        --------        ---
           Total South Texas       191         240       31,199          32.6        20          28,644         22
                                  ----      ------      -------         -----       ---        --------        ---
   Kentucky (Appalachian
   Basin)
     Meade Field                    30          --       35,394          35.4        21          10,709          8
                                  ----      ------      -------         -----       ---        --------        ---
   New Mexico
     Caprock (Queen) Field          57       2,500           --          15.0         9           7,806          6
     Other                          15         559          305           3.7         2           4,100          3
                                  ----      ------      -------         -----       ---        --------        ---
            Total New Mexico        72       3,059          305          18.7        11          11,906          9
                                  ----      ------
   Other                           213         951       22,091          27.8        17          31,601         24
                                  ----      ------      -------         -----       ---        --------        ---
   Total                           546       4,623      137,561         165.3       100%       $130,726        100%
</TABLE>

(1)  The proved reserves and SEC PV-10 with respect to the Net Profits and
     Royalties Interest were estimated by Ryder Scott Company. The proved
     reserves and SEC PV-10 other than with respect to the Net Profits and
     Royalties Interests were estimated by H.J. Gruy and Associates, Inc.

The following is an overview of our major fields, by area.

EAST TEXAS

     GILMER FIELD. The Gilmer Field consists of 40 natural gas wells that cover
approximately 13,000 gross acres in Upshur County, in East Texas. The wells
produce from the Cotton Valley Lime formation at a depth of approximately 11,500
feet to 12,000 feet.

     Goldston Oil Corporation ("Goldston") has an 80% working interest in, and
is the operator of, 13 gas units in the heart of the Gilmer Field. We own a
47.5% net profits interest in Goldston's working interest.

     The Gilmer Field is located on the northwestern flank of the Sabine Uplift.
The initial well in the field was drilled in 1986 and the field was delineated
over the following ten years, eventually expanding to 21 gas units. The
reservoirs are characterized by low permeability, depletion drive mechanisms and
require stimulation. Well spacing is currently four wells per 640 acre block for
most of the units in the field.

     At June 30, 1999, the Gilmer Field contained 51 Bcfe of proved reserves,
which represented approximately 31% of our total proved reserves and 37% of our
SEC PV-10. Our average daily net production from the Gilmer Field in June 1999
was approximately 10 MMcf of natural gas and 116 Bbls, aggregating 11 MMcfe.

     One additional proved undeveloped location remains to be drilled this year
which management believes will fully develop the field on 160 acre spacing.

     Fieldwide central compression was installed and operating in December 1998.
We believe that development of the well discussed above along with central
compression, which lowered the gathering system pressure, will allow the field
to maintain a higher production rate and a longer life.



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<PAGE>   7

SOUTH TEXAS

     J.C. Martin Field. The J.C. Martin Field consists of 51 producing natural
gas wells that cover approximately 8,300 gross acres in Zapata County, Texas on
the Mexican border. The field primarily produces from the Lobo 1, 3 and 6 series
of sands in the Wilcox formation at depths of approximately 8,000 feet to 10,000
feet.

     Our interests consist of (i) a 13.33% perpetual, non-participating mineral
royalty covering the Mecom family ranch and (ii) an 80% NPI in Devon Energy
Corporation's ("Devon's") 20% working interest in the ranch. Coastal Oil
Corporation ("Coastal") operates all of the wells. The reservoirs are low
permeability, producing through pressure depletion and requiring fracture
stimulations. Our royalty interest in this property is the subject of litigation
involving the predecessor owner. See "Item 1. Business - Legal Proceedings."

     At June 30, 1999, the J.C. Martin Field contained 12 Bcfe of proved
reserves, which represented approximately 7% of our total proved reserves and
approximately 10% of our SEC PV-10. Our average daily net production from the
J.C. Martin Field in June 1999 was 7.3 MMcfe.

     A well drilled during 1998 in this field tested natural gas from a deeper
Cretaceous zone. This zone previously had not produced on the lease but has
produced significant volumes to the north. We believe that there may be
additional potential on the west end of the Mecom Ranch for this zone as only
five wells have actually penetrated the Cretaceous zone. We also believe that
potential exists for reserves in the Middle Wilcox zones at approximately 5,000
feet to 6,000 feet.

     LOPENO AND VOLPE FIELDS. The Lopeno and Volpe Fields are located in Zapata
County, Texas. These fields consist of 13 wells with 16 separate completions.
All of the wells produce from multiple reservoirs in the Upper Wilcox formation.
Choctaw II Oil & Gas Ltd. ("Choctaw") is the operator of 10 of the 13 wells with
Pioneer Resources Corporation operating the remainder.

     Our interest in these fields consists of a 66.66% NPI in Choctaw's working
interests. Choctaw's working interests vary from 15.7% to 75%.

     The Lopeno Field covers over 6,000 acres and is an extension of a field
originally discovered in 1952. Over 20 sands have produced in the field at
depths ranging from 6,500 feet to 12,000 feet. Typical of the numerous Upper
Wilcox fields along the Texas Gulf Coast, Lopeno Field is highly faulted and
overpressured. The Volpe Field is also a Wilcox field located 8 miles north of
Lopeno, Texas. A well was drilled directionally along the trapping fault and is
producing from the Middle Wilcox formation. Multiple Upper Wilcox zones are
classified behind the pipe. Seven proved undeveloped locations have been
identified in these fields.

     At June 30, 1999, the Lopeno and Volpe Fields contained an estimated 17
Bcfe of proved reserves, which represented approximately 10% of our total
proved reserves and approximately 10% of our SEC PV-10. Our average daily net
production from the fields in June 1999 was 2.2 MMcf/d of natural gas.

     We believe that the production in these fields can be enhanced through
workovers and accelerated drilling for the shallow, behind-the-pipe reserves.

KENTUCKY

     Meade Field. We have a 60% working interest in approximately 61,000 gross
acres in Meade, Hardin and Breckinridge Counties, Kentucky. There are currently
30 gross producing and 1 gross shut-in natural gas wells located on our leases
in Meade County. We drilled 10 wells in this field last year. These wells
produce from the New Albany Shale formation between the depths of approximately
720 feet and 850 feet. The shale zone has two porosity members and averages 80
feet in thickness. In addition to the natural gas wells, we also own an interest
in two salt-water disposal wells and a related natural gas gathering system.

     At June 30, 1999, these properties contained 35 Bcfe of net proved
reserves, which represents approximately 21% of our total proved reserves and
approximately 8% of our SEC PV-10. We acquired these properties because we
believe



                                                                               6
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they have significant low risk development potential from relatively shallow
formations. Natural gas reserves are long-lived reserves (generally, over 40
years) characterized by an increase in production rates with dewatering and then
a gradual decline. Our average daily net production from the Meade Field in June
1999 was 430 Mcf.

NEW MEXICO

     Caprock (Queen) Field. The Caprock (Queen) Field was our first acquisition
and consists of 151 oil wells, 58 water injection wells, 81 shut-in wells and 71
temporarily abandoned wells on approximately 14,200 gross acres located in Lea
and Chaves Counties, New Mexico. The Caprock Field produces from the "Artesia
Red Sand" or Queen sandstone of Permian age in the Seven Rivers and Grayburg
formations at a depth of approximately 3,000 feet. Discovery wells were drilled
from 1940 through 1949. Development wells were drilled between 1954 and 1956
within the productive limits of the field, which is approximately twenty miles
long and three miles wide. Primary production was established on 40-acre
spacing. Initial waterflood operations began in 1959 through 1960.

     We have a 100% working interest and an 82.6% revenue interest in two
operating units (the Drickey Queen Sand Unit and the Westcap Unit), a 98.3%
working interest and a 79.3% revenue interest in a third operating unit (the
Rock Queen Unit), and a 100% working interest and a 90% revenue interest in the
Trigg and Federal V leases. These five properties comprise the central 14,200
acres of the approximately 26,000 productive acres that contain nine contiguous
development units.

     At June 30, 1999, the Caprock Field contained an estimated 2,500 MBbls (15
Bcfe) of net proved reserves, which represented approximately 9% of our total
proved reserves and 6% of our SEC PV-10.

     We temporarily shut the field in due to significantly low oil prices in
late 1998 and early 1999. Steps were recently taken to return the field to
production.

     Phase I of the program toward redeveloping the waterflood pattern has been
designed and we anticipate the program will be implemented in the first half of
fiscal year 2000. We are the operator.

DEVELOPMENT, EXPLOITATION AND EXPLORATION ACTIVITIES

     Our development drilling program is generated largely through our internal
technical evaluation efforts and as a result of our obtaining undeveloped
acreage in connection with producing property acquisitions. In addition, there
are numerous opportunities for infill drilling on our leases currently producing
oil and natural gas. We intend to continue to pursue development drilling
opportunities which offer potentially significant returns to us. Our
exploitation activities consist of the evaluation of additional reserves through
workovers, behind the pipe recompletions and secondary recovery operations.

     The objective of our overall development and exploitation strategy is to
achieve a balance between low risk workover and recompletion activities and
moderate risk infill and extensional development wells. This
exploitation/development strategy is intended to increase reserves while
minimizing the risk of uneconomic projects. We currently intend only limited
investments in exploratory drilling projects.

     During the year ended June 30, 1999, we participated in drilling 30 gross
(12.6 net) wells, of which 28 gross (26 net) were productive. However, there can
be no assurance that this past rate of drilling success will continue in the
future. We are currently pursuing development drilling projects in 9 different
asset areas and anticipate continued growth in its drilling activities.

     At June 30, 1999, we had identified approximately 184 development locations
and exploitation projects on our acreage. We expect to spend approximately $8.7
million on development locations and exploitation projects through June 30, 2000
depending on the availability of drilling capital.

     The following is a brief discussion of our primary areas of development and
exploitation activity:



                                                                               7
<PAGE>   9

  EAST TEXAS

      Segno Field. During April 1999, with an effective date of November 1,
  1998, we converted our 80% net profits interest in Prime Energy's working
  interest to an 80% working interest in the proved developed producing wells
  and a 50% working interest in all other proved and unproved locations. We
  believe this was necessary to encourage Prime Energy to take steps to develop
  the field more fully.

      We intend to continue participating with the operator (Prime Energy) in
  the development of the Segno field. Recent activity includes the deepening of
  several wells to test lower producing horizons, the Wilcox 'D', 'E', 'F' and
  'G' and the drilling of a number of new wells targeting reserves not yet
  produced from the Yegua and Wilcox formations. The operator continues to
  return wells that are off production back to service and to improve the
  field's facilities infrastructure. Projects planned through June 30, 2000
  include drilling two proved undeveloped locations and 8 workovers/deepenings
  at a total cost to us of approximately $423,000. In addition, several
  significant new prospects have been identified utilizing 2-D seismic data. We
  are participating in leasing of the acreage covering these prospects,
  identified as "Segno West" and "Flenk."

  SOUTH TEXAS

      J.C. Martin Field. A 3-D seismic survey, shot in 1996, has been the
  catalyst for the most recent drilling in the J.C. Martin Field. Coastal Oil
  Corporation, the operator, has been very active in this area and continues to
  propose new wells to be drilled. We anticipate at least 2 additional locations
  will be drilled this year to develop untested or undrained fault blocks in the
  Lobo 1, 3 and 6 series of Wilcox sands at a total cost to us of approximately
  $384,000. In addition to the proven locations discussed above, we also expect
  three additional wells to be drilled to the Lobo series and a workover to test
  the Middle Wilcox, an unproven shallower zone.

      Lopeno/Volpe Fields. We believe significant potential exists in the
  Lopeno/Volpe Fields to increase production. Over twenty sands have produced in
  the Lopeno Field and most wells have multiple behind-the-pipe zones.
  Accelerated drilling for some of the shallower zones may be justified,
  improving their present value. Three proved undeveloped locations have been
  identified in the Volpe Field that would develop Upper Wilcox sands. The new
  operator, Choctaw, has indicated that it intends to pursue the necessary
  workovers and additional drilling. We anticipate our share of capital
  expenditures in the Lopeno/Volpe fields will be approximately $2.1 million
  through June 2000.

  KENTUCKY

      Meade Field. We believe that the Meade Field presents opportunities for
  low cost developmental drilling at depths of less than 1,000 feet. We expect
  that the field will be developed in five phases. Phase 1, consisting of 20
  wells, was completed in 1996. Phase 2, consisting of 10 wells was completed
  this past year. Phases 3 through 5 are scheduled to occur between 1999 and
  2001 with each Phase consisting of 10-20 wells. We expect to develop a total
  of 91 wells at an average cost to the Company of $54,000 per well. The total
  capital expenditures for the project are estimated at $4.9 million.

  NEW MEXICO

      Caprock (Queen) Field. We temporarily shut-in the Caprock (Queen) for part
  of this past year during the period of significantly low oil prices. We are
  currently bringing the field back into production. Exploitation efforts at the
  Caprock (Queen) Field include a coordinated program of workovers, waterflood
  redevelopment and infill drilling. We, with the assistance of independent
  engineering consultants, have evaluated several alternate development options.
  We plan to redevelop the Drickey Queen/Westcap Units using a line drive
  waterflood pattern. A total of five dual lateral horizontal producers will be
  drilled and 14 single lateral horizontal injection wells are slated to be
  drilled. Phase I of the program consists of four horizontal water injection
  wells and one dual lateral horizontal producer with an associated water
  injection plant and production facility. The pilot program will fully develop
  one 640 acre section of the Drickey Queen Unit. We have entered into an
  agreement with Texican, Inc. ("Texican") regarding this pilot program to
  develop the Drickey Queen. The agreement requires Texican to fund 50% of the
  first $2.0 million of the cost of the pilot program. In consideration of this,
  Texican will earn a 25% working interest in the Drickey Queen Unit. We
  anticipate



                                                                               8
<PAGE>   10

  the pilot program will be implemented in the first half of fiscal 2000 and
  that our share of the program will cost $1.1 million.

  MARKETING

      Our oil and natural gas production is sold to various purchasers typically
  in the areas where the oil or natural gas is produced. We do not refine or
  process any of the oil and natural gas we produce. We are currently able to
  sell, under contract or in the spot market, all of the oil and the natural gas
  we are capable of producing at current market prices. Substantially all of our
  oil and natural gas is sold under short term contracts or contracts providing
  for periodic adjustments or in the spot market; therefore, our revenue streams
  are highly sensitive to changes in current market prices. Our market for
  natural gas is pipeline companies as opposed to end users. See "Item 1.
  Business - Risk Factors" for a discussion of the risks of commodity price
  fluctuations.

      In an effort to reduce the effects of the volatility of the price of crude
  oil and natural gas on our operations and cash flow, we adopted a policy of
  hedging oil and natural gas prices whenever market prices are in excess of the
  prices anticipated in our operating budget and financial plan through the use
  of commodity futures, options and swap agreements. We do not engage in
  speculative hedging. See "Item 7. Management's Discussion and Analysis of
  Financial Condition and Results of Operations "Changes in Prices and Hedging
  Activities."

      For the year ended June 30, 1999, Goldston Oil Corporation, Coastal Oil
  and Gas, Inc., Petrocorp, Inc. and Devon Energy Corporation accounted for
  approximately 30%, 12%, 11% and 9%, respectively, of our oil and natural gas
  sales. During the year ended June 30, 1998, Big Run Production and Goldston
  Oil Corporation accounted for approximately 13% and 17%, respectively, of our
  oil and natural gas sales. During the year ended June 30, 1997, Big Run
  Production, Navajo Refining, EOTT Energy, Texaco and Conoco accounted for 32%,
  14%, 17%, 10% and 9%, respectively, of our oil and natural gas sales. We do
  not believe that the loss of any of these buyers would have a material effect
  on our business or results of operations as we believe we could readily locate
  other buyers. However, short term disruptions could occur while we seek
  alternative buyers or while lines were being connected to other pipelines.

      The market for our oil and natural gas depends on factors beyond our
  control, including the:

     o   price of imports of oil and natural gas;
     o   the extent of domestic production and imports of oil and natural gas;
     o   the proximity and capacity of natural gas pipelines and other
         transportation facilities;
     o   weather;
     o   demand for oil and natural gas;
     o   the marketing of competitive fuels; and
     o   the effects of state and federal regulations.

     The oil and natural gas industry also competes with other industries in
supplying the energy and fuel requirements of industrial, commercial and
individual consumers.

OIL AND NATURAL GAS RESERVES

     The following tables summarize certain information regarding our estimated
proved oil and natural gas reserves as of June 30, 1997, 1998 and 1999. All
such reserves are located in the United States. The estimates relating to our
proved oil and natural gas reserves and future net revenues of oil and natural
gas reserves at June 30, 1998 and 1999 with respect to net profits and royalty
interests included in this Annual Report on Form 10-K are based upon reports
prepared by Ryder Scott Company. The estimates at June 30, 1997 and, other than
with respect to net profits and royalty interests, at June 30, 1998 and 1999
included in this Annual Report are based upon reports prepared by H.J. Gruy and
Associates, Inc. In accordance with guidelines of the Securities and Exchange
Commission (the "Commission"), the estimates of future net cash flows from
proved reserves and their SEC PV-10 are made using oil and natural gas sales
prices in effect as of the dates of such estimates and are held constant
throughout the life of the



                                                                               9
<PAGE>   11

properties. Our estimates of proved reserves, future net cash flows and SEC
PV-10 were estimated using the following weighted average prices, before
deduction of production taxes:

<TABLE>
<CAPTION>
                                                         JUNE 30
                                    ---------------------------------------------------
                                      1997                 1998                 1999
                                      ----                 ----                 ----

<S>                                 <C>                  <C>                  <C>
   Natural Gas (per Mcf)             $   2.25             $   2.40             $   2.32
   Oil (per Bbl)                     $  17.43             $  12.80             $  19.28
</TABLE>

     Reserve estimates are imprecise and may be expected to change, as
additional information becomes available. Furthermore, estimates of oil and
natural gas reserves, of necessity, are projections based on engineering data,
and there are uncertainties inherent in the interpretation of such data as well
as the projection of future rates of production and the timing of development
expenditures. Reservoir engineering is a subjective process of estimating
underground accumulations of oil and natural gas that cannot be measured in an
exact way, and the accuracy of any reserve estimate is a function of the quality
of available data and of engineering and geological interpretation and
judgement. Reserve reports of other engineers might differ from the reports
contained herein. Results of drilling, testing, and production subsequent to the
date of the estimate may justify revision of such estimate. Future prices
received for the sale of oil and natural gas may be different from those used in
preparing these reports. The amounts and timing of future operating and
development costs may also differ from those used. Accordingly, we cannot assure
you that the reserves set forth herein will ultimately be produced nor can there
be assurance that the proved undeveloped reserves will be developed within the
periods anticipated. The discounted future net cash inflows should not be
construed as representative of the fair market value of the proved oil and
natural gas properties belonging to Queen Sand Resources, since discounted
future net cash inflows are based upon projected cash inflows which do not
provide for changes in oil and natural gas prices nor for escalation of expenses
and capital costs. The meaningfulness of such estimates is highly dependent upon
the accuracy of the assumptions upon which they were based.

     All reserves are evaluated at constant temperature and pressure, which can
affect the measurement of natural gas reserves. Operating costs, development
costs and certain production-related and ad valorem taxes were deducted in
arriving at the estimated future net cash flows. No provision was made for
income taxes, operating methods and existing conditions at the prices and
operating costs prevailing at the dates indicated above. The estimates of the
SEC PV-10 from future net cash flows differ from the Standardized Measure set
forth in the notes to our Consolidated Financial Statements, which is calculated
after provision for future income taxes. We cannot assure you that these
estimates are accurate predictions of future net cash flows from oil and natural
gas reserves or their present value.

     For certain additional information concerning our oil and natural gas
reserves and estimates of future net revenues attributable thereto, see Note 9
of the Notes to Consolidated Financial Statements.



                                                                              10
<PAGE>   12


COMPANY RESERVES

     The following tables set forth our proved reserves of oil and natural gas
and the SEC PV-10 thereof on an actual basis for each year in the three-year
period ended June 30, 1999.

                     PROVED OIL AND NATURAL GAS RESERVES (1)

<TABLE>
<CAPTION>
                                                                                JUNE 30
                                                          ----------------------------------------------------
                                                                1997              1998             1999
                                                                ----              ----             ----
<S>                                                           <C>              <C>                <C>
    Natural gas reserves (MMcf):
       Proved Developed Reserves                              12,412           120,998            94,614

       Proved Undeveloped Reserves                             8,561            55,097            42,947
                                                            --------         ---------        ----------
          Total Proved Reserves of natural gas                20,973           176,095           137,561
    Oil reserves (MBbl):
       Proved Developed Reserves                               2,188             5,298             2,138

       Proved Undeveloped Reserves                             4,521             2,651             2,486
                                                            --------          --------          --------
          Total Proved Reserves of oil                         6,709             7,949             4,624
    Total Proved Reserves (Mmcfe)                             61,224           223,788           165,299
</TABLE>



                         SEC PV-10 OF PROVED RESERVES(1)

<TABLE>
<CAPTION>
                                                                                 JUNE 30
                                                            --------------------------------------------------
                                                                 1997              1998             1999
                                                                 ----              ----             ----
<S>                                                           <C>              <C>               <C>
     SEC PV-10 ($,000) (2):
        Proved Developed Reserves                             $ 21,660        $ 131,200         $  99,650

        Proved Undeveloped Reserves                             19,558           33,920            31,076
                                                              --------        ---------         ---------
              Total SEC PV-10                                 $ 41,218        $ 165,120         $ 130,726
</TABLE>

(1)  The data shown at June 30, 1997, June 30, 1998 and June 30, 1999 (excluding
     data with respect to the net profits and royalty interests at June 30, 1998
     and June 30, 1999) is based upon reports prepared by H.J. Gruy and
     Associates, Inc.. The data included with respect to the net profits and
     royalty interests at June 30, 1998 and June 30, 1999 is based upon reserve
     reports prepared by Ryder Scott Company.
(2)  SEC PV-10 differs from the Standardized Measure set forth in the notes to
     our Consolidated Financial Statements, which is calculated after provision
     for future income taxes.

     Except for the effect of changes in oil and natural gas prices no major
discovery or other favorable or adverse event is believed to have caused a
significant change in these estimates of our reserves since June 30, 1999.

      Except for Form EIA 23, "Annual Survey of Domestic Oil and Gas Reserves",
filed with the United States Department of Energy, no other estimates of total
proven net oil and natural gas reserves have been filed by us with, or included
in any report to, any United States authority or agency pertaining to our
individual reserves since the beginning of our last fiscal year. Reserves
reported on Form EIA 23 are comparable to the reserves reported by us herein.



                                                                              11
<PAGE>   13

OPERATIONS DATA

Productive Wells

      The following table sets forth the number of total gross and net
productive wells in which we owned an interest as of June 30, 1999.

<TABLE>
<CAPTION>
                                   OIL           GAS          TOTAL          OIL           GAS          TOTAL
                                   ---           ---          -----          ---           ---          -----

<S>                                <C>           <C>           <C>          <C>           <C>           <C>
          Texas                     160           113           273          41.0          29.4          70.3
          New Mexico                 57            --            57          56.0          --            56.0
          Louisiana                   1            --             1           1.0          00             1.0
          Oklahoma                   --           140           140           0.0          18.0          18.0
          Kentucky                   --            30            30          --            20.2          20.2
          Other (1)                   1            44            45           0.3           8.7           9.0
                                    ---           ---           ---          ----          ----         -----
                  Total             219           327           546          98.3          76.3         174.5
</TABLE>

 (1)  Represents wells located in Kansas, Alabama and Wyoming.

     As of June 30, 1999, we had an interest in 546 gross (174.5 net) productive
oil and natural gas wells.

Production Economics

     The following table sets forth certain operating information for the
periods presented.

<TABLE>
<CAPTION>
                                                                1997              1998             1999
                                                                ----              ----             ----
<S>                                                             <C>             <C>             <C>
         OPERATING DATA
         PRODUCTION VOLUMES:
           Natural Gas (MMcf)                                      546             3,368           12,962
           Oil (MBbl)                                              151               325              500
             Total (Mmcfe)                                       1,450             5,318           15,960
         AVERAGE SALES PRICE:
           Natural gas (per Mcf)                               $  2.31           $  2.27          $  2.13
           Oil (per Bbl)                                         20.73             15.52            12.37
         SELECTED EXPENSES (PER MCFE):
           Production taxes                                    $  0.21           $  0.12          $  0.08
           Lease operating expense                                1.52              1.07             0.49
           General and administrative                             1.00              0.43             0.22
           Depreciation, depletion and amortization (1)           0.68              0.91             0.74
</TABLE>


 (1)  Represents depreciation, depletion and amortization of oil and natural
gas properties only.



                                                                              12
<PAGE>   14



DRILLING ACTIVITY

     The following table sets forth our gross and net working interests in
exploratory and development wells (but excluding injection or service wells)
drilled during the indicated periods.

<TABLE>
<CAPTION>
                                          1997                     1998                     1999
                                          ----                     ----                     ----
                                  GROSS            NET      GROSS         NET       GROSS          NET
                                  -----            ---      -----         ---       -----          ---
<S>                                  <C>           <C>         <C>        <C>          <C>         <C>
         EXPLORATORY:
          Oil                        1             0.5         1          0.0          0           0.0
          Gas                        0             0.0         1          0.3          0           0.0
          Dry                        0             0.0         1          0.7          1           1.0
                                 -----          ------      ----       ------       ----        ------
               Total                 1             0.5         3          1.0          1           1.0
        DEVELOPMENT:
          Oil                        0             0.0         5          2.1          1           0.2
          Gas                        0             0.0        10          2.6         26           9.9
          Dry                        0             0.0         1          0.4          1           0.7
                                  ----          ------      ----       ------       ----        ------
               Total                 0             0.0        16          5.1         28          10.8
        TOTAL:
          Oil                        1             0.5         6          2.1          1           0.2
          Gas                        0             0.0        11          2.9         26           9.9
          Dry                        0             0.0         2          1.1          2           1.7
                                  ----           -----       ---        -----        ---         -----
               Total                 1             0.5        19          6.1         29          11.8
</TABLE>

     Between July 1 and September 24, 1999 we successfully drilled 2 gross (0.4
net) gas development wells. We are in the process of drilling 1 gross (0.2 net)
gas development well.

DEVELOPED AND UNDEVELOPED ACREAGE

     The following table sets forth the approximate gross and net acres in which
we owned an interest as of June 30, 1999.

<TABLE>
<CAPTION>
                                               DEVELOPED                         UNDEVELOPED
                                               ---------                         -----------
                                        GROSS             NET             GROSS             NET
                                        -----             ---             -----             ---

<S>                                     <C>              <C>              <C>              <C>
           Texas                        42,631           13,561           7,207            1,441
           New Mexico                   14,280           14,136               0                0
           Louisiana                       302              302           6,366            4,802
           Oklahoma                     37,440            5,335               0                0
           Kentucky                        604              395          60,817           42,572
           Other (1)                    20,510            5,190               0                0
                                      --------          -------         -------          -------
                    Total              115,767           38,919          74,390           48,815
</TABLE>

 (1)  Represents acreage located in Colorado, Kansas, Alabama and Wyoming.


MARKETS AND COMPETITION

     The oil and natural gas industry is highly competitive. Our competitors
include major oil companies, other independent oil and natural gas concerns and
individual producers and operators, many of which have financial resources,
staffs and facilities substantially greater than ours. In addition, we encounter
substantial competition in acquiring oil and natural gas properties, marketing
oil and natural gas and hiring trained personnel. When possible, we try to avoid
open competitive bidding for acquisition opportunities. The principal means of
competition with respect to the sale of oil and natural gas production are
product availability and price. While it is not possible for us to state
accurately our position in the oil and natural gas industry, we believe that we
represent a minor competitive factor.

     The market for our oil and natural gas production depends on factors beyond
our control, including domestic and foreign political conditions, the overall
level of supply of and demand for oil and natural gas, the price of imports of
oil and natural gas, gas pipelines and other transportation facilities and
overall economic conditions. The oil and gas



                                                                              13
<PAGE>   15

industry also competes with other industries in supplying the energy and fuel
requirements of industrial, commercial and individual consumers. See "Item 1.
Business - Risk Factors".

TITLE TO OIL AND NATURAL GAS PROPERTIES

     We have acquired interests in producing and non-producing acreage in the
form of working interests, royalty interests, overriding royalty interests and
net profits interests. Substantially all of our property interests, and the
assignors' interests in the working or other interests underlying our net
profits interests and royalty interests (the "underlying properties"), are held
pursuant to leases from third parties. The leases grant the lessee the right to
explore for and extract oil and natural gas from specified areas. Consideration
for a lease usually consists of a lump sum payment (i.e., bonus) and a fixed
annual charge (i.e., delay rental) prior to production (unless the lease is paid
up) and, once production has been established, a royalty based generally upon
the proceeds from the sale of oil and natural gas. Once wells are drilled, a
lease generally continues so long as production of oil and natural gas
continues. In some cases, leases may be acquired in exchange for a commitment to
drill or finance the drilling of a specified number of wells to predetermined
depths. Some of our non-producing acreage is held under leases from mineral
owners or a government entity which expire at varying dates. We are obligated to
pay annual delay rentals to the lessors of certain properties in order to
prevent the leases from terminating. Title to leasehold properties is subject to
royalty, overriding royalty, carried, net profits and other similar interests
and contractual arrangements customary in the oil and natural gas industry, and
to liens incident to operating agreements, liens relating to amounts owed to the
operator, liens for current taxes not yet due and other encumbrances.

     As is customary in the industry, we generally acquire oil and natural gas
acreage without any warranty of title except as to claims made by, through or
under the transferor. Although we have title examined prior to acquisition of
developed acreage in those cases in which the economic significance of the
acreage justifies the cost, there can be no assurance that losses will not
result from title defects or from defects in the assignment of leasehold rights.
In many instances, title opinions may not be obtained if in our judgment it
would be uneconomical or impractical to do so.

     The underlying properties are typically subject, in one degree or another,
to one or more of the following:

     o   royalties and other burdens and obligations, expressed and implied,
         under oil and gas leases;
     o   overriding royalties and other burdens created by Assignor or its
         predecessors in title;
     o   a variety of contractual obligations (including, in some cases,
         development obligations) arising under operating agreements, farmout
         agreements, production sales contracts and other agreements that may
         affect the properties or their titles;
     o   liens that arise in the normal course of operations, such as those for
         unpaid taxes, statutory liens securing unpaid suppliers and contractors
         and contractual liens under operating agreements;
     o   pooling, unitization and communitization agreements, declarations and
         orders; and
     o   easements, restrictions, rights-of-way and other matters that commonly
         affect property.

     To the extent that such burdens and obligations affect assignor's rights to
production and the value of production from the underlying properties, they have
been taken into account in calculating our interests and in estimating the size
and value of the reserves attributable to our net profits interests and royalty
interests.

REGULATION

General Federal and State Regulation

     Our oil and natural gas exploration, production and related operations are
subject to extensive rules and regulations promulgated by federal and state
agencies. Failure to comply with such rules and regulations can result in
substantial penalties. The regulatory burden on the oil and natural gas industry
increases our cost of doing business and affects its profitability. Because such
rules and regulations are frequently amended or reinterpreted, we are unable to
predict the future cost or impact of complying with such laws.



                                                                              14
<PAGE>   16

     The State of Texas and many other states require permits for drilling
operations, drilling bonds and reports concerning operations and impose other
requirements relating to the exploration and production of oil and natural gas.
Such states also have statutes or regulations addressing conservation matters,
including provisions for the unitization or pooling of oil and natural gas
properties, the establishment of maximum rates of production from wells, and the
regulation of spacing, plugging and abandonment of such wells. Many states
restrict production to the market demand for oil and natural gas. Some states
have enacted statutes prescribing ceiling prices for natural gas sold within
their states.

     FERC regulates interstate natural gas transportation rates and service
conditions, which affect the revenues received by us for sales of our
production. Since the mid-1980s, FERC has issued a series of orders, culminating
in Order Nos. 636, 636-A and 636-B ("Order 636"), that have significantly
altered the marketing and transportation of natural gas. Order 636 mandates a
fundamental restructuring of interstate pipeline sales and transportation
service, including the unbundling by interstate pipelines of the sale,
transportation, storage and other components of the city-gate sales services
such pipelines previously performed. One of FERC's purposes in issuing the
orders is to increase competition within all phases of the natural gas industry.
Order 636 and subsequent FERC orders on rehearing have been appealed and are
pending judicial review. Because these orders may be modified as a result of the
appeals, it is difficult to predict the ultimate impact of the orders on us.
Generally, Order 636 has eliminated or substantially reduced the traditional
role of intrastate pipeline as wholesalers of natural gas, and has substantially
increased competition and volatility in natural gas markets.

     The price we receive from the sale of oil and natural gas liquids is
affected by the cost of transporting products to market. Effective January 1,
1995, FERC implemented regulations establishing an indexing system for
transportation rates for oil pipelines, which, generally, would index such rates
to inflation, subject to certain conditions and limitations. The Railroad
Commission of the State of Texas is considering adopting rules to prevent
discriminatory transportation practices by intrastate gas gatherers and
transporters by requiring the disclosure of rate information under varying
conditions of service. We are not able to predict with certainty the effects, if
any, of these regulations on its operations. However, the regulations may
increase transportation costs or reduce wellhead prices for oil and natural gas
liquids.

     Finally, from time to time regulatory agencies have imposed price controls
and limitations on production by restricting the rate of flow of oil and natural
gas wells below natural production capacity in order to conserve supplies of oil
and natural gas. See "Item 1. Business - Risk Factors."

ENVIRONMENTAL REGULATION

     The exploration, development and production of oil and natural gas,
including the operation of saltwater injection and disposal wells, are subject
to various federal, state and local environmental laws and regulations. Such
laws and regulations can increase the costs of planning, designing, installing
and operating oil and natural gas wells. Our domestic activities are subject to
a variety of environmental laws and regulations, including but not limited to,
the Oil Pollution Act of 1990 ("OPA"), the Clean Water Act ("CWA"), the
Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA"),
the Resource Conservation and Recovery Act ("RCRA"), the Clean Air Act ("CAA"),
and the Safe Drinking Water Act ("SDWA"), as well as state regulations
promulgated under comparable state statutes. We are also subject to regulations
governing the handling, transportation, storage and disposal of naturally
occurring radioactive materials that are found in its oil and natural gas
operations. Civil and criminal fines and penalties may be imposed for
non-compliance with these environmental laws and regulations. Additionally,
these laws and regulations require the acquisition of permits or other
governmental authorizations before undertaking certain activities, limit or
prohibit other activities because of protected areas or species, and impose
substantial liabilities for cleanup of pollution.

     Under the OPA, a release of oil into water or other areas designated by the
statute could result in the Company being held responsible for the costs of
remediating such a release, certain OPA specified damages, and natural resource
damages. The extent of that liability could be extensive, as set forth in the
statute, depending on the nature of the release. A release of oil in harmful
quantities or other materials into water or other specified areas could also
result in our being held responsible under the CWA for the costs of remediation,
and civil and criminal fines and penalties.

     CERCLA and comparable state statutes, also known as "Superfund" laws, can
impose joint and several retroactive liability, without regard to fault or the
legality of the original conduct, on certain classes of persons for the release
of



                                                                              15
<PAGE>   17

a "hazardous substance" into the environment. In practice, cleanup costs are
usually allocated among various responsible parties. Potentially liable parties
include site owners or operators, past owners or operators under certain
conditions, and entities that arrange for the disposal or treatment of, or
transport hazardous substances found at the site. Although CERCLA, as amended,
currently exempts petroleum, including but not limited to, crude oil, natural
gas and natural gas liquids from the definition of hazardous substance, our
operations may involve the use or handling of other materials that may be
classified as hazardous substances under CERCLA. Furthermore, there can be no
assurance that the exemption will be preserved in future amendments of the act,
if any.

     RCRA and comparable state and local requirements impose standards for the
management, including treatment, storage, and disposal of both hazardous and
nonhazardous solid wastes. We generate hazardous and nonhazardous solid waste in
connection with its routine operations. From time to time, proposals have been
made that would reclassify certain oil and natural gas wastes, including wastes
generated during pipeline, drilling, and production operations, as "hazardous
wastes" under RCRA which would make such solid wastes subject to much more
stringent handling, transportation, storage, disposal, and clean-up
requirements. This development could have a significant impact on our operating
costs. While state laws vary on this issue, state initiatives to further
regulate oil and natural gas wastes could have a similar impact.

     Oil and natural gas exploration and production, and possibly other
activities, have been conducted at some of our properties by previous owners and
operators. Materials from these operations remain on some of the properties and
in some instances require remediation. In addition, we have agreed to indemnify
sellers of producing properties from whom we have acquired reserves against
certain liabilities for environmental claims associated with such properties.
While we do not believe that costs to be incurred by us for compliance and
remediating previously or currently owned or operated properties will be
material, there can be no guarantee that such costs will not result in material
expenditures.

     Additionally, in the course of our routine oil and natural gas operations,
surface spills and leaks, including casing leaks, of oil or other materials
occur, and we incur costs for waste handling and environmental compliance.
Moreover, we are able to control directly the operations of only those wells for
which we act as the operator. Notwithstanding our lack of control over wells
owned by us but operated by others, the failure of the operator to comply with
the applicable environmental regulations may, in certain circumstances, be
attributable to us.

     Is it not anticipated that we will be required in the near future to expend
amounts that are material in relation to our total capital expenditures program
by reason of environmental laws and regulations, but inasmuch as such laws and
regulations are frequently changed, we are unable to predict the ultimate cost
of compliance. There can be no assurance that more stringent laws and
regulations protecting the environment will not be adopted or that we will not
otherwise incur material expenses in connection with environmental laws and
regulations in the future. See "Item 1. Business - Risk Factors".

EMPLOYEES

     As of September 10, 1999, we had 18 full-time employees consisting of 8
officers and 10 support staff. Four of the employees are in Ottawa, Canada, 13
of the employees are located in the Dallas office, and one is on site in
Kentucky. In addition, we regularly engage technical consultants and independent
contractors to provide specific advice or to perform certain administrative or
technical functions.

RISK FACTORS

     In addition to the other information contained in this Annual Report on
Form 10-K, the following risk factors should be considered carefully. This
Annual Report on Form 10-K contains forward-looking statements which involve
risks and uncertainties.

WE HAVE INCURRED LOSSES FROM OPERATIONS SINCE COMMENCING OPERATIONS IN 1994

     Since beginning operations in 1994, we have not been profitable on an
annual or quarterly basis. We incurred net losses of approximately $47.5
million, $32.8 million, $1.3 million and $1.1 million for the years ended June
30, 1999, June 30, 1998, June 30, 1997 and June 30, 1996, respectively. We
expect operating losses to continue for the



                                                                              16
<PAGE>   18

foreseeable future as we continue to incur significant operating expenses and to
make capital expenditures. We may not ever generate sufficient revenues to
achieve profitability. Even if we do achieve profitability, we may not sustain
or increase profitability on a quarterly or annual basis in the future. At June
30, 1999, we had an accumulated deficit of approximately $83.6 million.

OUR LENDERS MAY FORECLOSE ON OUR OIL AND GAS PROPERTIES DUE TO OUR DEFAULTS
UNDER FINANCIAL COVENANTS

     We were in default of our tangible net worth covenant at June 30, 1999. We
are required to maintain an aggregate tangible net worth of not less than $40.0
million. Our aggregate tangible net worth was $37.4 million. Our credit
agreement was amended on October 13, 1999 to reset the required minimum
aggregate tangible net worth to $33.0 million.

     We are in the process of arranging additional capital to achieve a long
term resolution of our defaults under the credit agreement. If we are not
successful, our lender may declare all amounts borrowed under the credit
agreement, together with accrued interest, to be due and payable. If we do not
repay the indebtedness promptly, our lender could then foreclose against any
collateral securing the payment of the indebtedness. Substantially all of our
oil and gas interests secure our credit agreement. These facilities limit the
amounts we may borrow and restrict the amounts we may borrow under other credit
facilities. We could, under certain circumstances, borrow under the revolving
credit agreement with ECT up to $3.2 million. The lenders can semi-annually
adjust the borrowings permitted to be outstanding under these credit facilities.
The lenders require that we repay outstanding borrowings in excess of the
borrowing limit ratably over a period no longer than 30 days. We may not be able
to make mandatory principal payments required by the lenders.

PRICES OF OIL AND NATURAL GAS MAY FLUCTUATE WIDELY

     Prices for oil and natural gas may fluctuate widely. For example, oil and
natural gas prices declined significantly in 1998 through early 1999 and, for an
extended period of time, remained substantially below prices obtained in
previous years. Among the factors that can cause this fluctuation are:

     o   the level of consumer product demand,
     o   weather conditions,
     o   domestic and foreign governmental regulations,
     o   the price and availability of alternative fuels,
     o   political conditions in oil and natural gas producing regions,
     o   the domestic and foreign supply of oil and natural gas,
     o   the availability, proximity and capacity of gathering systems of
         natural gas,
     o   the price of foreign imports, and
     o   overall economic conditions.

     Our revenues, profitability and future growth depend substantially on
prices received for oil and natural gas. Prices affect the amount of cash flow
available for capital expenditures and the repayment of our outstanding debt.
Our ability to maintain or increase our borrowing capacity and to obtain
additional capital on attractive terms are also substantially dependent upon oil
and natural gas prices. See also "We may have difficulty financing our planned
growth". In addition, because we currently produce more natural gas than oil, we
face more risk with fluctuations in the price of natural gas than oil. We have
used hedging contracts to reduce our exposure to price changes. See also
"Hedging our production may result in losses."

THE FAILURE TO REPLACE AND EXPAND OUR RESERVES WOULD ADVERSELY AFFECT OUR
OPERATIONS AND FINANCIAL CONDITION

     Our future oil and natural gas production depends on our success in finding
or acquiring additional reserves. In general, production from our oil and
natural gas properties declines as reserves are depleted, with the rate of
decline depending on reservoir characteristics. Therefore, to expand our reserve
base, we must conduct other successful development and exploitation activities
on properties we already own or acquire new properties containing proved



                                                                              17
<PAGE>   19

reserves, or both. We rely on our cash flow from operations and other sources of
capital, including borrowings under our credit agreement, to fund development
and exploitation projects on our existing properties and to acquire new
reserves. If we do not have sufficient monies to fund these activities, our
reserve base will decline. Even if we have monies to fund these activities, we
may not be successful in expanding our reserve base. If we are not successful in
expanding our reserve base, our future results of operations and financial
condition will be adversely affected.

WE MAY HAVE DIFFICULTY FINANCING OUR PLANNED GROWTH

     We have experienced and expect to continue to experience substantial
capital expenditure and working capital needs, particularly as a result of our
development, exploitation and acquisition strategy. In the future, we will
require financing, in addition to cash generated from our operations, to fund
our planned growth. Over the past year, we have experienced constraints in our
ability to arrange additional capital to fund our business plan. These
constraints result from a combination of factors, including:

     o   The market for equity and debt capital available to independent oil and
         gas companies such as us has declined significantly over the past 18
         months.
     o   Our own financial condition and results of operations, especially
         during the period of low oil and natural gas prices experienced in late
         1998 and early 1999, has not been attractive to potential funders.
     o   The significant decline in prices paid for our common stock since
         November 1998.
     o   Restrictions on incurring debt imposed by our debt agreements.

     If additional capital resources are unavailable, we will be unable to grow
our business and we may curtail our drilling, development and other activities
or be forced to sell some of our assets on an untimely or unfavorable basis.

     As of September 10, 1999, we would not have been able to borrow any
additional funds under our credit agreement. Our lenders may adjust the amount
we may borrow under our credit agreement, and if our lenders reduce our
borrowing limit to an amount that exceeds our outstanding debt at that time, we
would have to repay the amount of the excess within 30 days. We may not have
sufficient funds to repay the amount required and then we would be in default
under our credit agreement. We may, in some circumstances, borrow funds from ECT
under our ECT revolving credit agreement up to the lesser of $10 million or 40%
of the borrowing base under our credit agreement.

WE HAVE A SIGNIFICANT AMOUNT OF DEBT THAT COULD ADVERSELY AFFECT OUR OPERATIONS
AND FINANCIAL CONDITION AND RESULTS

     We have a significant amount of debt. As of June 30, 1999, our ratio of
total indebtedness to total capitalization was 122% and our consolidated total
interest coverage ratio was 1.2:1.0. We intend to borrow more money in the
future to fund our business strategy. This relatively high leverage could:

     o   increase our vulnerability to general adverse economic and industry
         conditions, especially declines in oil and natural gas prices;
     o   limit our ability to fund future acquisitions, capital expenditures and
         other general corporate requirements;
     o   require us to dedicate a substantial portion of our cash flow from
         operations to payments on our debt;
     o   limit our flexibility in planning for or reacting to, changes in our
         business and industry;
     o   place us at a competitive disadvantage compared to our competitors with
         less debt;
     o   limit our ability to, among other things, borrow additional funds, sell
         assets and pay dividends.

     Our high debt level creates an increased risk that we may default on our
obligations. If we default, then our lenders could foreclose on our oil and
natural gas properties securing their loans. See "Our lenders may foreclose on
our oil and gas properties due to our defaults under financial covenants."



                                       18
<PAGE>   20

OUR ABILITY TO GENERATE SUFFICIENT CASH TO SERVICE OUR DEBT DEPENDS ON MANY
FACTORS BEYOND OUR CONTROL

     We rely on cash from our operations to pay the principal of and interest on
our debt. Our ability to generate cash from operations depends on our level of
production from our properties, general economic conditions, including the
prices paid for our oil and natural gas, our success in our development and
exploitation activities, legislative, regulatory, competitive and other factors
beyond our control. Our operations may not generate enough cash to pay the
principal of and interest on our debt.

     In addition, because our bank debt ($8.0 million at June 30, 1999) has a
floating interest rate, if market interest rates rise, our payments on this debt
will increase and require even more cash to service this debt. If we default,
then our lenders could foreclose on our oil and natural gas properties securing
their loans.

WE MAY PURCHASE OIL AND NATURAL GAS PROPERTIES WITH PROBLEMS WE DID NOT KNOW
ABOUT

     We continue to evaluate and pursue acquisition opportunities, primarily in
the mid-continent and southwest regions of the United States. Before acquiring
oil and natural gas properties, we assess the recoverable reserves, future oil
and natural gas prices, operating costs, potential environmental and other
liabilities and other factors relating to the properties. We believe our method
of review is generally consistent with industry practices. However, our review
involves many assumptions and estimates, and its accuracy is inherently
uncertain. As a result, we may not discover all existing or potential problems
associated with the properties we buy. We may not become sufficiently familiar
with the properties to fully assess their deficiencies and capabilities. We do
not generally perform inspections on every well, and we may not be able to
observe structural and environmental problems even when we conduct an
inspection. Even if we identify problems, the seller may not be willing or
financially able to give contractual protection against such problems, and we
may decide to assume environmental and other liabilities in connection with
acquired properties. If we acquire properties with problems or liabilities we
did not know about, our financial condition and results of operations could be
adversely affected.

WE CANNOT ASSURE YOU THAT WE WILL BE SUCCESSFUL IN MANAGING OUR GROWTH

     We have experienced significant growth through our acquisition and
development program. Our growth could strain our financial, technical,
operational and administrative resources. The success of our future growth will
depend on a number of factors, including:

     o   our ability to timely develop and exploit acquired properties,
     o   our ability to continue to attract and retain skilled personnel,
     o   our ability to continue to expand our technical, operational and
         administrative resources, and
     o   the results of our drilling program.

     In addition, we have only limited experience with operating and managing
field operations, and we cannot be certain that we will be successful in doing
so in the future. Our failure to successfully manage our growth could adversely
affect our operations and net revenues through increased operating costs and
revenues that do not meet our expectations.

THE OIL AND GAS BUSINESS INVOLVES MANY OPERATING RISKS THAT COULD CAUSE
SUBSTANTIAL LOSSES

     Drilling activities involve the risk that no commercially productive oil or
natural gas reservoirs will be found or produced. We may drill or participate in
new wells that are not productive. We may drill wells that are productive but
that do not produce sufficient net revenues to return a profit after drilling,
operating and other costs. Whether a well is productive and profitable depends
on a number of factors, including the following, many of which are beyond our
control:

     o   costs of drilling, completing and operating wells,




                                                                              19
<PAGE>   21


     o   general economic and industry conditions (including the prices received
         for oil and natural gas),
     o   mechanical problems encountered in drilling wells or in production
         activities,
     o   problems in title to our properties,
     o   weather conditions which delay drilling activities or cause producing
         wells to be shut-in,
     o   compliance with governmental requirements, and
     o   shortages in or delays in the delivery of equipment and services.

     If we do not drill productive and profitable wells in the future, our
financial condition and results of operations could be materially and adversely
affected due to decreased cash flow and net revenues.

     In addition to the substantial risk that we may not drill productive and
profitable wells, the following hazards are inherent in oil and natural gas
development, exploitation, exploration, production and gathering, including:

     o   unusual or unexpected geologic formations,
     o   unanticipated pressures,
     o   downhole fires,
     o   mechanical failures,
     o   blowouts where oil or gas flows uncontrolled at a wellhead,
     o   cratering or collapse of the formation,
     o   explosions,
     o   pollution, and
     o   environmental accidents such as uncontrollable flows of oil, gas or
         well fluids into the environment, including groundwater contamination.

     We could suffer substantial losses from these hazards due to injury and
loss of life, severe damage to and destruction of property and equipment,
pollution and other environmental damage and suspension of operations. We carry
insurance that we believe is in accordance with customary industry practices for
companies of our size. However, we do not fully insure against all risks
associated with our business either because such insurance is not available or
because we believe the cost is prohibitive. The occurrence of an event that is
not covered, or not fully covered by insurance, could have a material adverse
effect on our financial condition and results of operations.

WE ENCOUNTER RISKS IN SECONDARY RECOVERY PROJECTS

     We face the risk that we will spend a significant amount of money on
secondary recovery operations, such as waterflooding projects, without any
increase in production. Although waterflooding requires significant capital
expenditures, the total amount of secondary reserves that can be recovered
though waterflooding is uncertain. In addition, there is generally a delay
between the initiation of water injection into a formation containing
hydrocarbons and any increase in production that may result from the injection.
The unit production costs per barrel are generally higher during the initial
phases of the project due to the purchase costs of injection water. Our degree
of success, if any, of any secondary recovery program depends on a large number
of factors, including the porosity and permeability of the formation, the
technique used and the location of injection wells.

RESERVE ESTIMATES ARE INHERENTLY UNCERTAIN AND DEPEND ON MANY ASSUMPTIONS
THAT MAY TURN OUT TO BE INCORRECT

     Our proved reserve information included in this Annual Report on Form 10-K
represents estimates of proved reserves based on reports prepared by our
independent petroleum engineers. The process of estimating oil and natural gas
reserves is a subjective and complex process of estimating accumulations of oil
and natural gas. Because the oil and natural gas cannot be measured in an exact
manner, the process is also inherently uncertain. The process of estimating
reserves depends on many assumptions, including assumptions relating to:



                                                                              20
<PAGE>   22

     o   oil and natural gas prices,
     o   the amount and timing of drilling and operating expenses,
     o   the amount and timing of capital expenditures,
     o   taxes,
     o   the availability of funds for development and production, and
     o   production rates.

      In addition, an estimate of reserves requires an analysis of available
geological, geophysical, production and engineering data. The extent, quality
and reliability of this data can vary. Because the reliability of a reserve
estimate depends on the assumptions made and the quality and quantity of the
information available to prepare the estimate, estimates of our reserves from
other engineers might differ materially from those shown in this Annual Report
on Form 10-K.

     Our future production, oil and natural gas prices, taxes, drilling and
operating expenses, capital expenditures and quantities of recoverable oil and
natural gas reserves most likely will vary from the assumptions used in
estimating our proved reserves. Any significant variance could materially affect
the estimated quantities and present value of reserves shown in this Annual
Report on Form 10-K. In addition, we may adjust estimates of proved reserves to
reflect production history, results of development and exploitation, prevailing
oil and natural gas prices and other factors, many of which are beyond our
control.

     You should not assume that the present value of future net cash flows
referred to in this Annual Report on Form 10-K is the current market value of
our estimated oil and natural gas reserves. In accordance with SEC requirements,
we generally base the estimated discounted future net cash flows from proved
reserves on prices and costs on the date of the estimate. Actual future prices
and costs may differ materially from those used in the present value estimate.

WE CANNOT CONTROL THE DEVELOPMENT OF A SUBSTANTIAL PORTION OF OUR PROPERTIES
BECAUSE OUR INTERESTS ARE IN THE FORM OF NON-OPERATED NET PROFITS INTERESTS AND
OVERRIDING ROYALTY INTERESTS

     A substantial portion of our oil and natural gas property interests are in
the form of non-operated, net profits interests and royalty interests. The net
profits interests were conveyed to us by various assignors from the assignor's
net revenue interests in the oil and natural gas properties burdened by the net
profits interests and royalty interests (the "underlying properties"). The
assignors' net revenue interests are generally leasehold working interests less
lease burdens.

     Net profits interests. As the owner of net profits interests, we do not
have the direct right to drill or operate wells or to cause third parties to
propose or drill wells on the underlying properties. If an assignor or any other
working interest owner proposes to drill wells on one of the underlying
properties, then that assignor must give us notice of the proposal. Under an
agreement covering the underlying property, we will have the option to pay a
specified percentage of the assignor's working interest share of the costs of
the well that is proposed. We would then become entitled to a net profits
interest equal to the specified percentage multiplied by the assignor's net
revenue interest in that well. However, if an assignor elects not to participate
in the drilling of a well, we will not be able to participate in that well.
Moreover, if an assignor owns less than a 100% working interest in a proposed
well, and the other owners of working interests in such well elect not to
participate in the well, the well will not be drilled unless the money to pay
the costs allocable to the working interest owners who do not elect to
participate in the well is obtained. The financial strength and the competence
of the various assignors, and to a lesser extent the financial strength and the
competence of other parties owning working interests in the underlying
properties, may have an effect on when and whether wells get drilled on the
underlying properties, and on whether operations are conducted in a prudent and
competent manner.

     Finally, the net profits interests were created subsequent and subject to
the various operating agreements that govern operations on these underlying
properties. As a result of our net profits interests being subject to the
applicable operating agreements, our net profits interests may never yield any
cash flow to us in the following situations:



                                                                              21
<PAGE>   23

     o   if an assignor elects not to participate in a major operation, the
         entire original interest of the assignor (including the net profits
         interest) will be relinquished to the consenting parties under the
         non-consent penalty provisions of the standard form operating
         agreements that govern operations on most of the underlying properties,
         and
     o   if an assignor fails to pay its share of costs arising under an
         operating agreement, the entire original interest of the assignor
         (including the net profits interests) will be encumbered by the
         operator's lien.

     Because the net profits interest may not burden every well covered by an
operating agreement, the net profits interest could arguably be encumbered by
the operator's lien securing obligations incurred by an assignor on wells in
which we do not own a net profits interest.

     In the past, certain of the operators and/or assignors of the net profits
interests properties have experienced financial difficulties, including
bankruptcy. Further, in at least one instance an operator has claimed a right to
setoff against our revenue stream from our net profits interest for unpaid bills
arising from the nonpayment by a bankrupt assignor.

     Royalty interests. The royalty interests are generally in the form of term
royalty interests. The duration of these interests is the same as the underlying
oil and natural gas lease. Some of the royalty interests are perpetual royalty
interests which entitle the owner to a share of production from the underlying
properties under both the current oil and natural gas lease and any replacement
or successor oil and natural gas lease. In all cases, the royalty interests are
non-operating interests, have little or no influence over oil and natural gas
development or operation on the lands they burden and have limited cost-bearing
responsibilities.

     Sale and abandonment of underlying properties. An assignor has the right to
abandon any well or working interest included in the underlying properties if,
in its opinion, the well or property ceases to produce or is not capable of
producing oil or natural gas in commercially paying quantities. We may not
control the timing of plugging and abandoning wells. The conveyances provide
that the assignor's working interest share of the costs of plugging and
abandoning uneconomic wells are deducted in calculating our net cash flow from
the underlying property.

     The assignor can sell the underlying properties, subject to and burdened by
the royalty interests, without our consent. Accordingly, the underlying
properties could be transferred to a party with a weaker financial profile.

     Litigation. The landowner royalty on the J.C. Martin Field is currently
subject to a lawsuit that may create uncertainty as to our title to our royalty
interest. We believe the suit is without merit, and a favorable order of summary
judgment has been rendered in favor of the pension funds managed by the entity
that sold us the properties. However, that order may be appealed. Eight million
dollars of the purchase price we paid for the properties is currently in escrow
pending the resolution of this lawsuit. If the summary judgment is overturned
and a judgment is later entered against our seller (or us as the successor
owner), and that judgment unwinds the original transaction in which our seller
acquired their interest in the J.C. Martin Field, the escrowed monies would be
returned to us and we would convey our property interest in the J.C. Martin
Field to the plaintiff.

     Bankruptcy issues. Under state law, it is uncertain whether a court would
treat the net profits interests as contracts or real property interests. If any
of the assignors become involved in bankruptcy proceedings, we face the risk
that our net profits interests might be treated by a bankruptcy court as
contracts instead of real property interests. If the bankruptcy court treats our
net profits interests as contracts, then we would be treated as an unsecured
creditor in the bankruptcy, and under the terms of the bankruptcy plan, we could
lose all of the value of the net profits interests. If the bankruptcy court
treats the net profits interests as real property interests, then our interests
should not be materially affected.

WE HAVE WRITTEN DOWN THE CARRYING VALUE OF OUR PROVED PROPERTIES AND WE COULD
EXPERIENCE WRITE-DOWNS IN THE FUTURE AS A RESULT OF DECREASES IN OIL AND NATURAL
GAS PRICES

     There is a risk that we will be required to write-down the carrying value
of our oil and natural gas properties when oil and natural gas prices are low.
In addition, write-downs may occur if we have:

     o   downward adjustments to our estimated proved reserves,
     o   increases in our estimates of development costs or



                                                                              22
<PAGE>   24

     o   deterioration in our exploitation results.

     We use the full cost method of accounting to report operations for oil and
natural gas properties. We capitalize the costs to acquire, develop and exploit
oil and natural gas properties. Under the full cost accounting rules, the net
capitalized costs of oil and natural gas properties may not exceed a ceiling
limit that is based on the present value of estimated future net cash flows from
proved reserves, using constant oil and natural gas prices and a 10% discount
factor. If net capitalized costs of oil and natural gas properties exceed the
ceiling limit, we must charge the amount of this excess to earnings in the
quarter in which the excess occurs. This is called a ceiling limitation
write-down. We review the carrying value of our properties quarterly, based on
prices in effect as of the end of each quarter or as of the time of reporting
our results. We may not reverse write-downs even if prices increase in
subsequent periods. At June 30, 1998, we recorded a write-down of our oil and
natural gas properties of $28.2 million. Due to the further decline in prices of
oil and natural gas to December 31, 1998, we wrote down our oil and natural gas
properties again at December 31, 1998 by an additional $35.0 million. A
write-down does not affect cash flow from operating activities, but it does
reduce the book value of our net tangible assets and stockholders' equity.
Further writedowns could have any of the following effects:

     o   a further decline in our tangible net assets could cause us to default
         on one of our credit facility covenants; or
     o   our ability to raise new indebtedness or equity to finance our business
         strategy would be more difficult.

COMPETITION IN OUR INDUSTRY IS INTENSE AND WE ARE SMALLER THAN MANY OF OUR
COMPETITORS

     The oil and gas industry is highly competitive. Competition in this
industry takes many forms, including:

     o   acquiring properties,
     o   marketing oil and natural gas,
     o   securing equipment and hiring/retaining personnel; and
     o   operating properties.

     We compete with major and independent oil and gas companies for property
acquisitions. We also compete for the equipment and labor required to operate
and develop our properties. Many of our competitors have greater financial
resources than we have and have been engaged in the energy business for a much
longer time than we have. Our competitors may be able to pay more for desirable
leases and to evaluate, bid for and purchase a greater number of properties or
prospects than our financial or personnel resources will permit. As a result, we
may not be able to buy properties at affordable prices. Our ability to develop
and exploit oil and natural gas reserves and to acquire additional properties in
the future will depend on our ability to conduct operations, to evaluate and
select suitable properties and to consummate transactions in this highly
competitive environment.

WE ARE SUBJECT TO COMPLEX LAWS AND REGULATIONS, INCLUDING ENVIRONMENTAL
REGULATIONS, THAT CAN AFFECT THE COST, MANNER OR FEASIBILITY OF DOING BUSINESS

     The development, exploitation, production and sale of oil and natural gas
in the U.S. are subject to extensive federal, state and local laws and
regulations, including environmental laws and regulations. We may be required to
make large expenditures to comply with environmental and other governmental
regulations. Matters subject to regulation include:

     o   discharge permits for drilling operations,
     o   drilling bonds,
     o   reports concerning operations, and
     o   taxation.



                                                                              23
<PAGE>   25

     Under these laws and regulations, we could be liable for personal injuries,
property damage, oil spills, the discharge of hazardous materials, remediation
and clean-up costs and other environmental damages. While we maintain insurance
coverage for our operations, we do not believe that full insurance coverage for
all potential environmental damages is available at a reasonable cost. Failure
to comply with these laws and regulations also may result in the suspension or
termination of our operations and subject us to administrative, civil and
criminal penalties. Moreover, these laws and regulations could change in ways
that substantially increase our costs of doing business. Accordingly, any of
these liabilities, penalties, suspensions, terminations or regulatory changes
could materially adversely affect our financial condition and results of
operations.

HEDGING OUR PRODUCTION MAY RESULT IN LOSSES

     To reduce our exposure to changes in the prices of oil and natural gas, we
have entered into and may in the future enter into hedging arrangements. The
hedges that we have entered into generally provide a 'floor' (or 'cap' and
'floor') on the prices received for our oil and natural gas production over a
period of time. Hedging arrangements may expose us to the risk of financial loss
in some circumstances, including the following:

     o   our production does not meet the minimum production requirements under
         the agreement,
     o   the other party to the hedging contract defaults on its contract
         obligations or
     o   there is a change in the expected differential between the underlying
         price in the hedging agreement and actual prices received.

     In addition, these hedging arrangements may limit the benefit we would
receive from increases in the prices for oil and natural gas.

MANAGEMENT AND JEDI EACH OWNS A SIGNIFICANT AMOUNT OF OUR VOTING STOCK AND MAY
HAVE SIGNIFICANT INFLUENCE OVER THE COMPANY, AND THE INTERESTS OF JEDI MAY BE
DIFFERENT FROM OUR OTHER STOCKHOLDERS

     As of September 10, 1999, our officers and directors as a group had a
beneficial interest in or held a proxy for approximately 15.1% of our undiluted
voting stock. As of September 10, 1999, Joint Energy Development Investments
Limited Partnership ("JEDI"), an affiliate of Enron Corp., owned 9,600,000
shares of our Series A preferred stock, each share of which has the right to one
vote on all matters submitted to a vote by our stockholders, and 2,634,951
shares of our common stock, or approximately 27.9% of our undiluted voting
stock. JEDI also holds warrants to purchase an additional 769,221 shares of our
common stock and rights to acquire 261,051 shares of our common stock. As a
result, these stockholders, if they decide to act together, will be able to
exercise significant control on the outcome of matters requiring a stockholder
vote, including the election of directors and approval of major transactions. In
addition, if specified defaults under the terms of our Series A preferred stock
occur, then JEDI would have the right to appoint a majority of our board of
directors. Their influence on us may have the effect of delaying or preventing a
change of control of our company and may adversely affect the voting and other
rights of other stockholders.

     Conflicts of interest could arise in the future between our company, on the
one hand, and JEDI and its affiliates, on the other hand, concerning, among
other things, potential competitive business activities or business
opportunities. Conflicts could also arise because of existing agreements between
JEDI and its affiliates and our company. Enron Corp. and its affiliates are
engaged in nearly all phases of the oil and gas business and are, therefore,
competitors of the Company. Affiliates of Enron Corp. have also provided and
assisted in providing financing to some of our other competitors. We have been,
and continue to be, involved in various transactions with JEDI and its Enron
affiliates. We have entered into a subordinated revolving credit facility with
ECT and we have entered into hedging agreements with a subsidiary of Enron Corp.



                                                                              24
<PAGE>   26

WE MAY BE DELISTED FROM THE NASDAQ SMALLCAP MARKET

     On July 22, 1999, the Nasdaq SmallCap Market notified us that our
significantly reduced tangible net worth could lead to a delisting of our common
stock from trading on the Nasdaq SmallCap Market. We have responded to Nasdaq's
letter, and on August 27, 1999 Nasdaq notified us that it desired to delist our
common stock. In accordance with Nasdaq rules, we requested a hearing to respond
further to Nasdaq's concerns. The hearing is set for October 14, 1999. After the
hearing, if Nasdaq is not satisfied with our response to their concerns, then
Nasdaq may delist our common stock at any time without further notice to us. If
Nasdaq delists our common stock, then our common stock may be traded on the OTC
Bulletin Board or the "pink sheets," or not traded at all. Many institutional
and other investors refuse to invest in stocks that are traded at levels below
the Nasdaq SmallCap Market which could make our effort to raise capital more
difficult. In addition, the firms that currently make a market for our common
stock could discontinue that role. OTC Bulletin Board and "pink sheet" stocks
are often lightly traded or not traded at all on any given day. Any reduction in
liquidity or active interest on the part of the investors in our common stock
could have adverse consequences on our holders either because of reduced market
prices or a lack of a regular, active trading market for our common stock. In
addition, delisting from the Nasdaq SmallCap Market would constitute a
"Triggering Event" which would allow the certain holders of reset rights to put
their remaining shares and reset rights to us for repurchase.

OUR STOCKHOLDERS MAY EXPERIENCE SUBSTANTIAL DILUTION IN THE FUTURE

      Our stockholders may experience substantial dilution in the future upon
the conversion of shares of our Series C preferred stock and the exercise of
dilutive "reset" rights that we granted in connection with some prior issuances
of our common stock.

      Holders of our Series C preferred stock may convert their shares into
shares of common stock at a conversion price based on the market price of our
common stock. There were 13,974,156 shares of our common stock issuable per
conversion of the Series C preferred stock as of September 10, 1999 assuming a
conversion price of $0.344.

      Pursuant to two purchase agreements signed in July and November 1998, we
issued an aggregate of 3,845,241 shares of common stock. As part of those
issuances and in consideration for the original issuance price paid by the
investors, we agreed to protect the holders against declines in the price of
their common stock by granting them one repricing right for every share issued.
Each repricing right gives the holder a one-time right to require us to issue
additional shares without the payment of additional consideration. Generally,
subject to certain limitations, the number of additional shares that will be
issued when repricing rights are exercised by the holder is determined by
multiplying the number of reset rights being exercised times the "repricing
rate." The repricing rate is determined by the following formula:

                        "repricing price" - market price
                        --------------------------------
                                  market price

      The repricing price is determined by multiplying the original purchase
price of the share by a premium that rises to 128% over time. The repricing
rights expire upon exercise. As long as the market price exceeds the repricing
price, we are not required to issue any additional shares. We have issued
through September 10, 1999, a total of 1,650,784 shares of common stock upon
exercise of such rights. As of September 10, 1999, 64,619,686 shares of common
stock were issuable upon exercise of the reset rights assuming a market price of
$0.344.

      Because both the conversion provision of the Series C preferred stock and
the reset formula for the reset rights are based on the current bid price of the
common stock at the time of conversion or exercise, a significant number of
shares of common stock could be issued depending upon the market price of the
common stock.

      In addition, our board of directors may issue shares of common stock and
preferred stock in the future which may dilute our stockholders' ownership. We
are authorized to issue 100,000,000 shares of common stock (34,216,106 shares
were issued and outstanding at September 10, 1999). We are also authorized to
issue 50,000,000 shares of preferred stock (9,604,428 shares of preferred stock
were issued and outstanding at September 10, 1999).



                                                                              25
<PAGE>   27

FUTURE SALES OF OUR COMMON STOCK MAY ADVERSELY AFFECT THE MARKET PRICE

     Future sales by stockholders could adversely affect the prevailing market
price of our common stock. As of September 10, 1999, we had 34,216,106 shares of
common stock outstanding. In addition,

     o   9,600,000 shares of common stock are issuable upon conversion of our
         Series A preferred stock,
     o   13,974,156 shares of common stock are issuable upon conversion of our
         Series C preferred stock (assuming a conversion price of $0.344 per
         share),
     o   6,790,941 shares of common stock are issuable upon exercise of
         outstanding warrants,
     o   763,500 shares of common stock are issuable upon exercise of
         outstanding stock options, and
     o   64,619,686 shares would be issued upon exercise of the repricing rights
         (assuming a market price of $0.344 per share).

     Of the issued and outstanding shares of common stock, 24,511,155 are freely
tradeable without restriction or further registration under the Securities Act.
The remaining issued and outstanding shares of common stock (9,704,951 shares)
are "restricted shares" and shares held by our affiliates. Some of our
stockholders who hold "restricted securities" have previously been granted
registration rights entitling them to demand, in certain circumstances, that we
register the shares of common stock held by them for sale under the Securities
Act. Sales of substantial amounts of common stock in the public market, pursuant
to Rule 144 or otherwise, or the availability of such shares for sale, could
adversely affect the prevailing market price of the common stock and impair our
ability to raise additional capital through the sale of equity securities.

THE LOSS OF ANY OF OUR KEY PERSONNEL COULD ADVERSELY AFFECT US

     We depend to a large extent on the continued employment of Edward J.
Munden, Chairman of the Board, President and Chief Executive Officer, Robert P.
Lindsay, Chief Operating Officer and Executive Vice President, Ronald I. Benn,
Chief Financial Officer and Treasurer, Bruce I. Benn, Executive Vice President
and Secretary, and other key personnel, including V. Ed Butler, Vice President,
Asset Management and Ronald Idom, Vice President, Acquisitions. If any of these
persons becomes unable or unwilling to continue in their present positions, our
business and financial results could be materially adversely affected. We hold
key man insurance on the lives of each of Edward J. Munden, Robert P. Lindsay,
Bruce I. Benn and Ronald I. Benn. We also have employment agreements with each
of these officers (other than Mr. Butler and Mr. Idom) through 2002.

IN SOME CIRCUMSTANCES, WE MAY HAVE TO USE A SIGNIFICANT AMOUNT OF CASH TO HONOR
OUR OBLIGATION TO REPURCHASE SOME OF OUR SECURITIES

     We granted to the buyers in two private placements in 1998 the right to
require us to repurchase the buyer's shares of common stock and rights to
acquire additional shares of common stock after the occurrence of specified
major transactions or triggering events, including, without limitation, a
merger, sale or transfer of all or substantially all of our assets, a tender
offer for more than 40% of the shares of our common stock, and defaults by us
under some of our covenants to the buyers. In addition, in connection with two
private placements of our preferred stock, we granted to the buyers the right to
require us to repurchase the buyers' shares of preferred stock after the
occurrence of specified defaults and other events. We would be required to
obtain the consent of the lenders under our credit agreement and the ECT
revolving credit agreement and the consent of the holders of our senior notes
before repurchasing the shares and rights. If we could not obtain these
consents, we would be in default under our agreements with the buyers, and this
default could trigger cross defaults under the credit agreement, the ECT
revolving credit agreement or the indenture governing the senior notes. In
addition, if we fail to repurchase the shares of common stock, repricing rights
or shares of preferred stock as required, we could be liable to the buyers for
damages.



                                                                              26
<PAGE>   28


EFFECT OF CHANGE OF CONTROL OF THE COMPANY

     The indenture governing our senior notes contain provisions that, under
certain circumstances, will cause our senior notes to become due upon the
occurrence of a change of control (as defined in the indenture). If a change of
control occurs, we may not have the financial resources to repay this
indebtedness and would default under the indenture. This default could trigger a
default under our credit agreement and the ECT revolving credit agreement. These
provisions could also make it more difficult for a third party to acquire
control of us, even if that change of control might be beneficial to
stockholders.

OUR CERTIFICATE OF INCORPORATION CONTAINS PROVISIONS THAT COULD DISCOURAGE AN
ACQUISITION OR CHANGE OF CONTROL OF OUR COMPANY

     Our certificate of incorporation authorizes our board of directors to issue
preferred stock without stockholder approval. Provisions of our certificate of
incorporation, such as the provision allowing our board of directors to issue
preferred stock with rights more favorable than our common stock, could make it
more difficult for a third party to acquire control of us, even if that change
of control might be beneficial to stockholders.

OUR COMPUTER SYSTEMS AND THE COMPUTER SYSTEMS OF OUR BUSINESS PARTNERS MAY NOT
BE YEAR 2000 COMPLIANT, WHICH MAY CAUSE SYSTEM FAILURES AND DISRUPTIONS
ADVERSELY AFFECTING OUR OPERATIONS

     The "Y2K" issue is a general term used to refer to the business
implications of the arrival of the new millennium. In simple terms, on January
1, 2000, all computer hardware and software systems that use the two-digit year
convention could fail completely or create erroneous data as a result of the
system failing to recognize the two-digit internal date "00" as representing the
year 2000. Our computer systems and the computer systems of our business
partners may not be Y2K compliant, which may cause system failures and
disruptions adversely affecting our operations. Please read "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations--Y2K Compliance." We cannot assure you that our internal operations
do not have any material issues with respect to Y2K compliance. In addition, we
may not properly identify all potential problems or all potentially affected
systems or remedy all problems in our systems. Furthermore, the Y2K issue also
affects our customers and other third parties with whom we do business. The
failure of any of these entities to become Y2K compliant could adversely affect
our operations. The most reasonably likely "worst case" impacts would be:

     o   impairment of our ability to deliver our production to, or receive
         payment from, third parties gathering and/or purchasing our production
         from affected facilities;
     o   impairment of the ability of third-party suppliers or service companies
         to provide needed materials or services to our planned or ongoing
         operations, necessitating deferral or shut-in of exploitation,
         development or production operations; and
     o   our inability to execute financial transactions with our banks or other
         third parties whose systems fail or malfunction.

ITEM 2.  DESCRIPTION OF PROPERTIES

GENERAL

     We occupy approximately 8,360 square feet of office space at 13760 Noel
Road, Suite 1030, Dallas, Texas, under a lease that expires in October, 2003. We
also occupy approximately 2,000 square feet of space in Ottawa, Ontario for
offices for certain of its executive officers located there under a lease that
expires in August 2003. We also lease approximately 3,475 square feet of office
space at 3500 Oak Lawn, Suite 380, Dallas, Texas under a lease that expires in
November, 1999. We lease property for a rig yard in New Mexico.



                                                                              27
<PAGE>   29


OTHER

     For a description of our oil and natural gas properties, oil and gas
reserves, acreage, wells, production and drilling activity, see "Item 1.
Business."


ITEM 3.       LEGAL PROCEEDINGS

     The landowner royalty on the J.C. Martin Field is currently subject to a
lawsuit that may create uncertainty regarding the Company's title to its
interest in the J.C. Martin Field. See "Item 1. Business - Risk Factors" .

     No other legal proceedings are pending other than ordinary routine
litigation incidental to us, the outcome of which management believes will not
have a material adverse effect on our financial condition or results of
operations.

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

     During the last 3 months of the fiscal year ended June 30, 1999, no matter
was submitted by us to a vote of its stockholders through the solicitation of
proxies or otherwise.



                                                                              28
<PAGE>   30


                                     PART II

ITEM 5.       MARKET FOR THE COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

MARKET INFORMATION

     Our preferred stock are not publicly traded. The Company's common stock is
principally traded on the Nasdaq SmallCap Market under the symbol "QSRI." The
common stock commenced trading on the Nasdaq SmallCap Market on May 22, 1997.
Prior to that date the common stock was traded in the Over-The-Counter market.
The Nasdaq SmallCap Market has proposed to delist the common stock from that
market. We are appealing that determination. See "Item 1. Business - Risk
Factors." The following table sets forth the high and low closing bid prices for
the Company's Common Stock from July 1, 1996 through June 30, 1999, based upon
quotations which reflect inter-dealer prices, without retail mark-up, mark-down
or commission and may not necessarily represent actual transactions.

<TABLE>
<CAPTION>
                                                                     HIGH            LOW
                                                                     ----            ---

<S>                                                                <C>             <C>
                    FISCAL YEAR ENDED JUNE 30, 1997
                      First Quarter                                $ 2.125         $ 2.125
                      Second Quarter                                 3.375           2.125
                      Third Quarter                                  3.500           3.000
                      Fourth Quarter                                 4.250           3.500

                    FISCAL YEAR ENDED JUNE 30, 1998
                      First Quarter                                $ 5.375         $ 4.145
                      Second Quarter                                 6.344           5.250
                      Third Quarter                                  7.625           6.125
                      Fourth Quarter                                 7.625           7.125

                    FISCAL YEAR ENDED JUNE 30, 1999
                      First Quarter                                $ 8.000         $ 6.500
                      Second Quarter                                 7.000           3.375
                      Third Quarter                                  4.125           1.125
                      Fourth Quarter                                 1.469           0.937
</TABLE>

TRANSFER AGENT

     The Transfer Agent for our common stock is Continental Stock Transfer &
Trust Company, 2 Broadway, New York, New York 10004.

HOLDERS

     The approximate number of record holders of our common stock as of
September 1, 1999 was 890, inclusive of those brokerage firms and/or clearing
houses holding our common stock for their clientele (with each such brokerage
house and/or clearing house being considered as one holder).



                                                                              29
<PAGE>   31

CAPITAL STOCK ISSUANCES

     During the three months ended June 30, 1999, pursuant to Section 3(a) of
the Securities Act of 1933, we issued 348,118 shares of common stock for no
additional consideration to stockholders who exercised repricing rights included
with the private placement of July 8, 1998. The repricing rights were issued in
connection with the July 1998 private placement and permit the holders to
acquire shares of common stock without the payment of additional consideration
if the common stock does not achieve certain price thresholds in excess of the
original issuance price of the shares purchased by the holders in July 1998. The
resale of these shares of common stock is registered pursuant to a registration
statement on Form S-3 filed with the Commission.

     Additionally, pursuant to the Section 3(a) of the Securities Act of 1933,
the holders of Series C preferred stock converted 50 shares of Series C
preferred stock into 569,089 shares of common stock. In conjunction with those
conversions, we issued 39,378 shares of common stock in payment of stock
dividends. The value of these stock dividends was $39,444. The resale of these
shares of common stock is registered pursuant to a registration statement on
Form S-3 filed with the Commission.

DIVIDENDS

     We have not declared or paid any cash dividends on our common stock during
the two year period ended June 30, 1999, and do not anticipate paying cash
dividends on our common stock in the foreseeable future. In addition, our credit
agreement and the indenture (the "Indenture") dated as of July 1, 1998 among
parent company, certain of its subsidiaries and Harris Trust and Savings Bank,
as Trustee (the "Trustee") currently prohibit it from paying cash dividends. We
anticipate that any income generated in the foreseeable future will be retained
for the development and expansion of our business. Furthermore, dividends on the
common stock are limited by the terms of our Series A Participating Convertible
Preferred Stock, par value $0.01 per share, and the terms of our Series C
Convertible Preferred Stock, par value $0.01 per share, which prohibit cash
dividends on common stock unless all accrued and unpaid dividends on such
preferred stock have been paid. Future dividend policy is subject to the
discretion of the Board of Directors and will depend upon a number of factors,
including future earnings, debt service, capital requirements, restrictions in
our credit agreement, the Indenture and our Restated Certificate of
Incorporation, as amended, business conditions, our financial condition and
other factors that the Board of Directors deems relevant.


ITEM 6.  SELECTED FINANCIAL DATA

         The following table sets forth for the periods indicated certain of our
summary historical consolidated financial information. The summary historical
consolidated financial information for each of the years in the five years ended
June 30, 1999 have been derived from our audited consolidated financial
statements. We completed material acquisitions of producing properties in each
of the periods presented which affects the comparability of the historical
financial and operating data for all periods presented. The summary historical
information below should be read in conjunction with "Item 7. Management's
Discussion and Analysis of Financial Condition and Results and Operations," our
Consolidated Financial Statements and the notes thereto.



                                                                              30
<PAGE>   32

<TABLE>
<CAPTION>
                                                                      YEAR ENDED JUNE 30                     FOR THE
                                                    -----------------------------------------------------     PERIOD
                                                        1999          1998          1997          1996      FROM AUGUST
                                                                                                             9, 1994 TO
                                                                                                              JUNE 30,
                                                                                                                1995
                                                      ($,000)       ($,000)       ($,000)       ($,000)       ($,000)

<S>                                                   <C>           <C>            <C>           <C>             <C>
       OPERATIONS DATA:
         Oil and gas sales (1)                         33,783        12,665         4,381         2,079           435
         Oil and gas production expenses (1)            9,127         6,333         2,507         1,175           280
                                                     ---------      -------       -------       -------       -------
         Net oil and gas revenues                      24,656         6,332         1,874           904           155
         General and administrative expenses            3,534         2,259         1,452         1,113           294
                                                     ---------      -------       -------       -------       -------
         EBITDA                                        21,122         4,073           422           209          (139)
         Interest and financing costs (2)              17,003         3,957           878           421            25
         Depletion, depreciation, and                  13,354         4,809           982           630           132
         amortization (3)
         Ceiling test write-down                       35,033        28,166            --            --            --
         Interest and other income                       (326)         (105)         (300)          (71)          (10)
         Extraordinary item                             3,549            --           171            --           401
                                                     ---------      -------       -------       -------       -------
         Net loss                                     (47,491)      (32,754)       (1,309)       (1,189)         (687)
                                                     =========      =======       =======       =======       =======
         Net loss per common share                   $ (1.514)      $ (1.44)      $ (0.05)      $ (0.05)      $ (0.04)

       CASH FLOWS DATA:
         Net cash from in operating activities          9,504         1,041           263          (620)         (303)
         Net cash used in investing activities         (1,611)     (154,342)       (4,305)       (5,502)       (3,130)
         Net cash provided by financing activities        444       154,021         3,752         6,622         3,532
         Net increase (decrease) in cash                8,337           720          (290)          500            99

       BALANCE SHEET DATA (AT END OF PERIOD):
         Total current assets                           9,504         6,411         1,066         1,533           807
         Property and equipment, net                    1,611       142,467        16,187         9,662         4,043
         Deferred assets                                  444         4,797             0            88            --
         Total assets                                 119,210       153,675        17,253        11,283         4,850
         Total current liabilities                     11,142         6,836         3,670         1,450           771
         Long-term obligations, net of current
         portion                                      133,852       153,619         7,152         6,670           876
         Total stockholders' equity                   (25,784)       (6,780)        6,431         3,163         3,203
</TABLE>

1.   Oil and gas sales and production expenses related to net profits interests
     have been presented as if such net profits interests were working
     interests.
2.   Interest charges payable on outstanding debt obligations.
3.   Depreciation, depletion and amortization includes amortized deferred
     charges related to debt obligations of $1.3 million for the year ended June
     30, 1999, and $22,000 and $120,000 of amortized deferred charges related to
     our gas price hedging program for years ended June 30, 1998 and 1999,
     respectively.


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

GENERAL

     We are an independent energy company engaged in the acquisition,
development and exploitation of oil and natural gas reserves. We focus on buying
and developing on-shore oil and natural gas properties located in the United
States. We also strive to maintain low operating expenses. Because of our growth
strategy, we also seek to maintain financial flexibility so that we have funds
to purchase properties when we consider the terms to be favorable.

     Our strategy is to increase its reserves, production, earnings, cash flow
and net asset value by:

     1.  acquiring strategic oil and natural gas properties in a disciplined
         manner,
     2.  developing, exploiting and exploring our properties,
     3.  achieving low operating costs, and
     4.  maintaining financial flexibility.



                                                                              31
<PAGE>   33

     Our revenues, profitability and future growth rate also substantially
depend on factors beyond our control, such as economic, political and regulatory
developments and competition from other sources of energy. The energy markets
historically have been very volatile, and oil and natural gas prices may
fluctuate widely in the future. Sustained periods of low prices for oil and
natural gas could materially and adversely affect our financial position, our
results of operations, the quantities of oil and natural gas reserves that we
can economically produce and our access to capital.

     We use the full cost method of accounting for our investment in oil and
natural gas properties. Under this method, we capitalize all acquisition,
exploration and development costs incurred for the purpose of finding oil and
natural gas reserves, including salaries, benefits and other related general and
administrative costs directly attributable to these activities. We capitalized
general and administrative costs of $931,000 in 1999, $721,000 in 1998 and
$316,000 during 1997. We expense costs associated with production and general
corporate activities in the period incurred. We capitalize interest costs
related to unproved properties and properties under development. Sales of oil
and natural gas properties are accounted for as adjustments of capitalized
costs, with no gain or loss recognized, unless such adjustments would
significantly alter the relationship between capitalized costs and proved
reserves of oil and natural gas.

     We have experienced significant growth in reserves, production, revenue and
cash flow since we began operations. You should read this section 'Management's
Discussion and Analysis of Financial Condition and Results of Operations' in
conjunction with our Consolidated Financial Statements.
     The following table sets forth certain operating information for the
periods presented. We acquired certain significant producing oil and natural gas
producing properties during certain of the periods presented which affects the
comparability of the data for the periods presented.

<TABLE>
<CAPTION>
                                                                           YEAR ENDED JUNE 30
                                                                 ------------------------------------------
                                                                     1999           1998           1997
                                                                     ----           ----           ----

<S>                                                              <C>             <C>               <C>
       PRODUCTION DATA:

       Gas (Mcf)............................................     12,962,000      3,368,000         546,000
       Oil (Bbls)...........................................        500,000        325,000         151,000
       Mcfe.................................................     15,960,000      5,318,000       1,450,000

       AVERAGE SALES PRICE:

       Gas ($/Mcf)..........................................        $  2.13        $  2.27         $  2.31
       Oil ($/Bbl)..........................................        $ 12.37        $ 15.52         $ 20.73
       Mcfe ($/Mcfe)........................................        $  2.12        $  2.39         $  3.02

       AVERAGE COST ($/MCFE) DATA:

       Production and operating costs.......................        $  0.49        $  1.07         $  1.52
       Production and severance taxes.......................        $  0.08        $  0.12         $  0.21
       General and administrative costs.....................        $  0.22        $  0.43         $  1.00
       Interest expense (excluding amortization of deferred
       assets)..............................................        $  1.06        $  0.75         $  0.61
       Depletion,  depreciation, and amortization (excluding
       writedown of oil and natural gas properties).........        $  0.74        $  0.91         $  0.68
</TABLE>

     The following discussion of the results of operations and financial
condition should be read in conjunction with the Consolidated Financial
Statements and related Notes thereto included herein.


THE YEAR ENDED JUNE 30, 1999 COMPARED TO THE YEAR ENDED JUNE 30, 1998

     The following discussion and analysis reflects the operating results as if
the net profits interests were accounted for as working interests. We believe
that this presentation will provide you with a more meaningful understanding of
the underlying operating results and conditions for the period.



                                                                              32
<PAGE>   34

     RESULTS OF OPERATIONS

     Revenues. Total revenues during the year ended June 30, 1999 were $33.8
million, an increase of $21.1 million over the $12.7 million for the year ended
June 30, 1998. Our revenues were derived from the sale of 13.0 Bcf of natural
gas at an average price per Mcf of $2.13 and 500,000 barrels of oil at an
average price per barrel of $12.37. During the year ended June 30, 1998 our
revenues were derived from the sale of 3.4 Bcf of natural gas, at an average
price per Mcf of $2.27, and 325,000 barrels of oil, at an average price per
barrel of $15.52.

     The two periods are not readily comparable because of our significant
growth during the year ended June 30, 1998, primarily resulting from the April
1998 acquisition of the net profits interests. Production from properties owned
throughout both periods was 1.0 Bcf of gas and 223,000 barrels of oil during the
year ended June 30, 1999. This represents an increase of 0.1 Bcf(14%) over the
0.9 Bcf of gas, and an decrease of 26,000 barrels (11%) from the 250,000 barrels
of oil produced during the year ended June 30, 1998. The increase in gas
production is a reflection of our successful exploitation and development
programs implemented during the year ended June 30, 1999, offset by the natural
rate of depletion of the reservoirs associated with these properties. The
decrease in oil production is a combination of the decision to temporarily
reduce production from certain producing areas with relatively high production
costs, due to the low price of oil received during the year combined with the
natural rate of depletion of the reservoirs associated with these properties.
The production of oil from those properties temporarily shut in during the
period of low oil prices is being restored after oil prices returned to their
current higher levels. Production from properties acquired during 1998 was 11.9
Bcf of gas and 276,000 barrels of oil during 1999 as compared to 2.4 Bcf of gas
and 75,000 barrels of oil during 1998.

     Costs and Expenses. Operating costs and expenses for the year ended June
30, 1999, exclusive of a non-cash ceiling test write-down of $35.0 million and
an extraordinary charge of $3.5 million, were $43.0 million. Of this total,
lease operating expenses and production taxes were $9.1 million, general and
administrative expenses were $3.5 million, interest charges were $18.3 million
and depletion, depreciation and amortization costs were $11.9 million.
Operating costs and expenses for the year ended June 30, 1998, exclusive of a
non-cash ceiling test write-down of $28.2 million, were $17.4 million. Of this
total, lease operating expenses and production taxes were $6.3 million, general
and administrative costs were $2.3 million, interest charges were $4.0 million,
and depletion, depreciation and amortization costs were $4.8 million.

     The increase in lease operating expenses and production taxes is a result
of our increased levels of oil and natural gas production. When lease operating
expenses and production taxes are compared on a cost per unit basis, the cost of
producing an Mcfe during the year ended June 30, 1999 decreased by $0.62 per
Mcfe (52%) to $0.57 from the $1.19 per Mcfe achieved during the year ended June
30, 1998. This decrease in production costs per unit is primarily the result of
the acquisition of properties in April 1998 having lower operating costs per
unit than our other properties.

     General and administrative expenses have increased by $1.3 million as a
result of the increased size of our requiring additional employees and
incremental costs; however, on a per unit basis, general and administrative
expenses for the year ended June 30, 1999 were $0.22 per Mcfe, a decrease of
$0.21 per Mcfe (49%) from the $0.43 per Mcfe incurred during the year ended June
30, 1998. This per unit decline in general and administrative expenses is a
result of our increased level of oil and natural gas production.

     Interest expense for the year ended June 30, 1999 was $18.3 million. This
is comprised of $17.0 million paid or payable in cash and $1.3 million of
amortized deferred costs incurred at the time that the related debt obligations
were incurred. During the year ended June 30, 1998 total interest expense was
$4.0 million, being comprised of $3.9 million paid or payable in cash and $0.1
million of amortized deferred costs incurred at the time that the related debt
obligations were incurred. The increase of $14.3 million in interest expense is
due to an increase in the average interest bearing debt outstanding. During the
year ended June 30, 1999 we had average interest bearing debt outstanding of
$139.3 million, as compared to $48.5 million during the year ended June 30,
1998. On a per unit basis, cash interest expense for the year ended June 30,
1999 was $1.06 per Mcfe, as compared to $0.75 per Mcfe during the year ended
June 30, 1998.



                                                                              33
<PAGE>   35
     The increase in depletion, depreciation and amortization costs of $7.1
million is a result of the increased volume of crude oil and natural gas
produced by us and the higher per unit cost of acquisition of the properties
acquired during the year ended June 30, 1998. On a cost per Mcfe of reserves the
depletion, depreciation and amortization costs decreased by $0.17 per Mcfe
(29%), primarily due to the effects of the non-cash writedowns of $35.0 million
and $28.2 million recorded at December 31, 1998 and June 30, 1998 respectively,
to reflect the impact of lower oil and natural gas prices at those two dates.

     Extraordinary Loss. As a result of the placement of the $125 million of
12.5% Senior Notes in July, 1998 we unwound an interest rate hedge contract
related to existing floating interest rate bridge loans at a cost of $3,549,000.
As the debt hedged was retired using the proceeds from the issuance of the
Senior Notes, the costs of terminating the hedge was recognized as an
extraordinary loss.

     Net Loss. We have incurred losses since inception, including $47.5 million
($1.51 per common share) for the year ended June 30, 1999, compared to $32.8
million ($1.44 per share) for the year ended June 30, 1998. These losses are a
reflection of the low oil and natural gas prices experienced during the year
ended June 30, 1999 combined with our high leverage position. We believe, but
cannot assure, that as a result of the acquisitions made during the year ended
June 30, 1998 our revenues from natural gas and oil are sufficient to cover our
production costs and operating expenses, subject to prevailing prices for crude
oil and natural gas and the volumes thereof produced by us. We enter the 2000
fiscal year (July 1, 1999 to June 30, 2000) with a plan to improve production
from the properties we had acquired through June 1998 and to acquire additional
oil and natural gas producing properties to provide the revenue base required to
generate additional positive cash flow from operations. Our revenues,
profitability and future rate of growth are substantially dependent upon
prevailing prices for crude oil and natural gas and the volumes of crude oil and
natural gas produced by us. In addition, our proved reserves will decline as
crude oil and natural gas are produced unless we are successful in acquiring
properties containing proved reserves or conducts successful exploitation and
development activities.

     CASH FLOW DATA

     From Operations. During the year ended June 30, 1999 we generated $9.5
million from operations. The reduction in the accounts receivable of $0.7
million is primarily a reflection of the impact of reduced commodity prices
received by us from the sale of crude oil and natural gas during the period
April through June 1999 as compared to the same period in 1998. Accrued
liabilities of $9.7 million at June 30, 1999 includes $7.8 million in accrued
interest charges due on July 1, 1999. In comparison, during the year ended June
30, 1998 we generated $1.0 million from operations.

     Investing Activities. During the year ended June 30, 1999 we invested $11.5
million developing our existing properties. A further $171,000 was invested in
operating equipment and office equipment during the year. In addition, we
generated $10.0 million in net proceeds from the sale of certain oil and natural
gas properties. During the year ended June 30, 1998 we invested $154.2 million
in acquiring additional natural gas and crude oil producing properties and
developing existing properties. Of this amount, a total of $146.3 million was
expended in three acquisition transactions. The remaining $7.9 million was spent
on developing existing properties. A further $100,000 was invested in operating
equipment and office equipment during the year. There were no property sales
during the year ended June 30, 1998.

     Financing Activities. During July 1998 we issued $125.0 million of
unsecured bonds ($120.5 million net of costs) and raised an additional $31.0
million ($28.4 million net of costs) by issuing common stock. The proceeds from
these bonds and the common stock were used to repay $142.2 million of short-term
debt, unwind an interest rate hedge contract at a cost of $3.5 million and
redeem $1.3 million (2,350,000 DEM) of Deutchemark denominated bonds. The
remaining $1.9 million was added to our working capital. During November 1998 we
issued $2.5 million ($2.3 million net of costs) of common stock. The proceeds
were used to repurchase $2.3 million of Series C preferred stock. During January
1999 we borrowed an additional $7.0 million against the $25.0 million then
available under our credit agreement, to fund our capital expenditures incurred
during the period July to December 1998. During the period January to June 1999
we repaid $9.3 million of our outstanding loans under our credit agreement. At
June 30, 1999 the maximum amount available under the credit agreement was $8.0
million, which represented balance outstanding at that date. Also during the
year, we repaid $80,000 of a capital lease. During the year ended June 30, 1998
we raised $14.4 million by issuing



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<PAGE>   36

preferred and common stock and $152.5 million in short-term loans. We also
issued $121,000 in Deutchemark denominated subordinated bonds. During the year
we repaid $8.1 million of bank debt and $70,000 of a capital lease.

     BALANCE SHEET DATA

     Total Assets. At June 30, 1999 we owned assets of $119.2 million, comprised
of current assets of $14.0 million, investments in oil and gas producing
properties, net of accumulated depletion, depreciation and amortization, of
$97.2 million and deferred assets of $8.0 million. At June 30, 1998 we owned
assets of $153.7 million, comprised of current assets of $6.4 million,
investments in oil and gas producing properties, net of accumulated depletion,
depreciation and amortization, of $142.5 million and deferred assets of $4.8
million.

     Stockholders' Equity. At June 30, 1999 we had a net stockholders' deficit
of $26.5 million, primarily as a result of a total of $63.2 million of non-cash
ceiling test write-downs we recorded on June 30, 1998 and December 31, 1998.
During July 1998 we received $7.0 million on the exercise of warrants for 2.5
million shares of common stock, for an average exercise price of $2.83 per
common share. During July and November 1998, we privately placed a total of 3.8
million common shares for $28.5 million ($23.7 million net of costs) for an
average issuance price of $6.89 per common share. We also issued 1.4 million
shares of common stock for no additional consideration to stockholders who
exercised repricing rights included in the private placements of common stock in
July and November 1998. During the year ended June 30,1999 we repurchased 2,152
Series C preferred shares for $2.3 million. In addition, 2,546 Series C
preferred shares were converted into 1.3 million common shares. An additional
78,000 common shares issued as a stock dividend pursuant to these conversions.

     At June 30, 1998 we had a net stockholders' deficit of $6.8 million,
primarily as a result of the $28.2 million non-cash ceiling test write-down
recorded during 1998. During the year ended June 30, 1998 we privately placed
and issued 2,160,715 common shares for $5.2 million, for an average cash
issuance price of $2.40 per common share. During the year ended June 30, 1998 we
issued 1,000,000 and 337,500 common shares in connection with an acquisition,
which it valued at $3.125 per share ($3,125,000) and $5.00 per share
($1,687,500), respectively. Additionally, we issued 150,000 common shares in
consideration for professional services rendered, which it valued at $2.00 per
share ($300,000). We also issued 10,400 shares of Series C preferred stock for
$9.5 million, net of costs.

THE YEAR ENDED JUNE 30, 1998 COMPARED TO THE YEAR ENDED JUNE 30, 1997

     RESULTS OF OPERATIONS

     Revenues. Total revenue during the year ended June 30, 1998 were $12.7
million, an increase of $8.3 million over 1997. Operating revenue from the sale
of gas and oil was $6.3 million in 1998, while revenues from net profits
interests and royalty interests acquired during 1998 provided additional
revenues of $4.4 million. Our revenues are derived from the sale of 3.4 Bcf of
natural gas, at an average price per Mcf of $2.27, and 324,557 barrels of oil,
at an average price per barrel of $15.52. During the year ended June 30, 1997 we
generated operating revenue of $4.4 million from the sale of natural gas and
oil. The natural gas and oil revenues for the year ended June 30, 1997 were
derived from the sale of 546.3 MMcf of natural gas, at an average price per Mcf
of $2.31, and 150,546 barrels of oil, at an average price per barrel of $20.73.

     The two periods are not readily comparable because of the significant
growth that we experienced during the years ended June 30, 1998 and 1997.
Production from properties owned throughout both periods was 467.2 MMcf of
natural gas and 86,295 barrels of oil during the year ended June 30, 1998. This
represents an increase of 60.3 MMcf (15%) over the 407.1 MMcf of natural gas,
and a decrease of 17,682 barrels (17%) from the 103,977 barrels of oil produced
during the year ended June 30, 1997. The increase in natural gas production is a
reflection of the successful exploitation and development programs implemented
by us during the year ended June 30, 1998. The decrease in oil production is a
combination of the natural rate of depletion of the reservoirs associated with
these properties and temporary reductions in production as certain properties
were worked over. Production from properties acquired during the 1997 and 1998
periods were 2.9 Bcf of gas and 238,262 barrels of oil during 1998 as compared
to 139.2 MMcf of natural gas and 46,569 barrels of oil during 1997.



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<PAGE>   37
     Costs and Expenses. Operating costs and expenses for the year ended June
30, 1998, exclusive of a non-cash ceiling test write-down of $28.2 million, were
$17.4 million. Of this total, lease operating expenses and production taxes were
$4.5 million, general and administrative costs were $2.3 million, interest
charges were $4.0 million, and depletion, depreciation and amortization costs
were $4.8 million. Operating costs and expenses for the year ended June 30, 1997
were $6.3 million. Of this total, lease operating expenses and production taxes
were $2.5 million, general and administrative expenses were $1.5 million,
interest and financing charges were $878,000, and depletion, depreciation and
amortization costs were $982,000.

     The increase in lease operating expenses is a result of our increased
levels of oil and gas production. When lease operating expenses are compared on
a cost per unit basis, the cost of producing an Mcfe, including production
taxes, decreased by $0.54 per Mcfe (42%) to $1.19. This decrease in lease
operating costs per unit is primarily the result of the acquisition of
properties having lower operating costs per unit during the comparable periods.
General and administrative expenses have increased by $807,000 as a result of
our increased size requiring additional employees; however, on a per unit basis,
general and administrative expenses for the year ended June 30, 1998 were $0.43
per Mcfe, a decrease of $0.57 per Mcfe (57%). This per unit decline in general
and administrative expenses is a result of our increased level of oil and
natural gas production. The increase in depletion, depreciation and amortization
costs of $3.8 million is a result of the increased volume of crude oil and
natural gas produced by us and the higher per unit cost of acquisition of the
properties acquired during the year ended June 30, 1998. On a cost per Mcfe of
reserves the depletion, depreciation and amortization costs increased by $0.23
per Mcfe (34%).

     Pursuant to Commission regulations, we recorded a $28.2 million non-cash
write-down of the carrying value of our oil and natural gas properties to
reflect the impact of low oil and natural gas prices at June 30, 1998. We were
not required to record a similar write-down at June 30, 1997.

     Net Loss. We have incurred losses since its inception, including $32.8
million ($1.44 per common share) for the year ended June 30, 1998, compared to
$1.3 million ($0.05 per share) for the year ended June 30, 1997. These losses
are a reflection of the start-up nature of our crude oil and natural gas
production activities. We believe, but cannot assure, that as a result of the
acquisitions we have made during the year ended June 30, 1998 that our revenues
from natural gas and oil are sufficient to cover our production costs and
operating expenses, subject to prevailing prices for crude oil and natural gas
and the volumes thereof produced by us. We entered the 1999 fiscal year (July 1,
1998 to June 30, 1999) with a plan to improve production from the properties we
acquired through June 1998 and to acquire additional oil and natural gas
producing properties to provide the revenue base required to generate additional
positive cash flow from operations. Our revenues, profitability and future rate
of growth are substantially dependent upon prevailing prices for crude oil and
natural gas and the volumes of crude oil and natural gas we produced. In
addition, our proved reserves will decline as crude oil and natural gas are
produced unless we are successful in acquiring properties containing proved
reserves or conduct successful exploitation and development activities.

     CASH FLOW DATA

     From Operations. During the year ended June 30, 1998 we generated $1.0
million from operations. The growth in the accounts receivable of $4.6 million
(a net consumption of cash from operations) is indicative of our growth and the
related increase in demand for working capital. Similarly, the growth of $5.2
million in accounts payable (a net source of cash from operations) is also an
indicator of our growth as we incurred higher expenses. In comparison, during
the year ended June 30, 1997 we generated $263,000 from operations.

     Investing Activities. During the year ended June 30, 1998 we invested
$154.2 million in acquiring additional natural gas and crude oil producing
properties and developing existing properties. Of this amount, a total of $146.3
million was expended in three acquisition transactions. The remaining $7.9
million was spent on developing existing properties. A further $100,000 were
invested in operating equipment and office equipment during the year. During the
year ended June 30, 1997 we invested $3.0 million in acquiring additional oil
and gas producing properties and $1.2 million in developing existing properties.

     Financing Activities. During the year ended June 30, 1998 we raised $14.4
million by issuing preferred and common stock and $152.5 million in short-term
loans. We also issued $121,000 in Deutchemark denominated



                                                                              36
<PAGE>   38

subordinated bonds. During the year we repaid $8.1 million of bank debt and
$70,000 of a capital lease. Between July 8 and 20, 1998 we issued $125.0 million
of unsecured bonds ($120.5 million net of costs) and raised an additional $30.0
million by issuing common stock. The proceeds from these bonds and the common
stock were used to repay $142.2 million of short-term debt, unwind an interest
rate hedge contract at a cost of $3.5 million and redeem $1.3 million (2,350,000
DEM) of Deutchemark denominated bonds. The remaining $3.5 million were added to
our working capital.

     During the year ended June 30, 1997 we raised $802,000 of debt while
repaying short-term notes payable of $1.4 million and $58,000 on its capital
lease obligation, for a net decrease in debt of $663,000. On August 1, 1997 we
entered into a loan agreement with Bank of Montreal. We drew down $12 million in
loans, using $6 million to acquire certain crude oil and natural gas producing
properties in New Mexico, Texas and Oklahoma. A further $4.9 million was used to
retire outstanding loans with Comerica Bank Texas. The remaining $1,142,000 were
retained for working capital purposes, with some of the funds used to reduce
accounts payable. During the year ended June 30, 1997 we raised $5.0 million in
preferred share equity and $4.0 million in common stock equity. Additionally, we
collected $500,000 for a stock subscription receivable that was outstanding on
June 30, 1996. (See Note 5 of the Notes to the Consolidated Financial
Statements). We used $5.1 million of the cash equity raised to repurchase 9.6
million shares of common stock, for a net increase in cash equity of $4.4
million.

BALANCE SHEET DATA

     Total Assets. At June 30, 1998 we owned assets of $153.7 million, comprised
of current assets of $6.4 million, investments in oil and gas producing
properties, net of accumulated depletion, depreciation and amortization, of
$142.5 million and deferred assets of $4.8 million. At June 30, 1997 we had
assets of $17.3 million, comprised of current assets of $1.1 million,
investments in oil and gas producing properties, net of accumulated depletion,
depreciation and amortization, of $16.2 million.

     Stockholders' Equity. At June 30, 1998 we had a net stockholders' deficit
of $6.8 million, primarily as a result of the $28.2 million non-cash ceiling
test write-down recorded during 1998. During the year ended June 30, 1998 we
privately placed and issued 2,160,715 common shares for $5.2 million, for an
average cash issuance price of $2.40 per common share. During the year ended
June 30, 1998 we issued 1,000,000 and 337,500 common shares in connection with
an acquisition, which we valued at $3.125 per share ($3,125,000) and $5.00 per
share ($1,687,500), respectively. Additionally, we issued 150,000 common shares
in consideration for professional services rendered, which we valued at $2.00
per share ($300,000). We also issued 10,400 shares of Series C preferred stock
for $9.5 million, net of costs.

     At June 30, 1997 we had total stockholders' equity of $6.4 million. During
the year ended June 30, 1997 we placed and issued privately 1,560,000 common
shares for $2.50 per share, less 10% in commissions, ($3,510,000) and 200,000
common shares for $3.05 per share, less 10% in commissions, ($549,000).
Additionally, during the year ended June 30, 1997 we issued 192,000 common
shares pursuant to acquisitions which we valued at $0.18 per share ($34,560) for
purposes of those transactions, and 1,237,500 common shares pursuant to
acquisitions which we valued at $0.50 per share ($618,750) for purposes of those
transactions. Additionally, we issued 116,000 common shares in partial
settlement of obligations, which we valued at $0.18 per share ($20,880) for
purposes of those transactions.

LIQUIDITY AND CAPITAL RESOURCES

GENERAL

     Consistent with our strategy of acquiring and developing reserves, we have
an objective of maintaining as much financing flexibility as is practicable.
Since we commenced our oil and natural gas operations, we have utilized a
variety of sources of capital to fund our acquisitions and development and
exploitation programs, and to fund our operations.

     Our general financial strategy is to use cash flow from operations, debt
financings and the issuance of equity securities to service interest on our
indebtedness, to pay ongoing operating expenses, and to contribute toward the
further development of our existing proved reserves as well as additional
acquisitions. There can be no assurance that cash from operations will be
sufficient in the future to cover all such purposes.



                                                                              37
<PAGE>   39

     We have planned development and exploitation activities for all of our
major operating areas. In addition, we are continuing to evaluate oil and
natural gas properties for future acquisition. Historically, we have used the
proceeds from the sale of our securities in the private equity market and
borrowings under our credit facilities to raise cash to fund acquisitions or
repay indebtedness incurred for acquisitions, and we have also used our
securities as a medium of exchange for other companies assets in connection with
acquisitions. However, there can be no assurance that such funds will be
available to us to meet our budgeted capital spending. Furthermore, our ability
to borrow other than under the credit agreement is subject to restrictions
imposed by such credit agreement. If we cannot secure additional funds for our
planned development and exploitation activities, then we will be required to
delay or reduce substantially both of such activities.

     During the year ended June 30, 1999 we were in default under our credit
agreement on four occasions. During each of the three months ended September 30,
1998, December 31, 1998 and March 31, 1999 we failed to achieve the minimum
interest coverage ratios set out in the credit agreement. At June 30, 1999 we
failed to meet the minimum required aggregate tangible net worth covenant set
out in our credit agreement. On each occasion the lenders have waived and/or
amended the credit agreement. However, they have limited our borrowing ability
to $8.0 million of which we are fully drawn, and the maturity date has been
accelerated to July 1, 2000. We are in the process of arranging additional
capital to achieve a long term resolution of our defaults under the credit
agreement. If we are not successful, our lenders may declare all amounts
borrowed under the credit agreement, together with accrued interest, to be due
and payable. If we do not repay the indebtedness promptly, our lenders could
then foreclose against any collateral securing the payment of the indebtedness.
Substantially all of our oil and gas interests secure our credit agreement.

SOURCES OF CAPITAL

     Our principal sources of capital for funding our business activities have
been cash flow from operations, debt financings and the issuance of equity
securities. Our historical sources of funds from debt financings include funds
available under the credit agreement, the ECT revolving credit agreement, bridge
facilities, unsecured, senior bonds issued to North American investors, certain
bonds issued to certain European investors and capital leases.

     On April 17, 1998, we amended and restated our credit agreement with Bank
of Montreal, as agent for the lenders party thereto. The credit agreement
provides for borrowings up to $125.0 million (subject to borrowing base
limitations) from such lenders to, among other things, fund development and
exploitation expenditures, acquisitions and general working capital. The
proceeds under the credit agreement were used to fund the property acquisitions
in part. As of September 10, 1999, we were able to borrow up to $8.0 million
under the credit agreement, all of which was outstanding as of September 10,
1999. The loan under the credit agreement matures on July 1, 2000. In the
event of a default on the indebtedness under the credit agreement, not
subsequently waived by the lenders, it is unlikely that we would be able to
continue our business.

     Indebtedness incurred under the credit agreement generally bears interest
at bank prime plus 2.0%.

     The loan under the credit agreement is secured by a first lien on our oil
and natural gas properties, the title to which is held by a wholly owned
subsidiary of Queen Sand Resources, and on the stock of two of our subsidiaries.
In addition, the parent company and its operating subsidiaries, other than the
subsidiary which is the borrower of record entered into guaranty agreements
guaranteeing the repayment of the indebtedness under the credit agreement.

     Pursuant to the credit agreement, we are subject to certain affirmative and
negative financial and operating covenants that are usual and customary for
transactions of this nature. The affirmative covenants include, but are not
limited to, covenants to:

     o   provide annual audited and unaudited interim financial information;
     o   provide notices of the occurrence of certain material events affecting
         us;
     o   promptly provide notice of all legal or arbital proceedings affecting
         us or our subsidiaries which could reasonably be expected to have a
         material adverse effect;
     o   maintain and preserve its existence and oil and gas properties and
         other material properties;



                                                                              38
<PAGE>   40

     o   implement and comply with certain environmental procedures;
     o   perform our obligations under the credit agreement;
     o   provide reserve reports;
     o   deliver certain title information;
     o   grant a security interest in oil and gas properties that are not
         currently subject to a lien under the credit agreement such that the
         mortgaged property includes at least 85% (with an obligation to use
         reasonable efforts to maintain 95%) of the SEC PV-10 of our total
         proved reserves; and
     o   deliver certain information relating to compliance with ERISA laws and
         regulations.

     The negative covenants include, but are not limited to, covenants:

     o   not to incur any indebtedness except as expressly permitted under the
         credit agreement;
     o   not to incur any lien on any of its properties except as expressly
         permitted under the credit agreement;
     o   not to make any loans or advances to or investments in any person
         except as expressly permitted under the credit agreement;
     o   with respect to the parent company, not to declare or pay any dividends
         or redeem or otherwise acquire for value any capital stock of the
         parent company except for stock dividends and certain permitted
         repurchases of Series C preferred stock;
     o   not to enter into sale and leaseback transactions;
     o   not to materially change the character of our business as an
         independent oil and natural gas exploration and production company;
     o   not to enter into lease agreements except as expressly permitted under
         the credit agreement;
     o   not to merge with or sell all or substantially all of our property or
         assets to any other person;
     o   not to permit the borrowed proceeds under the credit agreement to be
         used for any purpose except as expressly permitted under the credit
         agreement;
     o   not to violate ERISA laws and regulations;
     o   not to discount or sell any notes or accounts receivable;
     o   not to maintain a working capital ratio of less than 1.0 to 1.0;
     o   not to maintain a consolidated tangible net worth of less than $33.0
         million;
     o   to pay our trade accounts payable when due;
     o   not maintain a fixed charge coverage ratio of less than 1.15 to 1.0;
     o   not to sell, assign or otherwise transfer any interest in any oil or
         natural gas properties except as expressly permitted under the credit
         agreement;
     o   not to violate environmental laws and regulations;
     o   not to enter into transactions with affiliates other than those entered
         into in the ordinary course of business on fair and reasonable terms;
     o   not to create any additional subsidiaries unless such subsidiaries
         guarantee the obligations under the credit agreement or issue stock of
         any subsidiaries to third parties;
     o   not to enter into negative pledge agreements;
     o   not to enter into any contracts which warrant production of oil and
         natural gas and not allow gas imbalances, take-or-pay or other
         prepayments which would require the delivery of oil or natural gas at
         some future time without receiving full payment therefor to exceed 5%
         of the current aggregate monthly gas production from the mortgaged oil
         and natural gas properties;
     o   not to amend or modify any material agreements;
     o   not to repay other indebtedness except as expressly permitted under the
         credit agreement; and
     o   not make or pay capital expenditures more than specified amounts.

     The credit agreement also contains usual and customary events of default
and provides remedies to the lenders in the event of default. The events of
default include:

     o   default in payment when due of any principal of or interest on
         indebtedness under the credit agreement;
     o   default in payment when due of any principal of or interest on any
         other indebtedness aggregating $500,000 or more or an event shall occur
         which requires us to mandatorily redeem any of our existing preferred
         stock;



                                                                              39
<PAGE>   41

     o   breach of a representation and warranty under the credit agreement;
     o   default in performance of obligations under the credit agreement;
     o   our admitting in writing our inability to pay debts as they become due;
     o   voluntary or involuntary bankruptcy;
     o   a judgment in excess of $100,000 shall be entered and not vacated
         within 30 days;
     o   the security agreements under the credit agreement shall cease to be in
         full force and effect; and
     o   we discontinue our usual business or any person or group of persons
         (other than JEDI, Enron or its affiliates) shall have acquired
         beneficial ownership of 30% or more of the outstanding shares of voting
         stock the parent company or individuals who constitute the Board of
         Directors of the parent company cease to constitute a majority of the
         then-current Board of Directors of the parent company.

     Although we believe that our cash flows and available sources of financing
will be sufficient to satisfy the interest payments on our debt at currently
prevailing interest rates and oil and natural gas prices, our level of debt may
adversely affect our ability:

     o   to obtain additional financing for working capital, capital
         expenditures or other purposes, should we need to so do; or
     o   to acquire additional oil and natural gas properties or to make
         acquisitions utilizing new borrowings.

     There can be no assurances that we will be able to obtain additional
financing, if required, or that such financing, if obtained, will be on terms
favorable to us.

     On September 30, 1998 and December 31, 1998 and March 31, 1999 we were not
in compliance with the interest coverage ratio specified in the credit
agreement. The lenders waived the September 30, 1998 and December 31, 1998
covenant violation solely with respect to these specific defaults. On May 14,
1999, the lenders waived our March 31, 1999 noncompliance with the interest
coverage ratio. On the same date, the credit agreement was amended to reduce the
interest coverage ratio to 1.15:1 for the quarter ending June 30, 1999 and for
each quarter thereafter. We believe, but cannot assure, that we will be able to
comply with all restrictive covenants in the future or obtain waivers from the
bank with respect to noncompliance.

     On June 30, 1999 we were not in compliance with the minimum tangible net
worth covenant in the credit agreement. On October 13, 1999 the lenders
waived this covenant violation and the credit agreement was amended to reduce
the minimum tangible net worth covenant to $33.0 million. We are in the
process of arranging additional capital to achieve a long-term resolution of our
defaults under the credit agreement. If we are not successful, our lenders may
declare all amounts borrowed under the credit agreement, together with accrued
interest, to be due and payable. If we do not repay the indebtedness promptly,
our lenders could then foreclose against any collateral securing the payment of
the indebtedness. Substantially all of our oil and gas interests secure our
credit agreement.

     Effective December 29, 1997, we established the ECT revolving credit
agreement with ECT, as a lender and as agent for the lenders thereto, to fund on
a revolving basis capital costs incurred with future development projects and to
fund further acquisitions. The ECT revolving credit agreement is subordinate to
the credit agreement. The ECT revolving credit agreement provides for borrowings
up to $10.0 million, on a revolving basis and subject to borrowing base
limitations, which has been initially set at an amount equal to 40% of the
borrowing base established from time to time under the credit agreement. This
facility is designed to provide bridge financing for development projects and
acquisitions to be completed on relatively short notice or until the affected
assets are eligible to be included in the borrowing base for the credit
agreement or financed with longer-term indebtedness or equity capital; provided,
that the availability for acquisitions under the facility is limited to the
lesser of $5.0 million or 50% of the borrowing base as in effect from time to
time. There is no indebtedness outstanding under this facility as of the date of
this Form 10-K. Borrowings in excess of certain amounts under the ECT Revolving
credit agreement will reduce the available borrowing base under the credit
agreement. The loan is secured by a second priority lien and security interest
(behind the first lien position of the credit agreement) in approximately 95% of
our oil and natural gas properties.



                                                                              40
<PAGE>   42

     The ECT revolving credit agreement is subject to payment of interest at a
fluctuating rate per annum equal to (i) the rate of 1% above the then highest
rate of interest being paid on any portion of the indebtedness owed under the
credit agreement or (ii) the rate of 15%, depending upon whether there is any
indebtedness owed under the credit agreement outstanding or whether there has
been a certain amount of indebtedness owed under the ECT revolving credit
agreement for certain time periods.

     The maturity date for the ECT revolving credit agreement is the earlier of
December 30, 2002 or the date that is 60 days after we receive written notice
that the lenders and their affiliates beneficially own in the aggregate less
than 10% of the capital stock of the parent company entitled to vote in the
election of directors. From March 31, 1998 through the maturity date, we must
pay interest on the outstanding loans at quarterly intervals, on the last
business day of every March, June, September and December. In addition, the ECT
revolving credit agreement provides for certain voluntary prepayments and
certain mandatory prepayments of amounts borrowed under the facility.

     We are obligated to pay ECT, for the account of each lender under the ECT
revolving credit agreement, a fee of 3/8% per annum on the daily average of the
unadvanced portion of the facility, payable at the end of each quarter. This fee
has been waived indefinitely since April 1998.

     We are subject to various covenants under the ECT revolving credit
agreement, which covenants are substantially similar to the covenants described
above with respect to the credit agreement. In addition to the covenants, the
ECT revolving credit agreement contains representations, warranties, covenants
and default provisions customary for a facility of this type.

     As of September 10, 1999 we have outstanding to investors in Europe
Deutschemark denominated (DEM) 12% Bonds (the "12% Bonds") totaling DEM 1.6
million ($851,000). Under Regulation S of the Securities Act, we are prohibited
from selling these Bonds to U.S. persons (as defined in Regulation S). In
January 1998 we discontinued our efforts to sell any additional 12% Bonds. We
are obligated to make periodic interest payments (January 15 and July 15 of each
year) and to repay the principal when it comes due on July 15, 2000 in DEM. All
interest payments have been paid in full at the time they came due. The funds
generated by us from operations, which form the primary source of funds to pay
the interest, are denominated in $US. We are exposed to the risk that, upon
repayment, the exchange rate between DEM and $US may be less favorable than that
which existed at the time that the bonds were issued. This would result in our
having to repay a larger amount of $US than we received initially. Changes in
the $US equivalent of the DEM bonds arising from changes to the DEM:$US exchange
rate are recognized monthly. At June 30, 1999 we had recorded unrealized
exchange rate gains of approximately $39,000 (at June 30, 1998 $141,000).
However, there are no assurances that we will continue to realize gains related
to favorable changes in the DEM:$US exchange rates in the future. Unfavorable
changes to the DEM:$US exchange rate will result in us recording unrealized
exchange rate losses related to the changes as they occur. We believe that we
have the opportunity to enter into arrangements to manage its DEM:$US exchange
rate risk. At this time, we have not entered into any such arrangements.

     We have issued both preferred stock and common stock for cash to raise
equity to finance our working capital, to repay existing indebtedness,
repurchase Series C preferred stock and to fund acquisitions. In December 1997
we raised $10.0 million of gross proceeds through a private institutional
placement of preferred stock. Since July 1, 1997 we have also received
approximately $13.4 million of cash proceeds from the exercise of previously
issued warrants and the exercise of certain anti-dilution rights of JEDI. In
addition, we have also issued common stock as partial consideration when
acquiring oil and natural gas producing properties.

     On July 8, 1998, we completed a private placement (the "Note Offering") of
$125,000,000 principal amount of 12 1/2% Senior Notes due 2008 (the "Notes"). In
addition, on July 8, 1998 and July 20, 1998, we completed the private placement
of $31.0 million of common stock. Pursuant to the Note Offering, we issued and
sold the Notes to certain institutional buyers pursuant to Rules 144A and
Regulation D promulgated under the Securities Act of 1933. The Notes mature on
July 1, 2008, and interest on the Notes is payable semiannually on January 1 and
July 1 of each year, commencing January 1, 1999 at the rate of 12 1/2% per
annum. The payment of the Notes is guaranteed by the parent company's three
operating subsidiaries. The net proceeds received by us from the Note Offering
and the Private Equity Placement completed on July 8, 1998 of approximately
$144.5 million and on July 20, 1998 of approximately



                                                                              41
<PAGE>   43

$6.9 million were used to repay indebtedness outstanding under the credit
agreement, to repay indebtedness outstanding under the certain short term loans
used to finance an acquisition of net profits and royalty interests, to redeem
$1.3 million (2,350,000 DEM) of Deutchemark denominated bonds and to unwind an
interest rate hedge contract at a cost of $3.5 million. With the exception of
the Deutchemark denominated bonds, substantially all of this indebtedness was
incurred to fund the April 20, 1998 acquisition of net profits and royalty
interests.

     We are in the process of negotiating a revolving loan in the amount of $50
million, to be secured by a first lien on our oil and natural gas properties.
This loan is expected to bear interest at bank prime plus 2% when borrowings are
less than $25 million and bank prime plus 4.5% if the amount outstanding is
equal to or greater than $25 million. The funds available under this facility
would be available for general corporate purposes, including the funding of the
exploitation and development of our existing oil and natural gas properties.
There is no assurance that these negotiations will be successful. In the event
that these negotiations are successful, the new lender would acquire the
existing notes from the current lending group and replace the existing credit
agreement with an amended and restated credit agreement. As a consequence of no
longer holding a security interest in our oil and natural gas properties, Bank
of Montreal has asked us to unwind the ceiling price feature of our hedge
agreements with them. The cost of unwinding these contracts is a function of the
future market price of natural gas over the remaining life of the contracts,
which expire December 31, 2003. There has been considerable volatility in the
natural gas market during the month of October 1999 and therefore it is not
possible to estimate the cost of unwinding the contract. It is possible that the
cost could be material. At such time as the contracts are unwound we will treat
the cost as an expense in the period in which it occurs. See "Changes in Prices
and Hedging Activities."

     We believe that we can generate sufficient cash flow from operations to pay
the interest charges on all of our interest-bearing debt. The gas price hedging
program currently in place provides a degree of protection against significant
decreases in oil and gas prices. Furthermore, 94% of our interest-bearing debt
is at fixed rates for extended periods, providing an effective hedge against
increases in prevailing interest rates.

     We do not have sufficient liquidity or capital to undertake significant
potential acquisition prospects. Therefore, we will continue to be dependent on
raising substantial amounts of additional capital through any one or a
combination of institutional or bank debt financing, equity offerings, debt
offerings and internally generated cash flow, or by forming sharing arrangements
with industry participants. Although we have been able to obtain such financings
and to enter into such sharing arrangements in certain of our projects to date,
there can be no assurance that we will continue to be able to do so.
Alternatively, we may consider issuing additional securities in exchange for
producing properties. There can be no assurance that any such financings or
sharing arrangement can be obtained. Therefore, notwithstanding our need for
substantial amounts of additional capital, there can be no assurance that it can
be obtained.

     Further acquisitions and development activities in addition to those for
which we are contractually obligated are discretionary and depend to a
significant degree on cash availability from outside sources such as bank debt
and the sale of securities or properties.

USES OF CAPITAL

     Since commencing our oil and natural gas operations in August 1994 we have
completed 19 acquisitions of oil and natural gas producing properties. Through
June 30, 1999, we have expended a total of $178.4 million in acquiring,
developing and exploiting oil and natural gas producing properties. Initially,
our operations represented a net use of funds. As demonstrated in the operating
results for the year ended June 30, 1999, we generate a positive cash flow from
operations. We expect to spend $8.4 million on discretionary capital
expenditures through June 2000 for exploitation and development projects,
depending on the availability of funds. We are not contractually obligated to
fund any capital expenditures through June 2000.

INFLATION

     During the past several years, we have experienced some inflation in oil
and natural gas prices with moderate increases in property acquisition and
development costs. During the fiscal year ended June 30, 1999, we received



                                                                              42
<PAGE>   44


somewhat lower commodity prices for the natural resources produced from our
properties. Our results of operations and cash flow have been, and will continue
to be, affected to a certain extent by the volatility in oil and natural gas
prices. Should we experience a significant increase in oil and natural gas
prices that is sustained over a prolonged period, we would expect that there
would also be a corresponding increase in oil and natural gas finding costs,
lease acquisition costs, and operating expenses.

CHANGES IN PRICES AND HEDGING ACTIVITIES

<TABLE>
<CAPTION>
                                                                                      JUNE 30
                                                              ---------------------------------------------------------
                                                                     1999               1998               1997
                                                                     ----               ----               ----
<S>                                                                 <C>                 <C>                <C>
GAS (PER MCF):
   Price received at wellhead                                       $ 2.00              $ 2.24             $ 2.31
   Effect of hedge contracts                                          0.13                0.03               --
   Effective price received, including hedge contracts                2.13                2.27               2.31

   Average NYMEX Henry Hub                                            2.01                2.46               2.52
   Average basis differential including hedge contracts               0.12               (0.19)             (0.21)
   Average basis differential excluding hedge contracts              (0.01)              (0.22)             (0.21)

OIL (PER BARREL):
   Average price received at wellhead per barrel                     12.37               15.07              20.73
   Average effect of hedge contract                                   0.00                0.45               --
   Average price received, including hedge contracts                 12.37               15.52              20.73

   Average NYMEX Sweet Light Oil                                     14.45               17.62              22.40
   Average basis differential including hedge contracts              (2.08)              (2.10)             (1.67)
   Average basis differential excluding hedge contracts              (2.08)              (2.55)             (1.67)
</TABLE>

     We have a commodity price risk management (hedging) strategy that is
designed to provide protection from low commodity prices while providing some
opportunity to enjoy the benefits of higher commodity prices. We have a series
of natural gas futures contracts with Bank of Montreal and with an affiliate of
Enron. This strategy is designed to provide a degree of protection of negative
shifts in natural gas prices (Henry Hub Nymex Index) on approximately 80% of our
expected natural gas production from reserves currently classified as proved
developed producing during the fiscal year ending June 30, 2000. At the same
time, we are able to participate completely in upward movements in the Henry Hub
Nymex Index to the extent of approximately 30% of our expected natural gas
production for the fiscal year ending June 30, 2000, and up to $2.70 per MMBtu
on approximately 73% of our expected natural gas production for the fiscal year
ended June 30, 2000.

     In addition to the natural gas contracts entered into on April 25, 1998, we
were under contract with an affiliate of Enron for 10,000 Bbls of oil per month
with a floor of $18.00 per Bbl and a ceiling of $20.40 per Bbl with
participation on 50% of the price of WTI Nymex over $20.40 for the period from
September 1, 1997 through August 31, 1998. We also had a contract for 50,000
MMBtu of natural gas per month with an affiliate of Enron, with a floor price of
$1.90 per MMBtu and a ceiling price of $2.66 per MMBtu, with participation on
50% of the price of Henry Hub Nymex Index over $2.66 per MMBtu for the period
from September 1, 1997 through August 31, 1998. In September 1998 we entered
into a swap contract on 12,000 barrels of crude oil per month at $17.00 per
barrel from October 1 through December 31, 1998. In March 1999 we entered into a
swap contract on 10,000 barrels of crude oil per month at $13.50 per barrel from
March 1 through August 31, 1999. We also entered into two additional swap
contracts of 5,000 barrels of crude oil per month at $14.35 per barrel and
$14.82 per barrel respectively from April 1 through September 30, 1999.

     We have implemented a comprehensive hedging strategy for our natural gas
production over the next five years. We have placed approximately 25% of the
expected natural gas production from our proved developed producing reserves
into a swap at $2.40 per MMBtu. Approximately 10% of the expected natural gas
production from our proved developed producing reserves is hedged in a contract
with a floor of $1.90 per MMBtu. We also hedged approximately



                                                                              43
<PAGE>   45

40% of the expected natural gas production from our proved developed producing
reserves with a series of non-participating collars with ceilings that escalate
from $2.70 per MMBtu to $2.90 per MMBtu over time.

     The table below sets out volume of natural gas hedged with a floor price of
$1.90 per MMBtu with Enron. The volumes presented in this table are divided
equally over the months during the period:

<TABLE>
<CAPTION>
                                                    VOLUME
PERIOD BEGINNING           PERIOD ENDING            (MMBTU)
----------------           -------------            -------

<S>                      <C>                       <C>
May 1, 1998              December 31, 1998           885,000
January 1, 1999          December 31, 1999         1,080,000
January 1, 2000          December 31, 2000           880,000
January 1, 2001          December 31, 2001           740,000
January 1, 2002          December 31, 2002           640,000
January 1, 2003          December 31, 2003           560,000
</TABLE>

     The table below sets out volume of natural gas hedged with a swap at $2.40
per MMBtu with Enron. The volumes presented in this table are divided equally
over the months during the period:

<TABLE>
<CAPTION>
                                                      VOLUME
PERIOD BEGINNING             PERIOD ENDING            (MMBTU)
----------------             -------------            -------

<S>                        <C>                      <C>
May 1, 1998                December 31, 1998        2,210,000
January 1, 1999            December 31, 1999        2,710,000
January 1, 2000            December 31, 2000        2,200,000
January 1, 2001            December 31, 2001        1,850,000
January 1, 2002            December 31, 2002        1,600,000
January 1, 2003            December 31, 2003        1,400,000
</TABLE>

     Effective May 1, 1998 through December 31, 2003 we have a contract
involving the hedging of a portion of our future natural gas production
involving floor and ceiling prices as set out in the table below. The volumes
presented in this table are divided equally over the months during the period.

<TABLE>
<CAPTION>
                                                            VOLUME
         PERIOD BEGINNING      PERIOD ENDING                (MMBTU)        FLOOR PRICE   CEILING PRICE
         ----------------      -------------                -------        -----------   -------------

<S>                           <C>                           <C>            <C>           <C>
         May 1, 1998           December 31, 1998             3,540,000        $ 2.00        $ 2.70
         January 1, 1999       December 31, 1999             4,330,000          2.00          2.70
         January 1, 2000       December 31, 2000             3,520,000          2.00          2.70
         January 1, 2001       April 30, 2001                  900,000          2.00          2.70
         May 1, 2001           December 31, 2001             1,980,000          2.00          2.80
         January 1, 2002       April 30, 2002                  850,000          2.00          2.80
         May 1, 2002           December 31, 2002             1,700,000          2.00          2.90
         January 1, 2003       December 31, 2003             2,250,000          2.00          2.90
</TABLE>



                                                                              44
<PAGE>   46

INTEREST RATE HEDGING

     We entered into a forward LIBOR interest rate swap effective for the period
June 30, 1998 through June 29, 2009 at a rate of 6.30% on $125.0 million. We
entered into this interest rate swap at a time when interest rates were rising.
Our objective was to mitigate the risk of our having to pay higher than expected
interest rates on what eventually became our 12 1/2% Senior Notes due 2008. The
swap would have also served as an interest hedge on our indebtedness under the
credit agreement and certain short term loans used to finance the April 1998
acquisition of our net profit and royalty interests in the event that we failed
to complete the private placement of the unsecured notes. Once the private
placement of the 12 1/2% Senior Notes was completed we determined that the
interest rate swap no longer had any on-going value to us. On July 9, 1998, we
unwound this swap at a cost to us of approximately $3.5 million, using a portion
of the proceeds from the Notes proceeds. This cost was expensed as an
extraordinary loss during the year ended June 30, 1999.

YEAR 2000 COMPUTER ISSUE

     General. We are addressing the potential impact of the Year 2000 ("Y2K")
issue on our operations. A review of internal systems and a review of the state
of readiness of significant suppliers and customers is nearing completion. We
believe that appropriate remedial action can be completed in advance of the year
2000 and the costs of such action will not have a material affect on our
financial condition or results of operations.

     State of Readiness. We currently use commercially available software for
our management information ('IT') systems including accounting, engineering
evaluation, acquisition analysis and word processing. This software is warranted
by the suppliers/manufacturers to be Y2K compliant. We have not taken any steps
to independently verify the truth of such warranties but we have no reason to
believe that the software is not as warranted. We are in the process of
reviewing our non-IT systems, which we expect to complete by the end of October,
1999.

     Costs of Compliance. We believe that the cost of compliance will be
minimal. As our IT systems were warranted to be compliant when purchased, we
have not incurred, nor do we expect to incur any significant incremental costs
to modify or replace such systems to make them compliant. Non-IT systems are
currently being evaluated to determine whether and to what extent they may be
non-compliant. We do not currently believe that the amount of non-compliant
equipment will be found to be significant nor will the cost to modify or replace
such equipment be material. Our products do not contain any microprocessors.

     We are seeking written verification from our major suppliers and customers
that they will be Y2K compliant. The costs of seeking verification are minimal.
We believe that it will not be practical to independently verify the responses
because we do not believe that we would be given access to carry out such
verification or that the costs of doing so would be affordable. The cost of
replacing non-compliant or non-responsive suppliers and customers will not be
possible to determine until the review process has been completed.

     Risk. Any Y2K problems that do occur will likely manifest themselves in
reduced production through equipment shut down or impaired liquidity through
inability of customers to take delivery or process payment.

     Contingency. We plan to establish contingency plans once its verification
program is complete and the risks have been more fully quantified.


ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

HEDGES OF OIL AND NATURAL GAS PRODUCTION

     To reduce our exposure to changes in the prices of oil and natural gas, we
have entered into and may in the future enter into arrangements to hedge our
crude oil and natural gas production, whereby gains and losses in the fair value
of the derivative instruments are generally offset by price changes in the
underlying commodity. The hedges that we



                                       45
<PAGE>   47

have entered into generally provide a 'floor' (or 'cap' and 'floor') on the
prices paid for our oil and natural gas production over a period of time.
Hedging arrangements may expose us to the risk of financial loss in some
circumstances, including the following:

     o   our production does not meet the minimum production requirements under
         the agreement,
     o   the other party to the hedging contract defaults on its contract
         obligations or
     o   there is a change in the expected differential between the underlying
         price in the hedging agreement and actual prices received.

     Due to our risk assessment procedures and internal controls, we believe
that the use of such derivative instruments does not expose us to material risk,
however, the use of derivative instruments for the hedging activities could
affect our results of operations in particular quarterly or annual periods. The
use of such instruments limits the downside risk of adverse price movements, but
it may also limit our ability to benefit from favorable price movements.

     Our hedging strategy is designed to provide protection from low commodity
prices while providing some opportunity to enjoy the benefits of higher
commodity prices. We have a series of natural gas futures contracts with Bank of
Montreal and with an affiliate of Enron. This strategy is designed to provide a
degree of protection of negative shifts in natural gas prices (Henry Hub Nymex
Index) on approximately 80% of our expected natural gas production from reserves
currently classified as proved developed producing during the fiscal year ending
June 30, 2000. At the same time, we are able to participate completely in upward
movements in the Henry Hub Nymex Index to the extent of approximately 30% of our
expected natural gas production for the fiscal year ending June 30, 2000, and up
to $2.70 per MMBtu on approximately 73% of our expected natural gas production
for the fiscal year ended June 30, 2000.

     In addition to our natural gas hedging agreements, at June 30, 1999, we
have a swap contract on 10,000 barrels of crude oil per month at $13.50 per
barrel from March 1 through August 31, 1999 as well as two additional swap
contracts of 5,000 barrels of crude oil per month at $14.35 per barrel and
$14.82 per barrel respectively from April 1 through September 30, 1999.

INTEREST RATES

     At June 30, 1999, our exposure to interest rates relates primarily to
borrowings under our credit agreement. As of June 30, 1999, we are not using any
derivatives to manage interest rate risk. Interest is payable on borrowings
under the credit agreement based on a floating rate. If short-term interest
rates average 10% higher during our fiscal year 2000 than they were during 1999,
our interest expense would increase by approximately $78,000. This amount was
determined by applying the hypothetical interest rate change of 10% to our
outstanding borrowings under the credit agreement at June 30, 1999.


ITEM 8.       FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     For the Financial Statements required by Item 8, see the Consolidated
Financial Statements included elsewhere in this Annual Report on Form 10-K.

ITEM 9.       CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
              AND FINANCIAL DISCLOSURE

     There are no changes or disagreements required to be reported under this
Item 9.



                                                                              46
<PAGE>   48
                   Queen Sand Resources, Inc. and Subsidiaries

                   Index to Consolidated Financial Statements


<TABLE>
<CAPTION>
                                                                                                      Page
                                                                                                      ----
<S>                                                                                                   <C>
Report of Ernst & Young LLP, Independent Auditors..................................................    F-2

Consolidated Financial Statements:
   Consolidated Balance Sheets as of June 30, 1999 and 1998........................................    F-3
   Consolidated Statements of Operations for the
     Years ended June 30, 1999, 1998, and 1997.....................................................    F-4
   Consolidated Statements of Stockholders' Equity (Net Capital
     Deficiency) for the Years ended June 30, 1999, 1998, and 1997.................................    F-5
   Consolidated Statements of Cash Flows for the
     Years ended June 30, 1999, 1998, and 1997.....................................................    F-7
   Notes to Consolidated Financial Statements......................................................    F-8
</TABLE>


                                       F-1
<PAGE>   49

                Report of Ernst & Young LLP, Independent Auditors

The Board of Directors and Stockholders
Queen Sand Resources, Inc.

We have audited the accompanying consolidated balance sheets of Queen Sand
Resources, Inc. and subsidiaries as of June 30, 1999 and 1998, and the related
consolidated statements of operations, stockholders' equity (net capital
deficiency) and cash flows for each of the three years in the period ended June
30, 1999. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audit.

We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides 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 Queen Sand
Resources, Inc. and subsidiaries as of June 30, 1999 and 1998, and the results
of their operations and their cash flows for each of the three years in the
period ended June 30, 1999, in conformity with generally accepted accounting
principles.


                                             /s/ Ernst & Young LLP


Dallas, Texas
September 1, 1999,
except for Note 3, as to which
the date is October 13, 1999


                                       F-2
<PAGE>   50

                   Queen Sand Resources, Inc. and Subsidiaries

                           Consolidated Balance Sheets


<TABLE>
<CAPTION>
                                                                                  JUNE 30
                                                                          1999                1998
                                                                      -------------      -------------
<S>                                                                   <C>                <C>
ASSETS
Current assets:
   Cash                                                               $   9,367,000      $   1,030,000
   Accounts receivable                                                    4,499,000          5,252,000
   Note receivable from employee                                             79,000             73,000
   Other                                                                     74,000             56,000
                                                                      -------------      -------------
Total current assets                                                     14,019,000          6,411,000
                                                                      -------------      -------------
Property and equipment, at cost (Notes 1, 2, 3, 9 and 10):
   Oil and gas properties, based on full cost accounting method         178,421,000        176,943,000
   Other equipment                                                          392,000            221,000
                                                                      -------------      -------------
                                                                        178,813,000        177,164,000

   Less accumulated depreciation and amortization                       (81,615,000)       (34,697,000)
                                                                      -------------      -------------
Net property and equipment                                               97,198,000        142,467,000

Other assets                                                              7,993,000          4,797,000
                                                                      -------------      -------------
                                                                      $ 119,210,000      $ 153,675,000
                                                                      =============      =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
   Accounts payable                                                   $   1,419,000      $   5,493,000
   Accrued liabilities                                                    9,681,000          1,258,000
   Current portion of long-term obligations (Note 3)                         42,000             85,000
                                                                      -------------      -------------
Total current liabilities                                                11,142,000          6,836,000

Long-term obligations, net of current portion (Note 3)                  133,852,000        153,620,000

Commitments (Note 5)

Stockholders' equity (net capital deficiency) (Notes 2 and 5):
   Preferred stock, $.01 par value:
     Authorized shares - 50,000,000 at June 30, 1999 and 1998
     Issued and outstanding shares - 9,604,698 and 9,610,400
       at June 30, 1999 and 1998, respectively                               96,000             96,000
     Aggregate liquidation preference - $5,000,000
   Common stock, $.0015 par value:
     Authorized shares - 100,000,000 at June 30, 1999 and 1998
     Issued and outstanding shares - 33,442,210 and 24,323,767
       at June 30, 1999 and 1998, respectively                               65,000             51,000
   Additional paid-in capital                                            64,912,000         34,011,000
   Accumulated deficit                                                  (83,606,000)       (35,939,000)
   Treasury stock, at cost                                               (7,251,000)        (5,000,000)
                                                                      -------------      -------------
Total stockholders' equity (net capital deficiency)                     (25,784,000)        (6,781,000)
                                                                      -------------      -------------
Total liabilities and stockholders' equity                            $ 119,210,000      $ 153,675,000
                                                                      =============      =============
</TABLE>


See accompanying notes.


                                      F-3
<PAGE>   51

                   Queen Sand Resources, Inc. and Subsidiaries

                      Consolidated Statements of Operations


<TABLE>
<CAPTION>
                                                                   YEAR ENDED JUNE 30
                                                        1999              1998              1997
                                                    ------------      ------------      ------------
<S>                                                 <C>               <C>               <C>
Revenues:
   Oil and gas sales                                $  4,591,000      $  6,446,000      $  4,381,000
   Net profits and royalty interests (Note 2)         23,140,000         4,432,000              --
   Interest and other (Note 1)                           326,000           105,000           300,000
                                                    ------------      ------------      ------------
                                                      28,057,000        10,983,000         4,681,000

Expenses:
   Production expenses                                 3,196,000         4,547,000         2,507,000
   Depreciation and amortization (Note 1)             11,885,000         4,809,000           982,000
   Writedown of oil and gas properties (Note 1)       35,033,000        28,166,000              --
   General and administrative (Notes 1 and 7)          3,533,000         2,259,000         1,452,000
   Interest and financing costs                       18,352,000         3,956,000           878,000
                                                    ------------      ------------      ------------
                                                      71,999,000        43,737,000         5,819,000
                                                    ------------      ------------      ------------
Loss before extraordinary item                       (43,942,000)      (32,754,000)       (1,138,000)
Extraordinary loss (Note 4)                            3,549,000              --             171,000
                                                    ------------      ------------      ------------
Net loss                                            $(47,491,000)     $(32,754,000)     $ (1,309,000)
                                                    ============      ============      ============

Loss before extraordinary item per common share     $      (1.40)     $      (1.44)     $       (.04)
                                                    ============      ============      ============
Net loss per common share                           $      (1.51)     $      (1.44)     $       (.05)
                                                    ============      ============      ============

Weighted average common shares outstanding            31,434,465        22,719,177        26,964,334
                                                    ============      ============      ============
</TABLE>


See accompanying notes.


                                      F-4
<PAGE>   52

                   Queen Sand Resources, Inc. and Subsidiaries

                 Consolidated Statements of Stockholders' Equity
                            (Net Capital Deficiency)

                    Years ended June 30, 1999, 1998 and 1997


<TABLE>
<CAPTION>
                                        PREFERRED STOCK                     COMMON STOCK
                                 -----------------------------    -------------------------------
                                    SHARES           AMOUNT           SHARES            AMOUNT
                                 ------------     ------------     ------------      ------------
<S>                              <C>              <C>              <C>               <C>
Balance at June 30, 1996                 --       $       --         27,020,000      $     41,000
   Issuance of common
     stock for services                  --               --            116,052              --
   Issuance of common
     stock for oil and
     gas properties (Note 2)             --               --          1,529,500             2,000
   Issuance of common
     stock for cash
     (Note 5)                            --               --          1,760,000             3,000
   Issuance of convertible
     preferred stock and
     warrants to purchase
     common stock for cash
     (Note 5)                       9,600,000           96,000             --                --
   Repurchase of common
     stock (Note 5)                      --               --         (9,600,000)             --
   Net loss                              --               --               --                --
                                 ------------     ------------     ------------      ------------
Balance at June 30, 1997            9,600,000           96,000       20,825,552            46,000
   Issuance of common
     stock for services                  --               --            150,000              --
   Issuance of common
     stock for oil and
     gas properties (Note 2)             --               --          1,337,500             2,000
   Issuance of common
     stock for cash (Note 5)             --               --          2,010,715             3,000
   Issuance of convertible
     preferred stock and
     warrants to purchase
     common stock for cash
     (Note 5)                          10,400             --               --                --
   Net loss                              --               --               --                --
                                 ------------     ------------     ------------      ------------
Balance at June 30, 1998            9,610,400     $     96,000       24,323,767      $     51,000

<CAPTION>
                                  ADDITIONAL                                              TOTAL
                                   PAID-IN                           ACCUMULATED       STOCKHOLDERS'
                                   CAPITAL           TREASURY          DEFICIT            EQUITY
                                 ------------      ------------      ------------      -------------
<S>                              <C>               <C>               <C>               <C>
Balance at June 30, 1996         $  4,997,000      $       --        $ (1,876,000)     $  3,162,000
   Issuance of common
     stock for services                21,000              --                --              21,000
   Issuance of common
     stock for oil and
     gas properties (Note 2)          639,000              --                --             641,000
   Issuance of common
     stock for cash
     (Note 5)                       4,056,000              --                --           4,059,000
   Issuance of convertible
     preferred stock and
     warrants to purchase
     common stock for cash
     (Note 5)                       4,904,000              --                --           5,000,000
   Repurchase of common
     stock (Note 5)                  (143,000)       (5,000,000)             --          (5,143,000)
   Net loss                              --                --          (1,309,000)       (1,309,000)
                                 ------------      ------------      ------------      ------------
Balance at June 30, 1997           14,474,000        (5,000,000)       (3,185,000)        6,431,000
   Issuance of common
     stock for services               300,000              --                --             300,000
   Issuance of common
     stock for oil and
     gas properties (Note 2)        4,810,000              --                --           4,812,000
   Issuance of common
     stock for cash (Note 5)        4,883,000              --                --           4,886,000
   Issuance of convertible
     preferred stock and
     warrants to purchase
     common stock for cash
     (Note 5)                       9,544,000              --                --           9,544,000
   Net loss                              --                --         (32,754,000)      (32,754,000)
                                 ------------      ------------      ------------      ------------
Balance at June 30, 1998         $ 34,011,000      $ (5,000,000)     $(35,939,000)     $ (6,781,000)
</TABLE>


See accompanying notes.


                                      F-5
<PAGE>   53

                   Queen Sand Resources, Inc. and Subsidiaries

                 Consolidated Statements of Stockholders' Equity
                      (Net Capital Deficiency) (continued)

                    Years ended June 30, 1999, 1998 and 1997


<TABLE>
<CAPTION>

                                      PREFERRED STOCK                     COMMON STOCK
                              ------------------------------     -----------------------------
                                 SHARES            AMOUNT           SHARES           AMOUNT
                              ------------      ------------     ------------     ------------
<S>                           <C>               <C>              <C>              <C>
   Issuance of common
     stock for oil and
     gas properties
     (Note 1)                         --        $       --              8,740     $       --
   Issuance of common
     stock for cash
     (Note 5)                         --                --          3,845,241            6,000
   Issuance of common
     stock upon exercise
     of warrants (Note 5)             --                --          2,474,236            4,000
   Issuance of common
     stock pursuant to
     repricing rights
     (Note 5)                         --                --          1,384,016            2,000
   Issuance of common
     stock on conversion
     of convertible
     preferred stock
     (Note 5)                       (3,550)             --          1,328,639            2,000
   Issuance of common
     stock as stock
     dividend (Note 5)                --                --             77,571             --
   Repurchase of
     convertible
     preferred stock
     (Note 5)                       (2,152)             --               --               --
   Net loss                           --                --               --               --
                              ------------      ------------     ------------     ------------
Balance at June 30, 1999         9,604,698      $     96,000       33,442,210     $     65,000
                              ============      ============     ============     ============

<CAPTION>
                               ADDITIONAL                                               TOTAL
                                PAID-IN                           ACCUMULATED       STOCKHOLDERS'
                                CAPITAL           TREASURY          DEFICIT            EQUITY
                              ------------      ------------      ------------      ------------
<S>                           <C>               <C>               <C>               <C>
   Issuance of common
     stock for oil and
     gas properties
     (Note 1)                 $     65,000      $       --        $       --        $     65,000
   Issuance of common
     stock for cash
     (Note 5)                   23,668,000              --                --          23,674,000
   Issuance of common
     stock upon exercise
     of warrants (Note 5)        6,996,000              --                --           7,000,000
   Issuance of common
     stock pursuant to
     repricing rights
     (Note 5)                       (2,000)             --                --                --
   Issuance of common
     stock on conversion
     of convertible
     preferred stock
     (Note 5)                       (2,000)             --                --                --
   Issuance of common
     stock as stock
     dividend (Note 5)             176,000              --            (176,000)             --
   Repurchase of
     convertible
     preferred stock
     (Note 5)                         --          (2,251,000)             --          (2,251,000)
   Net loss                           --                --         (47,491,000)      (47,491,000)
                              ------------      ------------      ------------      ------------
Balance at June 30, 1999      $ 64,912,000      $ (7,251,000)     $(83,606,000)     $(25,784,000)
                              ============      ============      ============      ============
</TABLE>


See accompanying notes.


                                      F-6
<PAGE>   54

                   Queen Sand Resources, Inc. and Subsidiaries

                      Consolidated Statements of Cash Flows

<TABLE>
<CAPTION>
                                                                                 YEAR ENDED JUNE 30
                                                                 ---------------------------------------------------
                                                                     1999               1998               1997
                                                                 -------------      -------------      -------------
<S>                                                              <C>                <C>                <C>
OPERATING ACTIVITIES
Net loss                                                         $ (47,491,000)     $ (32,754,000)     $  (1,309,000)
Adjustments to reconcile net loss to net cash provided by
   operating activities:
     Extraordinary loss                                              3,549,000               --              171,000
     Depreciation and amortization                                  13,354,000          4,809,000            982,000
     Writedown of oil and gas properties                            35,033,000         28,166,000               --
     Unrealized foreign currency translation gains                     (19,000)           (18,000)          (300,000)
     Issuance of common stock for services                                --              300,000             21,000
     Accretion of debt discount                                           --                 --               72,000
     Changes in operating assets and liabilities:
       Accounts receivable                                             747,000         (4,580,000)          (317,000)
       Other assets                                                    (18,000)           (45,000)            (6,000)
       Accounts payable and accrued liabilities                      4,349,000          5,163,000            949,000
                                                                 -------------      -------------      -------------
Net cash provided by operating activities                            9,504,000          1,041,000            263,000

INVESTING ACTIVITIES
Additions to oil and gas properties                                (11,474,000)      (154,242,000)        (4,180,000)
Proceeds from sales of oil and gas properties                       10,024,000               --                 --
Net additions to other property and equipment                         (161,000)          (100,000)          (125,000)
                                                                 -------------      -------------      -------------
Net cash used in investing activities                               (1,611,000)      (154,342,000)        (4,305,000)

FINANCING ACTIVITIES
Proceeds from revolving credit facilities                           12,300,000        103,000,000            276,000
Proceeds from bridge financing facilities                                 --           60,000,000               --
Repayments of borrowing from bridge financing facilities           (58,860,000)        (1,140,000)              --
Debt issuance costs                                                 (4,665,000)        (4,898,000)              --
Termination of LIBOR swap agreement                                 (3,549,000)              --                 --
Payments on revolving credit facilities                            (96,800,000)       (15,358,000)              --
Proceeds from issuance of 121/2% Senior Notes                      125,000,000            121,000            526,000
Payments on notes payable                                           (1,325,000)        (2,064,000)        (1,408,000)
Collection of stock subscription                                          --                 --              500,000
Proceeds from sale of convertible preferred stock and
   warrants to purchase common stock                                      --            9,544,000          5,000,000
Proceeds from the issuance of common stock                          30,674,000          4,886,000          4,059,000
Repurchase of common and preferred stock                            (2,251,000)              --           (5,143,000)
Payments on capital lease obligation                                   (80,000)           (70,000)           (58,000)
                                                                 -------------      -------------      -------------
Net cash provided by financing activities                              444,000        154,021,000          3,752,000

Net increase (decrease) in cash                                      8,337,000            720,000           (290,000)
Cash at beginning of year                                            1,030,000            310,000            600,000
                                                                 -------------      -------------      -------------
Cash at end of year                                              $   9,367,000      $   1,030,000      $     310,000
                                                                 =============      =============      =============
</TABLE>


See accompanying notes.


                                      F-7
<PAGE>   55

                   Queen Sand Resources, Inc. and Subsidiaries

                   Notes to Consolidated Financial Statements

                                  June 30, 1999


1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

GENERAL

Queen Sand Resources, Inc. (QSRI or the Company) was formed on August 9, 1994,
under the laws of the State of Delaware. At June 30, 1999, EIBOC Investments
Ltd. (EIBOC) held approximately 6,600,000 shares of the Company's common stock,
par value $.0015 (Common Stock), representing approximately 7% of the Company's
outstanding shares of Common Stock on a fully diluted basis. Certain officers of
the Company have beneficial interests in EIBOC (see Note 5). Joint Energy
Development Investments Limited Partnership (JEDI), an affiliate of Enron Corp.
(Enron), holds approximately 28% of the Company's voting capital stock on a
fully diluted basis.

The Company is engaged in one industry segment, the acquisition, exploration,
development, production, and sale of crude oil and natural gas. The Company's
business activities are carried out primarily in Kentucky, Louisiana, New
Mexico, Oklahoma and Texas.

PRINCIPLES OF CONSOLIDATION

The accompanying consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries. All significant intercompany balances
and transactions have been eliminated in consolidation.

PROPERTY AND EQUIPMENT

The Company follows the full cost method of accounting for its oil and gas
activities under which all costs, including direct general and administrative
expenses associated with property acquisition, exploration, and development
activities, are capitalized. Capitalized general and administrative expenses
directly associated with acquisitions, exploration, and development of oil and
gas properties were approximately $931,000, $721,000, and $316,000 for the years
ended June 30, 1999, 1998, and 1997, respectively. Capitalized costs are
amortized by the unit-of-production method using estimates of proved oil and gas
reserves prepared by independent engineers. The costs of unproved properties are
excluded from amortization until the properties are evaluated. Sales of oil and
gas properties are accounted for as adjustments to the capitalized cost center
unless such sales significantly alter the relationship between capitalized costs
and proved reserves of oil and gas attributable to the cost center, in which
case a gain or loss is recognized.


                                      F-8
<PAGE>   56

                   Queen Sand Resources, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)


1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

The Company limits the capitalized costs of oil and gas properties, net of
accumulated amortization, to the estimated future net revenues from proved oil
and gas reserves less estimated future development and production expenditures
discounted at 10%, plus the lower of cost or estimated fair value of unproved
properties, as adjusted for related estimated future tax effects. If capitalized
costs exceed this limit (the full cost ceiling), the excess is charged to
depreciation and amortization expense. During the years ended June 30, 1999 and
1998, the Company recorded full cost ceiling writedowns of $35,033,000 and
$28,166,000, respectively.

Amortization of the capitalized costs of oil and gas properties and limits to
capitalized costs are based on estimates of oil and gas reserves which are
inherently imprecise. Accordingly, it is reasonably possible that such estimates
could differ materially in the near term from amounts currently estimated.

Depreciation of other property and equipment is provided principally by the
straight-line method over the estimated service lives of the related assets.
Equipment under capital lease is recorded at the lower of fair value or the
present value of future minimum lease payments and are depreciated over the
lease term.

Costs incurred to operate, repair, and maintain wells and equipment are charged
to expense as incurred.

The Company's oil and gas activities are conducted jointly with others and,
accordingly, the financial statements reflect only the Company's proportionate
interest in such activities.

The Company does not expect future costs for site restoration, dismantlement and
abandonment, postclosure and other exit costs which may occur in the sale,
disposal, or abandonment of a property to be material.

REVENUE RECOGNITION

The Company uses the sales method of accounting for oil and gas revenues. Under
the sales method, revenues are recognized based on actual volumes of oil and gas
sold to purchasers.


                                      F-9
<PAGE>   57

                   Queen Sand Resources, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)


1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

ENVIRONMENTAL MATTERS

The Company is subject to extensive federal, state, and local environmental laws
and regulations. These laws, which are constantly changing, regulate the
discharge of materials into the environment and may require the Company to
remove or mitigate the environmental effects of the disposal or release of
petroleum or chemical substances at various sites. Environmental expenditures
are expensed or capitalized depending on their future economic benefit.
Expenditures that relate to an existing condition caused by past operations and
that have no future economic benefits are expensed. Liabilities for expenditures
of a noncapital nature are recorded when environmental assessment and/or
remediation is probable, and the costs can be reasonably estimated.

INCOME TAXES

Income taxes are accounted for under the asset and liability method, under which
deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date. The measurement of deferred tax assets
is adjusted by a valuation allowance, if necessary, to recognize the extent to
which based on available evidence, the future tax benefits more likely than not
will be realized.

STATEMENT OF CASH FLOWS

The Company considers all highly liquid investments purchased with an original
maturity of three months or less to be cash equivalents.

During 1999, 1998, and 1997, the Company issued an aggregate of 8,740,
1,337,500, and 1,529,500 shares of Common Stock, respectively, valued at
$65,000, $4,812,000, and $641,000, respectively, in connection with the
acquisitions of certain interests in oil and gas properties. In 1998, in
connection with certain promotional services rendered by an unrelated party, the
Company issued 150,000 shares of Common Stock valued at $300,000. In 1997, in
connection with the acquisitions of oil and gas properties, the Company issued
notes payable to the sellers of the properties which were recorded at
$2,473,000, net of issuance discount of $354,000.


                                      F-10
<PAGE>   58

                   Queen Sand Resources, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)


1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

NET LOSS PER COMMON SHARE

Net loss per common share is presented in accordance with Statement of Financial
Accounting Standards No. 128, Earnings per Share. As the Company incurred net
losses during each of the years ended June 30, 1999, 1998 and 1997, the loss per
common share data is based on the weighted average common shares outstanding.

STOCK OPTIONS

The Company has elected to follow Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees (APB 25) in accounting for its employee
stock options. Under APB 25, if the exercise price of an employee's stock
options equals or exceeds the market price of the underlying stock on the date
of grant and certain other plan conditions are met, no compensation expense is
recognized.

CONCENTRATIONS OF CREDIT RISK

For the year ended June 30, 1999, four oil and gas companies accounted for 30%,
12%, 11%, and 9%, respectively, of the Company's oil and gas sales. For the year
ended June 30, 1998, two oil and gas companies accounted for 17% and 13%,
respectively, of the Company's oil and gas sales. For the year ended June 30,
1997, five oil and gas companies accounted for 32%, 14%, 17%, 10% and 9%,
respectively, of the Company's oil and gas sales. The Company does not believe
that the loss of any of these buyers would have a material effect on the
Company's business or results of operations as it believes it could readily
locate other buyers. The Company's receivables are generally unsecured.

FOREIGN CURRENCY

Foreign currency transactions are translated into U.S. dollars at the rate of
exchange on the date of the transaction. Amounts payable and receivable in
foreign currency are translated at the exchange rate at the balance sheet date.
Unrealized translation gains of $19,000, $18,000, and $300,000 were recognized
during the years ended June 30, 1999, 1998, and 1997, respectively, and are
included in interest and other income in the accompanying consolidated
statements of operations.


                                      F-11
<PAGE>   59

                   Queen Sand Resources, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)


1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

USE OF 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 revenue and expenses during the reporting period.
Because of the use of estimates inherent in the financial reporting process,
actual results could differ from those estimates.

DERIVATIVES

The Company utilizes certain derivative financial instruments to hedge future
oil and gas prices and interest rate risk (see Note 4). Gains and losses arising
from the use of the instruments are deferred until realized. Gains and losses
from hedges of oil and gas prices are reported as oil and gas sales. Gains and
losses from interest rate hedges are reported in interest expense.

In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities, which is required to be adopted in years beginning after
June 15, 2000. The Statement permits early adoption as of the beginning of any
fiscal quarter after its issuance. The Company expects to adopt the new
Statement effective July 1, 2000. The Statement will require the Company to
recognize all derivatives on the balance sheet at fair value. Derivatives that
are not hedges must be adjusted to fair value through income. If the derivative
is a hedge, depending on the nature of the hedge, changes in the fair value of
derivatives will either be offset against the change in fair value of the hedged
assets, liabilities, or firm commitments through earnings or recognized in other
comprehensive income until the hedged item is recognized in earnings. The
ineffective portion of a derivative's change in fair value will be immediately
recognized in earnings. The Company has not yet determined what the effect of
Statement 133 will be on the earnings and financial position of the Company.

COMPREHENSIVE INCOME

As of July 1, 1998, the Company adopted Financial Accounting Standards Board
Statement No. 130, Reporting Comprehensive Income. Comprehensive income is
defined as the change in equity of a business enterprise during a period from
transactions and other events and circumstances from non-owner sources.
Statement 130 establishes rules for the reporting and display of comprehensive
income and its components. For 1998, 1997 and 1996, there were no differences
between net earnings and total comprehensive income.

2. ACQUISITIONS

The consolidated financial statements include the results of operations of the
acquired interests in oil and gas properties from their respective acquisition
dates.


                                      F-12
<PAGE>   60

                   Queen Sand Resources, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)


2. ACQUISITIONS (CONTINUED)

On November 6, 1996, the Company acquired eight gross productive wells (three
net productive wells), all located in various counties in Texas (the Frymire
Purchase). In consideration for these properties the Company paid approximately
$650,000 in cash, issued notes for $427,000, and issued 100,000 shares of Common
Stock valued at $18,000.

On December 16, 1996, the Company acquired 15 gross productive wells (15 net
productive wells), all located in New Mexico (the Trigg Federal Purchase). In
consideration, the Company paid $100,000 in cash and issued 92,000 shares of
Common Stock valued at approximately $16,000.

On February 5, 1997, the Company acquired 60 gross productive wells (48.4 net
productive wells) and two developmental properties located in Mississippi,
Louisiana, and Texas (the Core Properties). The adjusted purchase price
consisted of cash of approximately $1,700,000, four notes payable totaling
$2,400,000, and 659,000 shares of Common Stock valued at approximately $330,000.
On March 13, 1997, the Company acquired one gross productive well (0.3375 net
productive well) located in Louisiana (the Intercoastal Property). The purchase
price consisted of cash of $562,500 and 578,500 shares of Common Stock valued at
approximately $289,000. The cash portion of these acquisitions was funded
through sales of 1,060,000 shares of Common Stock pursuant to Regulation S,
resulting in net proceeds to the Company of $2,385,000 (the Equity Private
Placements).

The following unaudited pro forma summary of the Company's consolidated results
of operations for the year ended June 30, 1997, was prepared as if the
acquisitions of the Core Properties, the Intercoastal Property, and the Equity
Private Placements had occurred on July 1, 1996. The historical results of the
Frymire Purchase and the Trigg Federal Purchase were not significant. The
unaudited pro forma data is based on numerous assumptions and is not necessarily
indicative of future operations or of results which would actually have occurred
if the acquisitions and the Equity Private Placements had been made on July 1,
1996.

<TABLE>
<CAPTION>
                                                               1997
                                                           -----------
           <S>                                             <C>
           Revenues                                        $ 6,318,000
                                                           ===========
           Net loss                                        $  (506,000)
                                                           ===========
           Loss per common share                           $      (.02)
                                                           ===========
</TABLE>


                                      F-13
<PAGE>   61

                   Queen Sand Resources, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)


2. ACQUISITIONS (CONTINUED)

On August 1, 1997, the Company acquired 77 productive wells (12.35 net
productive wells) located in New Mexico, Oklahoma, and Texas (the Collins and
Ware Properties). In consideration for these properties, the Company paid
$6,000,000 in cash and issued 1,000,000 shares of Common Stock valued at
$3,125,000. The cash portion of these acquisitions was funded with borrowings
under the Company's credit facility.

On March 9, 1998, the Company purchased certain operated natural gas properties
in western Kentucky for net cash consideration of $450,000 and 337,500 shares of
the Company's Common Stock valued at approximately $1,687,000 (the NASGAS
Property Acquisition). The acquired properties are comprised of interests in 21
gross wells (12.6 net) and 61,421 gross acres (36,858 net) (the NASGAS
Properties).

On April 20, 1998, the Company acquired certain non-operated, net profits
interests (NPIs) and royalty interests (RIs; together with the NPIs, the Morgan
Properties) for net cash consideration of approximately $137.9 million from
pension funds managed by J.P. Morgan Investments (the Morgan Property
Acquisition). The Morgan Property Acquisition was financed with borrowings under
the Credit Agreement and two subordinated bridge credit facilities (see Note 3).

The Company's interest in the Morgan Properties primarily takes the form of
nonoperated net profits overriding royalty interests, whereby the Company is
entitled to a percentage of the net profits from the operations of the
properties. The oil and gas properties burdened by the Morgan Properties are
primarily located in East Texas, South Texas, and the mid-continent region of
the United States.

Presented below are the oil and gas sales and associated production expenses
associated with the Morgan Properties, which are presented in the accompanying
consolidated statements of operations for the years ended June 30, 1999 and
1998, respectively, as net profits and royalty interests revenues:

<TABLE>
<CAPTION>
                                                   YEAR ENDED JUNE 30
                                             -----------------------------
                                                 1999             1998
                                             ------------     ------------
<S>                                          <C>              <C>
Oil and gas sales                            $ 29,071,000     $  6,219,000
Production expenses                             5,931,000        1,787,000
                                             ------------     ------------
Net profits and royalty interests            $ 23,140,000     $  4,432,000
                                             ============     ============
</TABLE>


                                      F-14
<PAGE>   62

                   Queen Sand Resources, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)


2. ACQUISITIONS (CONTINUED)

The following unaudited pro forma summary of the Company's consolidated results
of operations for the years ended June 30, 1998 and 1997 was prepared as if the
acquisitions of the Collins and Ware Properties, the NASGAS Properties and the
Morgan Properties, including related borrowings, had occurred on July 1, 1996.
The unaudited pro forma data is based on numerous assumptions and is not
necessarily indicative of future operations or of results which would have
actually occurred if the acquisitions and related borrowings had been made on
July 1, 1996.

<TABLE>
<CAPTION>
                                                   YEAR ENDED JUNE 30
                                             -------------------------------
                                                  1998              1997
                                             -------------     -------------
<S>                                          <C>               <C>
Revenues                                     $  34,635,000     $  42,052,000
                                             =============     =============
Net income (loss)                            $ (31,528,000)    $   2,316,000
                                             =============     =============
Income (loss) per common share:
     Basic                                   $       (1.38)    $        0.08
                                             =============     =============
     Diluted                                           N/A     $        0.08
                                             =============     =============
</TABLE>

3. CURRENT AND LONG-TERM DEBT

A summary of current and long-term debt follows:

<TABLE>
<CAPTION>
                                                                                  JUNE 30
                                                                      --------------------------------
                                                                          1999                1998
                                                                      -------------      -------------
<S>                                                                   <C>                <C>
12 1/2% Senior Notes, due July 2008                                   $ 125,000,000      $        --
12% unsecured DEM bonds, due July 2000                                      852,000          2,196,000
Bank of Montreal Revolving Credit Agreement                               8,000,000         92,500,000
Variable Rate Senior Third Secured Equity Bridge Note
  Purchase Agreement                                                           --           28,860,000
Variable Rate Senior Second Secured Note Purchase
  Agreement                                                                    --           30,000,000
Capital lease obligations                                                    42,000            149,000
                                                                      -------------      -------------
                                                                        133,894,000        153,705,000
Less current portion of debt and capitalized lease obligation                42,000             85,000
                                                                      -------------      -------------
Total long-term obligations                                           $ 133,852,000      $ 153,620,000
                                                                      =============      =============
</TABLE>

Effective August 1, 1997, the Company entered into a credit agreement with Bank
of Montreal. This agreement provided for an initial borrowing base of
$17,000,000 to be redetermined from time to time by Bank of Montreal based on
engineering reports of oil and gas reserves. The Company was required to pay a
commitment fee annually of .35% of the unused portion of the borrowing base.


                                      F-15
<PAGE>   63

                   Queen Sand Resources, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)


3. CURRENT AND LONG-TERM DEBT (CONTINUED)

On April 17, 1998, the Company entered into an amended and restated credit
agreement with Bank of Montreal and certain affiliates of JEDI. The amended and
restated agreement (the Credit Agreement) provides for borrowings up to
$125,000,000 (subject to borrowing base limitations). As of June 30, 1999 and
1998, $8,000,000 and $92,500,000, respectively, were outstanding under the
Credit Agreement. As of June 30, 1999, no additional borrowing capability was
available to the Company under the terms of the Credit Agreement. The loan under
the Credit Agreement matures on October 1, 2000.

Indebtedness incurred under the Credit Agreement generally bears interest under
various interest rate pricing options based upon a Federal Funds rate (plus
 .5%), Prime Rate or LIBOR rate options. LIBOR rate loans bear an applicable
margin over the LIBOR rate of (i) 2.25%, if greater than 90% of the available
Borrowing Base has been drawn, (ii) 2%, if greater than 75% and not more than
90% of the available Borrowing Base has been drawn, (iii) 1.5%, if greater than
40% but not more than 75% of the available Borrowing Base has been drawn, and
(iv) 1%, if not more than 40% of the available Borrowing Base has been drawn. On
May 14, 1999 the Credit Agreement was amended to reflect an interest rate
pricing of Base Rate plus 2.00%. The interest rate at June 30, 1999 and 1998 was
9.75% and 8.50%, respectively.

The loan under the Credit Agreement is secured by a first lien on the oil and
gas properties of the Company. Pursuant to the Credit Agreement, the Company is
subject to certain affirmative and negative financial and operating covenants
that are usual and customary for transactions of this nature. On September 30,
1997, December 31, 1997, September 30, 1998, December 31, 1998 and March 31,
1999 the Company was not in compliance with its interest coverage ratio
covenant. Bank of Montreal waived these covenant violations solely with respect
to these specific defaults. At June 30, 1999, the Company was in default of its
tangible net worth covenant which required the Company to maintain an aggregate
tangible net worth of not less than $40.0 million. At June 30, 1999, the
Company's aggregate tangible net worth, as calculated under the terms of the
Credit Agreement, was $37.4 million. The Credit Agreement was amended on
October 13, 1999 to reset the minimum aggregate tangible net worth covenant to
$33.0 million. The Company believes, but cannot assure, that it will be able to
comply with all restrictive covenants in the future or obtain waivers from the
bank with respect to noncompliance.


                                      F-16
<PAGE>   64

                   Queen Sand Resources, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)


3. CURRENT AND LONG-TERM DEBT (CONTINUED)

Also in April 1998, in connection with the acquisition of the Morgan Properties,
the company entered into a Variable Rate Senior Second Secured Note Purchase
Agreement (the Debt Bridge Facility) in the amount of $30,000,000 and a Variable
Rate Senior Third Secured Equity Bridge Note Purchase Agreement (the Equity
Bridge Facility and collectively the Bridge Facilities), also in the amount of
$30,000,000, with Bank of Montreal, Enron, and an affiliate of Enron. As of June
30, 1998, an aggregate of $58,860,000 was outstanding under the Bridge
Facilities.

The Debt Bridge Facility bore interest at a rate of LIBOR plus 4% per annum (10%
at June 30, 1998). The Equity Bridge Facility bore interest at a rate of LIBOR
plus 6% per annum (12% at June 30, 1998).

On July 8, 1998, the Bridge Facilities were retired and approximately
$82,200,000 of borrowings under the Credit Agreement were repaid, and the
borrowing base of the Credit Agreement was revised to $25,000,000. The Credit
Agreement was amended during the year ended June 30, 1999 to provide for a
borrowing base of $8,000,000 as of June 30, 1999.

On July 8, 1998, the Company completed a private placement of $125,000,000
principal amount of 12 1/2% Senior Notes (the Notes) due July 1, 2008. Interest
on the Notes is payable semiannually on January 1 and July 1 of each year,
commencing January 1, 1999, at the rate of 12 1/2% per annum. The Notes are
senior unsecured obligations of the Company and rank pari passu with any
existing and future unsubordinated indebtedness of the Company. The Notes rank
senior to all unsecured subordinated indebtedness of the Company. The Notes
contain normal covenants that limit the Company's ability to incur additional
debt, pay dividends, and sell assets of the Company. Substantially all of the
proceeds from issuance of the Notes were used to retire the Bridge Facilities
and repay borrowings under the Credit Agreement.

Effective December 29, 1997, the Company established the ECT Revolving Credit
Agreement with ECT, an affiliate of Enron, to fund capital costs incurred with
future development projects and to fund future acquisitions. The ECT Revolving
Credit Agreement is subordinate to the Credit Agreement. The ECT Revolving
Credit Agreement provides for borrowing up to $10.0 million, on a revolving
basis and subject to borrowing base limitations, which has initially been set at
an amount equal to 40% of the borrowing base established from time to time under
the Credit Agreement. This facility is designed to provide bridge financing for
development projects and acquisitions to be completed on relatively short notice
or until the affected assets are eligible to be


                                      F-17
<PAGE>   65

                   Queen Sand Resources, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)


3. CURRENT AND LONG-TERM DEBT (CONTINUED)

included in the borrowing base for the Credit Agreement or financed with
longer-term indebtedness or equity capital; provided, that the availability for
acquisitions under the facility is limited to the lesser of $5.0 million or 50%
of the borrowing base as in effect from time to time. No indebtedness was
outstanding under this facility as of June 30, 1999 and 1998. Borrowings in
excess of certain amounts under the ECT Revolving Credit Agreement will reduce
the available borrowing base under the Credit Agreement. The loan is secured by
a second priority lien and security interest (behind the first lien position of
the Credit Agreement) in substantially all of the oil and gas properties of the
Company.

The ECT Revolving Credit Agreement is subject to payment of interest at a
fluctuating rate per annum equal to (i) the rate of 1% above the then highest
rate of interest being paid on any portion of the indebtedness owed under the
Credit Agreement or (ii) 15%, under certain circumstances described in the
agreement.

The maturity date for the ECT Revolving Credit Agreement is the earlier of
December 30, 2002 or the date that is 60 days after the Company receives written
notice that Enron and its affiliates beneficially own in the aggregate less than
10% of the capital through the maturity date. From March 31, 1998 the Company
will pay interest on the outstanding loans at quarterly intervals, on the last
business day of every March, June, September, and December. In addition, the ECT
Revolving Credit Agreement provides for certain voluntary prepayments and
certain mandatory prepayments of amounts borrowed under the facility.

The ECT Revolving Credit Agreement also provides that, commencing January 1999,
during certain periods any indebtedness of the Company under the agreement may
be exchanged for shares of the Company's Common Stock. The exchange ratio is
based on a formula that is a function of the market price of the Common Stock at
the time of exchange.

The Company is subject to various covenants under the ECT Revolving Credit
Agreement, which covenants are substantially similar to the covenants described
above with respect to the Credit Agreement. In addition to the covenants, the
ECT Revolving Credit Agreement contains representations, warranties, covenants,
and default provisions customary for a facility of this type.


                                      F-18
<PAGE>   66

                   Queen Sand Resources, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)


3. CURRENT AND LONG-TERM DEBT (CONTINUED)

The Company paid ECT a fee of $200,000 during 1998 in connection with the
arrangement of the ECT Revolving Credit Agreement. In addition, commencing March
31, 1998, and on each payment date thereafter, the Company is obligated to pay
ECT, for the account of each lender under the ECT Revolving Credit Agreement, a
fee of 3/8% per annum on the daily average of the unadvanced portion of the
facility for the period since January 12, 1998 or the previous payment date to
such payment date. Payment of this fee has been waived by ECT indefinitely since
April 12, 1998.

Beginning July 1995, the Company initiated private debt offerings whereby it may
issue up to a maximum of 5,000,000 Deutschmark (DEM) denominated 12% notes due
on July 15, 2000, of which DEM 3,950,000 was outstanding at June 30, 1998. On
July 15, 1998, the Company redeemed notes totaling DEM 2,350,000 for
approximately $1,300,000. At June 30, 1999, DEM 1,600,000 was outstanding. The
notes may be redeemed at the option of the Company, in whole or in part, at any
time prior to maturity date on or after December 15, 1997, at 101% of the
principal amount, plus accrued interest to the redemption date. The notes are
unsecured, general obligations of the Company, subordinated in right of payment
to any senior and secured indebtedness of the Company including all other
existing indebtedness. The note agreement contains covenants which place
limitations on dividends and liens.

In February 1997, in connection with the acquisition of certain oil and gas
properties, the Company issued four notes totaling $2,400,000 (the Acquisition
Notes) secured by a first lien on the acquired properties. Two of these notes,
totaling $400,000, bore no interest and were retired prior to June 30, 1997. The
remaining two notes, totaling $2,000,000, were originally payable no later than
February 4, 2000, and bore no interest for the first two years and 9% for the
final year, payable in Common Stock of the Company. The terms of the remaining
two notes were renegotiated, with the seller surrendering the first lien on the
Core Properties in exchange for a note requiring a payment of $2,000,000 on
January 31, 1998. As a result of the modification of the debt terms, in 1997 the
Company recognized an extraordinary loss on modification of $171,000, the
difference between the carrying value of the original notes (including accreted
discount of approximately $72,000) and the present value of the new note. This
note was retired during 1998.

Although the Company believes that its cash flows and available sources of
financing will be sufficient to satisfy the interest payments on its debt at
currently prevailing interest rates and oil and gas prices, the Company's level
of debt may adversely affect the Company's ability: (i) to obtain additional
financing for working capital, capital expenditures or other purposes, should it
need to do so; or (ii) to acquire additional oil


                                      F-19
<PAGE>   67

                   Queen Sand Resources, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)


3. CURRENT AND LONG-TERM DEBT (CONTINUED)

and gas properties or to make acquisitions utilizing new borrowings. There can
be no assurances that the Company will be able to obtain additional financing,
if required, or that such financing, if obtained, will be on terms favorable to
the Company.

During 1999, 1998, and 1997, the Company made cash payments of interest totaling
approximately $9,105,000; $3,946,000; and $765,000, respectively.

4. HEDGING ACTIVITIES

The Company had agreements with an affiliate of JEDI to hedge 50,000 MMBtu of
natural gas production and 10,000 barrels of oil production monthly. The
agreements, effective September 1, 1997, and terminating August 31, 1998, called
for a natural gas and oil ceiling and floor price of $2.66 and $1.90 per MMBtu
and $20.40 and $18.00 per barrel, respectively. If the average market price of
oil and gas per month, as defined in the agreements, exceeds the ceiling price,
the Company must pay the counterparty an amount equal to one-half the amount of
the hedged quantities multiplied by the difference between the ceiling price and
the market price. If the average market price, as defined, falls below the floor
price, the counterparty will pay the Company an amount equal to the amount of
the hedged quantities multiplied by the difference in the floor price and the
market price. During the years ended June 30, 1999 and 1998, the Company
recognized net hedging gains of approximately $85,000 and $120,000,
respectively, relating to these agreements, which are included in oil and gas
sales.

The Company has implemented a comprehensive hedging strategy for its natural gas
production over the next few years. The table below sets out volumes of natural
gas hedged with a floor price of $1.90 per MMBtu with Enron, an affiliate of
JEDI, which received a fee of $478,000 during the year ended June 30, 1998 for
entering into this agreement. The volumes presented in this table are divided
equally over the months during the period:


                                      F-20
<PAGE>   68

                   Queen Sand Resources, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)


4. HEDGING ACTIVITIES (CONTINUED)

<TABLE>
<CAPTION>
          Period Beginning                           Period Ending      Volume (MMBtu)
          --------------------------------------   -----------------    --------------
          <S>                                      <C>                  <C>
          May 1, 1998...........................   December 31, 1998        885,000
          January 1, 1999.......................   December 31, 1999      1,080,000
          January 1, 2000.......................   December 31, 2000        880,000
          January 1, 2001.......................   December 31, 2001        740,000
          January 1, 2002.......................   December 31, 2002        640,000
          January 1, 2003.......................   December 31, 2003        560,000
</TABLE>

The table below sets out volume of natural gas hedged with a swap at $2.40 per
MMBtu with Enron. The volumes presented in this table are divided equally over
the months during the period:

<TABLE>
<CAPTION>
          Period Beginning                           Period Ending      Volume (MMBtu)
          --------------------------------------   -----------------    --------------
          <S>                                      <C>                  <C>
          May 1, 1998...........................   December 31, 1998      2,210,000
          January 1, 1999.......................   December 31, 1999      2,710,000
          January 1, 2000.......................   December 31, 2000      2,200,000
          January 1, 2001.......................   December 31, 2001      1,850,000
          January 1, 2002.......................   December 31, 2002      1,600,000
          January 1, 2003.......................   December 31, 2003      1,400,000
</TABLE>

Effective May 1, 1998 through December 31, 2003, the Company has a contract
involving the hedging of a portion of its future natural gas production
involving floor and ceiling prices as set out in the table below. The volumes
presented in this table are divided equally over the months during the period.


                                      F-21
<PAGE>   69

                   Queen Sand Resources, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)


4. HEDGING ACTIVITIES (CONTINUED)

<TABLE>
<CAPTION>
                                                                  Volume       Floor     Ceiling
Period Beginning                            Period Ending         (MMBtu)      Price      Price
-------------------------------------     ------------------     ---------     -----     -------
<S>                                       <C>                    <C>           <C>       <C>
May 1, 1998..........................     December 31, 1998      3,540,000     $2.00      $2.70
January 1, 1999......................     December 31, 1999      4,330,000      2.00       2.70
January 1, 2000......................     December 31, 2000      3,520,000      2.00       2.70
January 1, 2001......................     April 30, 2001           990,000      2.00       2.70
May 1, 2001..........................     December 31, 2001      1,980,000      2.00       2.80
January 1, 2002......................     April 30, 2002           850,000      2.00       2.80
May 1, 2002..........................     December 31, 2002      1,700,000      2.00       2.90
January 1, 2003......................     December 31, 2003      2,250,000      2.00       2.90
</TABLE>

During the years ended June 30, 1999 and 1998, the Company recognized hedging
gains of approximately $1,690,000 and $122,000, respectively, relating to these
agreements, which are included in net profits and royalty interests revenues.

During the year ended June 30, 1999, the Company entered into a swap agreement
with an affiliate of JEDI to hedge 12,000 barrels of oil production monthly at
$17.00 per barrel, for the months of October, November and December 1998. The
Company recognized hedging gains of approximately $147,000 relating to this
agreement which are included in net profits and royalty interests revenues.

During the year ended June 30, 1999, the Company entered into a swap agreement
with an affiliate of JEDI to hedge 10,000 barrels of oil production monthly at
$13.50 per barrel for the six months March through August, 1999, and for 5,000
barrels of oil production monthly at $14.35 per barrel, and for 5,000 barrels of
oil production monthly at $14.82 per barrel for the six months April through
September 1999. The Company recognized hedging losses of approximately $231,000
relating to this agreement which are included in net profits and royalty
interests revenues.

The Company entered into a forward LIBOR interest rate swap effective for the
period June 30, 1998 through June 29, 2009 at a rate of 6.30% on $125.0 million,
which could be unwound at any time at the option of the Company. On July 9,
1998,as a result of the retirement of the Bridge Facilities and borrowings under
the Credit Agreement, the Company terminated the agreement at a cost of
$3,549,000. The cost of termination has been reflected as an extraordinary loss
in the accompanying consolidated statement of operations for the year ended June
30, 1999.


                                      F-22
<PAGE>   70

                   Queen Sand Resources, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)


5. STOCKHOLDERS' EQUITY

GENERAL

On November 12, 1996, the Company entered into an agreement to sell 100,000
shares of Common Stock to an unrelated party for $2.50 per share.

During 1997, the Company's Certificate of Incorporation was amended to (i)
authorize the issuance of 50,000,000 shares of preferred stock of the Company,
par value $.01 per share (the Preferred Stock), of which 9,600,000 shares have
been designated as Series A Preferred Stock, 9,600,000 shares have been
designated as Series B Preferred Stock, and (ii) increase the number of
authorized shares of Common stock from 40,000,000 shares to 100,000,000 shares.
During 1998, 10,400 shares of Preferred Stock were designated and issued as
Series C Preferred Stock.

Any authorized but unissued or unreserved Common Stock and undesignated
Preferred Stock is available for issuance at any time, on such terms and for
such purposes as the Board of Directors may deem advisable in the future without
further action by stockholders of the Company, except as may be required by law
or the Series A Certificate of Designation. The Board of Directors of the
Company has the authority to fix the rights, powers, designations, and
preferences of the undesignated Preferred Stock and to provide for one or more
series of undesignated Preferred Stock. The authority will include, but not be
limited to, determination of the number of shares to be included in the series;
dividend rates and rights; voting rights, if any; conversion privileges and
terms; redemption conditions; redemption values; sinking funds; and rights upon
involuntary or voluntary liquidation.

CAPITAL STOCK PURCHASE AGREEMENTS

In March 1997, the Company entered into a Securities Purchase Agreement (the
JEDI Purchase Agreement) with Joint Energy Development Investments Limited
Partnership (JEDI), an affiliate of Enron Finance Corp. (EFC), and a Securities
Purchase Agreement (the Forseti Purchase Agreement) with Forseti Investments
Ltd. (Forseti).

Pursuant to the JEDI Purchase Agreement, in May 1997, JEDI acquired 9,600,000
shares of Series A Participating Convertible Preferred Stock, par value $0.01
per share, of the Company (the Series A Preferred Stock), certain warrants to
purchase Common Stock and nondilution rights as in regard to future stock
issuances. The aggregate consideration received by the Company consisted of
$5,000,000 ($0.521 per share).


                                      F-23
<PAGE>   71

                   Queen Sand Resources, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)


5. STOCKHOLDERS' EQUITY (CONTINUED)

The JEDI nondilution rights resulted in JEDI receiving warrants, with a one year
term, in connection with certain Company stock issuances prior to December 31,
1998. The exercise price of such warrants equals the price per share of the
issuances.

In connection with the issuance of the Series A Preferred Stock, the Company
granted JEDI certain maintenance rights and certain demand and piggyback
registration rights with respect to the shares of Common Stock issuable upon
conversion of the Series A Preferred Stock and the shares of Common Stock
issuable upon exercise of the warrants.

Pursuant to the terms of the Series A Preferred Stock, JEDI may designate a
number of directors to the Company's Board of Directors, such that the
percentage of the number of directors that JEDI may designate approximates the
percentage voting power JEDI has with respect to the Company's Common Stock. In
addition, upon certain events of default (as defined in the Series A Certificate
of Designation), JEDI will have the right to elect a majority of the directors
of the Company and an option to sell the Series A Preferred Stock to the
Company.

Pursuant to the Forseti Purchase Agreement, in May 1997, the Company repurchased
9,600,000 shares of Common Stock owned by Forseti in exchange for (i) $5,000,000
($0.521 per share) cash, (ii) the issuance by the Company of Class A Common
Stock Purchase Warrants to purchase 1,000,000 shares of Common Stock at an
initial exercise price of $2.50 per share (the Class A Warrants) and Class B
Common Stock Purchase Warrants to purchase 2,000,000 shares of Common Stock at
an initial exercise price of $2.50 per share (the Class B Warrants, and together
with the Class A Warrants, the Forseti Warrants), and (iii) certain contingent
payments. Forseti had the option of either selling or exercising the Forseti
Warrants or receiving the contingent payments. During the year ended June 30,
1998, Forseti elected to sell the warrants to a third party and thus lost the
rights to receive any contingent payments.

The JEDI Purchase Agreement contains certain positive and negative covenants.
The Company was in compliance with all of the applicable covenants at June 30,
1999 and 1998.

Pursuant to the JEDI Purchase Agreement, JEDI, EIBOC, and certain officers of
the Company (Management Stockholders) entered into a Stockholders Agreement
whereby JEDI, EIBOC, and the Management Stockholders agreed to certain
restrictions on the transfer of shares of Common Stock held by EIBOC and the
transfer of shares of Common Stock or securities convertible, exercisable, or
exchangeable for shares of



                                      F-24
<PAGE>   72

                   Queen Sand Resources, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)


5. STOCKHOLDERS' EQUITY (CONTINUED)

Common Stock held by JEDI. The Stockholders Agreement will terminate on the
earlier of (i) the fifth anniversary of the date of the Stockholders Agreement
or (ii) the date on which JEDI and its affiliates beneficially own in the
aggregate less than 10% of the voting power of the Company's capital stock.

SERIES A PREFERRED STOCK

The holders of shares of Series A Preferred Stock are generally entitled to vote
(on an as-converted basis) as a single class with the holders of the Common
Stock, together with all other classes and series of stock of the Company that
are entitled to vote as a single class with the Common Stock, on all matters
coming before the Company's stockholders.

For so long as at least 960,000 shares of Series A Preferred Stock are
outstanding, the following matters require the approval of the holders of shares
of Series A Preferred Stock, voting together as a separate class:

  (i)    the amendment of any provision of the Company's Certificate of
         Incorporation or the bylaws;

 (ii)    the creation, authorization, or issuance of, or the increase in the
         authorized amount of, any class or series of shares ranking on a parity
         with or prior to the Series A Preferred Stock either as to dividends or
         upon liquidation, dissolution, or winding up;

(iii)    the merger or consolidation of the Company with or into any other
         corporation or other entity or the sale of all or substantially all of
         the Company's assets; or

 (iv)    the reorganization, recapitalization, or restructuring or similar
         transaction that requires the approval of the stockholders of the
         Company.

The holders of shares of Series A Preferred Stock have the right, acting
separately as a class, to elect a number of members to the Company's Board of
Directors. The number shall be a number such that the quotient obtained by
dividing such number by the maximum authorized number of directors is as close
as possible to being equal to the percentage of the outstanding voting power of
the Company entitled to vote generally in the election of directors represented
by the outstanding shares of Series A Preferred Stock at the relevant time.


                                      F-25
<PAGE>   73

                   Queen Sand Resources, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)


5. STOCKHOLDERS' EQUITY (CONTINUED)

A holder of shares of Series A Preferred Stock has the right, at the holder's
option, to convert all or a portion of its shares into shares of Common Stock at
any time at an initial rate of one share of Series A Preferred Stock for one
share of Common Stock.

The Series A Certificate of Designation provides for customary adjustments to
the number of shares issuable upon conversion in the event of certain dividends
and distributions to holders of Common Stock, certain reclassifications of the
Common Stock, stock splits, and combinations and mergers and similar
transactions.

The holders of the shares of Series A Preferred Stock are entitled to receive
dividends (other than a dividend or distribution paid in shares of, or warrants,
rights, or options exercisable for or convertible into or exchangeable for,
Common Stock) when and if declared by the Board of Directors on the Common Stock
in an amount equal to the amount each such holder would have received if such
holder's shares of Series A Preferred Stock had been converted into Common
Stock. The holders of Series A Preferred Stock will also have the right to
certain dividends upon and during the continuance of an Event of Default.

Upon the liquidation, dissolution, or winding up of the Company, the holders of
the shares of Series A Preferred Stock, before any distribution to the holders
of Common Stock, are entitled to receive an amount per share equal to $.521 plus
all accrued and unpaid dividends thereon (Liquidation Preference). The holders
of the shares of Series A Preferred Stock will not be entitled to participate
further in the distribution of the assets of the Company.

The Series A Certificate of Designation provides that an Event of Default will
be deemed to have occurred if the Company fails to comply with any of its
covenants in the JEDI Purchase Agreement, provided that the Company will have a
30-day cure period with respect to the non-compliance with certain covenants.

Upon the occurrence but only during the continuance of an Event of Default, the
holders of Series A Preferred Stock are entitled to receive, in addition to
other dividends payable to holders of Series A Preferred Stock, when and if
declared by the Board of Directors, cumulative preferential cash dividends
accruing from the date of the Event of Default in an amount per share per annum
equal to 6% of the Liquidation Preference in effect at the time of accrual of
such dividends, payable quarterly in arrears on or before the 15th day after the
last day of each calendar quarter during which such dividends are payable.
Unless full cumulative dividends accrued on shares of Series A Preferred Stock
have been


                                      F-26
<PAGE>   74

                   Queen Sand Resources, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)


5. STOCKHOLDERS' EQUITY (CONTINUED)

or contemporaneously are declared and paid, no dividend may be declared or paid
or set aside for payment on the Common Stock or any other junior securities
(other than a dividend or distribution paid in shares of, or warrants, rights,
or options exercisable for or convertible into or exchangeable for, Common Stock
or any other junior securities), nor shall any Common Stock nor any other junior
securities be redeemed, purchased, or otherwise acquired for any consideration,
nor may any monies be paid to or made available for a sinking fund for the
redemption of any shares of any such securities.

Upon the occurrence and during the continuance of an Event of Default resulting
from the failure to comply with certain covenants, the holders of shares of
Series A Preferred Stock have the right, acting separately as a class, to elect
a number of persons to the Board of Directors of the Company that, along with
any members of the Board of Directors who are serving at the time of such
action, will constitute a majority of the Board of Directors.

Upon the occurrence of an Event of Default resulting from the failure to comply
with certain covenants, each holder of shares of Series A Preferred Stock has
the right, by written notice to the Company, to require the Company to
repurchase, out of funds legally available therefor, such holder's shares of
Series A Preferred Stock for an amount in cash equal to the Liquidation
Preference in effect at the time of the Event of Default.

Concurrently with the transfer of any shares of Series A Preferred Stock to any
person (other than a direct or indirect affiliate of JEDI or other entity
managed by Enron Corp. or any of its affiliates), the shares of Series A
Preferred Stock so transferred will automatically convert into a like number of
shares of Series B Preferred Stock.

SERIES B PREFERRED STOCK

The Series B Certificate of Designation authorizes the issuance of up to
9,600,000 shares of Series B Preferred Stock. The terms of the Series B
Preferred Stock are substantially similar to those of the Series A Preferred
Stock, except that the holders of Series B Preferred Stock will not (i) have
class voting rights except as required under Delaware corporate law, (ii) be
entitled to any remedies upon an event of default, or (iii) be entitled to elect
any directors of the Company, voting separately as a class.


                                      F-27
<PAGE>   75

                   Queen Sand Resources, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)


5. STOCKHOLDERS' EQUITY (CONTINUED)

SERIES C PREFERRED STOCK

The holders of shares of Series C Preferred Stock are not entitled to vote with
the holders of the Common Stock except as required by law or as set forth below.
For so long as any shares of Series C Preferred Stock are outstanding, the
following matters will require the approval of the holders of at least
two-thirds of the then outstanding shares of Series C Preferred Stock, voting
together as a separate class:

  (i)    alter or change the rights, preferences or privileges of the Series C
         Preferred Stock or any other capital stock of the Company so as to
         affect adversely the Series C Preferred Stock;

 (ii)    create any new class or series of capital stock having a preference
         over or ranking pari passu with the Series C Preferred Stock as to
         redemption, the payment of dividends or distribution of assets upon a
         Liquidation Event (as defined in the Series C Certificate of
         Designation) or any other liquidation, dissolution or winding up of the
         Company;

(iii)    increase the authorized number of shares of Preferred Stock of the
         Company;

 (iv)    re-issue any shares of Series C Preferred Stock which have been
         converted in accordance with the terms hereof;

  (v)    issue any Senior Securities (other than the Company's Series B
         Preferred Stock pursuant to the terms of the Company's Series A
         Preferred Stock) or Pari Passu Securities (each, as defined in the
         Series C Certificate of Designation); or

 (vi)    declare, pay or make any provision for any dividend or distribution
         with respect to the Common Stock or any other capital stock of the
         Company ranking junior to the Series C Preferred Stock as to dividends
         or as to the distribution of assets upon liquidation, dissolution or
         winding up of the Company.

The holders of at least two-thirds (2/3) of the then outstanding shares of
Series C Preferred Stock can agree to allow the Company to alter or change the
rights, preferences or privileges of the shares of Series C Preferred Stock.
Holders of the Series C Preferred Stock that did not agree to such alteration or
change shall have the right for a period of thirty (30) days following such
change to convert their Series C Preferred Stock to Common Stock.


                                      F-28
<PAGE>   76


                   Queen Sand Resources, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)


5. STOCKHOLDERS' EQUITY (CONTINUED)

A holder of shares of Series C Preferred Stock has the right, at the holder's
option, to convert all or a portion of its shares into shares of Common Stock at
any time. The number of shares of Common Stock into which a share of Series C
Preferred Stock may be converted will be determined as of the conversion date
according to a formula set forth in the Series C Certificate of Designation.
Generally, the conversion rate is equal to the aggregate stated value of the
shares to be converted divided by a floating conversion price that may not
exceed $7.35 per share. On December 24, 2001, all shares of Series C Preferred
Stock that are then outstanding shall be automatically converted into shares of
Common Stock.

The Series C Certificate of Designation provides for customary adjustments to
the number of shares issuable upon conversion in the event of certain dividends
and distributions to holders of Common Stock, certain reclassifications of the
Common Stock, stock splits, combinations and mergers, and similar transactions
and certain changes of control.

The holders of the shares of Series C Preferred Stock are entitled to receive
cumulative dividends, when and if declared by the Board of Directors, subject to
the prior payment of any accumulated and unpaid dividends to holders of Senior
Securities, but before payment of dividends to holders of Junior Securities (as
defined in the Series C Certificate of Designation), on each share of Series C
Preferred Stock in an amount equal to the stated value of such share multiplied
by 5%.

Upon the liquidation, dissolution or winding up of the Company, the holders of
the shares of Series C Preferred Stock, before any distribution to the holders
of Junior Securities, and after payments to holders of Senior Securities, will
be entitled to receive an amount equal to the stated value of the Series C
Preferred Stock (subject to ratable adjustment in the event of reclassification
of the Series C Preferred Stock or other similar event) plus any accrued and
unpaid dividends thereon.

The Company has the right to redeem all of the outstanding Series C Preferred
Stock under certain conditions. Holders of Series C Preferred Stock have the
right to tender shares for redemption upon the occurrence of certain events,
which are in the control of management. During fiscal year 1999, the Company
repurchased 2,152 shares of Series C Preferred Stock at a cost of $2,251,000.


                                      F-29
<PAGE>   77

                   Queen Sand Resources, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)


5. STOCKHOLDERS' EQUITY (CONTINUED)

During fiscal year 1999, 3,550 shares of Series C Preferred Stock were converted
into 1,328,639 shares of Common Stock. Additionally, 77,571 shares of Common
Stock, representing accrued but unpaid dividends due to the converting Series C
Preferred Stock holders, were issued upon conversion.

COMMON STOCK

During July 1998, the Company completed the private placement of an aggregate of
3,428,574 shares of the Company's Common Stock at $7 per share (the July Equity
Offerings) which included certain repricing rights (the Repricing Rights) to
acquire additional shares of Common Stock (Repricing Common Shares) and warrants
(the Warrants) to purchase an aggregate of up to 1,085,000 shares of Common
Stock (Warrant Common Shares). Additionally, JEDI exercised warrants to acquire
an aggregate of 980,935 shares of Common Stock at $3.33 per share and
nondilution rights to purchase 693,301 shares of the Company's Common Stock at
$2.50 per share and another entity exercised warrants to acquire an aggregate of
800,000 shares of Common Stock at $2.50 per share (collectively, the Warrant
Exercises).

During November 1998, the Company completed the private placement of an
aggregate of 416,667 shares of the Company's Common Stock at $6 per share (the
November Equity Offerings) which included certain repricing rights (the
Repricing Rights) to acquire additional shares of Common Stock (Repricing Common
Shares) and warrants (the Warrants) to purchase an aggregate of up to 206,340
shares of Common Stock (Warrant Common Shares).

The Repricing Rights allows the purchasers of the Common Shares under the Equity
Offerings to receive Repricing Common Shares based on the following formula:

                (Repricing Price - Market Price) X Common Shares
                --------------------------------
                          Market Price

The Repricing Price is a percentage increase in the purchase price paid for the
Common Shares (up to 128% over the following 8 months). The Repricing Rights can
only be exercised one time and the Company can repurchase the Repricing Rights
under certain conditions. During the year ended June 30, 1999, 1,384,016 shares
of Common Stock were issued upon exercise of Repricing Rights.


                                      F-30
<PAGE>   78

                   Queen Sand Resources, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)


5. STOCKHOLDERS' EQUITY (CONTINUED)

Each holder of Repricing Common Shares or Repricing Rights has the right to
require the Company to repurchase all or a portion of such holder's Repricing
Common Shares or Repricing Rights upon the occurrence of a Major Transaction or
a Triggering Event, both of which are under the control of management of the
Company.

The Warrants are exercisable for three years commencing July 8, 1998 and
November 23, 1998 at an exercise price equal to 110% of the Purchase Price. The
Warrants provide for customary adjustments to the exercise price and number of
shares to be issued in the event of certain dividends and distributions to
holders of Common Stock, stock splits, combinations and mergers. The Warrants
also include customary provisions with respect to, among other things, transfer
of the Warrants, mutilated or lost warrant certificates, and notices to
holder(s) of the Warrants.

WARRANTS

As of June 30, 1999, JEDI held warrants to purchase an aggregate of 2,569,746
shares of Common Stock at prices ranging from $3.54 to $7.44. The warrants held
by JEDI expire at various times from August 19, 1999 through December 22, 1999.
In addition, certain institutional investors hold warrants to purchase an
aggregate of 4,275,138 shares of Common Stock at prices ranging from $1.50 to a
floating rate based on market price at the time of exercise. The warrants held
by the institutional investors expire at various times from September 30, 1999
through December 24, 2001.

RIGHTS

As of June 30, 1999, JEDI held rights to purchase an aggregate of 201,366 shares
of Common Stock at $0.625. These rights expired unexercised during July 1999.

STOCK OPTIONS

Employee stock option activity for the years ended June 30, 1999,1998 and 1997
is as follows:


                                      F-31
<PAGE>   79

                   Queen Sand Resources, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)


5. STOCKHOLDERS' EQUITY (CONTINUED)

<TABLE>
<CAPTION>
                                                                  YEAR ENDED JUNE 30
                                     -----------------------------------------------------------------------------
                                              1999                       1998                         1997
                                     ----------------------      ---------------------       ---------------------
                                                  Weighted-                  Weighted-                   Weighted-
                                                   Average                    Average                     Average
                                                  Exercise                   Exercise                    Exercise
                                     Options       Price         Options      Price          Options       Price
                                     -------     ----------      -------    ----------       -------     ---------
<S>                                  <C>         <C>             <C>        <C>              <C>         <C>
Outstanding at July 1                173,000     $     5.25         --       $     --           --       $     --
Granted                              590,500           7.34      173,000           5.25         --             --
Exercised                               --             --           --             --           --             --
Canceled                                --             --           --             --           --             --
                                     -------                     -------                     -------
Outstanding at June 30               763,500     $     6.87      173,000     $     5.25         --       $     --
                                     =======                     =======                     =======
Exercisable options outstanding
  at June 30                          96,500     $     5.25         --       $     --           --       $     --
                                     =======                     =======                     =======
</TABLE>

The weighted-average grant date fair value of stock options granted during 1999
and 1998 were $6.23 and $3.22, respectively. The grant date fair values were
estimated at the date of grant using the Black-Scholes option pricing model. As
of June 30, 1999, the weighted average remaining contractual life of outstanding
stock options was 8.4 years.

Statement of Financial Accounting Standards No. 123, Accounting for Stock Based
Compensation, (SFAS 123) requires the disclosure of pro forma net income and
earnings per share information computed as if the Company had accounted for its
employee stock options under the fair value method set forth in SFAS 123. The
fair value for these options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted-average
assumptions, respectively: a risk-free interest rate of 6.00% and 5.88% during
1999 and 1998,respectively; a dividend yield of 0%; and a volatility factor of
 .792 and .51 during 1999 and 1998, respectively. In addition, the fair value of
these options was estimated based on an expected weighted average life of 10
years and 7.5 years during 1999 and 1998, respectively.

The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value


                                      F-32
<PAGE>   80


                   Queen Sand Resources, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)


5. STOCKHOLDERS' EQUITY (CONTINUED)

estimate, in management's opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of its employee stock
options.

For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma information follows:

<TABLE>
<CAPTION>
                                                    YEAR ENDED JUNE 30
                                             ---------------------------------
                                                  1999              1998
                                             --------------     --------------
<S>                                          <C>                <C>
Pro forma net loss                           $ (48,917,000)     $ (32,928,000)
                                             =============      =============
Loss per common share                        $       (1.56)     $       (1.45)
                                             =============      =============
</TABLE>

6. FAIR VALUE OF FINANCIAL INSTRUMENTS

The Company defines the fair value of a financial instrument as the amount at
which the instrument could be exchanged in a current transaction between willing
parties. The carrying value of accounts receivable, accounts payable, and
accrued liabilities approximates fair value because of the short maturity of
those instruments. The estimated fair value of the Company's long-term
obligations is estimated based on the current rates offered to the Company for
similar maturities. At June 30, 1999 and 1998, the carrying value of long-term
obligations approximates their fair values.

7. RELATED PARTY TRANSACTIONS

During 1997, the Company was charged a monthly fee by Capital House A Finance
and Investment Corporation (Capital House) (owned by certain officers of the
Company) for general and administrative costs. Such fee covered the services
provided to the Company by certain employees of Capital House and amounted to
$440,000 for the year ended June 30, 1997. The Company also reimbursed Capital
House for certain direct general and administrative costs incurred by Capital
House on behalf of the Company. The Company reimbursed Capital House
approximately $129,000 for such costs for the year ended June 30, 1997. The
Company capitalized $120,000 of the management fees and general and
administrative costs paid to Capital House which were directly associated with
oil and gas property acquisitions, exploration, and development for the year
ended June 30, 1997. The agreement with Capital House was terminated effective
May 31, 1997, at which time the Company purchased all existing assets of Capital
House.


                                      F-33
<PAGE>   81

                   Queen Sand Resources, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)


7. RELATED PARTY TRANSACTIONS (CONTINUED)

The Company has entered into various hedging arrangements with affiliates of
Enron. (see Note 4).

The Company has entered into a revolving credit facility with ECT, an affiliate
of Enron. (see Note 3). During the year ended June 30, 1998, commitment fees of
approximately $200,000 and interest totaling approximately $9,000 was paid to
ECT in connection with this facility.

Enron, through its affiliates, participated in the Bridge Facilities and the
Credit Agreement (see Note 3). During the years ended June 30, 1999 and 1998,
Enron received fees of approximately $0 and $460,000, respectively, and interest
payments of approximately $365,000 and $542,000, respectively, from the Company
relating to its participation in these facilities.

The Company paid Enron approximately $100,000 during both of the years ended
June 30, 1999 and 1998 under the terms of an agreement which allows the Company
to consult, among other things, with Enron's engineering staff.

During the years ended June 30, 1999 and 1998, the Company paid approximately
$38,000 and $26,000, respectively, to a company affiliated with a director of
the Company for operating certain of the Company's properties.

8. INCOME TAXES

The Company's effective tax rate differs from the U.S. statutory rate for each
of the years ended June 30, 1999, 1998, and 1997 due to losses for which no
deferred tax benefit was recognized. The tax effects of the primary temporary
differences giving rise to the deferred federal income tax assets and
liabilities as determined under Statement of Accounting Standards No. 109,
"Accounting for Income Taxes," at June 30, 1999 and 1998, follow:


                                      F-34
<PAGE>   82

                   Queen Sand Resources, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)


8. INCOME TAXES (CONTINUED)

<TABLE>
<CAPTION>
                                                                          1999              1998
                                                                      ------------      ------------
<S>                                                                   <C>               <C>
Deferred income tax assets (liabilities):
   Reverse acquisition costs                                          $     43,000      $     66,000
   Net operating loss carryforwards                                     10,965,000         2,823,000
   Statutory depletion carryforward                                        126,000           126,000
   Oil and gas properties, principally due to differences in
     depreciation and amortization                                      16,902,000         9,219,000
   Other                                                                  (146,000)          (21,000)
                                                                      ------------      ------------
                                                                        27,890,000        12,213,000
Less valuation allowance                                               (27,890,000)      (12,213,000)
                                                                      ------------      ------------
Net deferred income tax asset                                         $       --        $       --
                                                                      ============      ============
</TABLE>

The net changes in the total valuation allowance for the years ended June 30,
1999 and 1998, were increases of $15,677,000 and $11,133,000, respectively. The
Company's net operating loss carryforwards begin expiring in 2010.

9. OIL AND GAS PRODUCING ACTIVITIES

The following tables set forth supplementary disclosures for oil and gas
producing activities in accordance with Statement of Financial Accounting
Standards No. 69.

RESULTS OF OPERATIONS FOR PRODUCING ACTIVITIES

The following sets forth certain information with respect to results of
operations from oil and gas producing activities for the years ended June 30,
1999 1998, and 1997:

<TABLE>
<CAPTION>
                                                        1999              1998              1997
                                                    ------------      ------------      ------------
<S>                                                 <C>               <C>               <C>
Oil and gas sales                                   $  4,591,000      $  6,446,000      $  4,381,000
Net profits and royalty interests revenues            23,140,000         4,432,000              --
Production expenses                                   (3,196,000)       (4,547,000)       (2,507,000)
Depreciation and amortization                        (11,803,000)       (4,736,000)         (915,000)
Writedown of oil and gas properties                  (35,033,000)      (28,166,000)             --
                                                    ------------      ------------      ------------
Results of operations (excludes corporate
   overhead and interest expense)                   $(22,301,000)     $(26,571,000)     $    959,000
                                                    ============      ============      ============
</TABLE>

Depreciation and amortization of oil and gas properties was $.74, $.89 and $.68
per Mcfe produced for the years ended June 30, 1999, 1998, and 1997,
respectively.


                                      F-35
<PAGE>   83

                   Queen Sand Resources, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)


9. OIL AND GAS PRODUCING ACTIVITIES (CONTINUED)

CAPITALIZED COSTS

The following table summarizes capitalized costs relating to oil and gas
producing activities and related amounts of accumulated depreciation and
amortization at June 30, 1999 and 1998:

<TABLE>
<CAPTION>
                                                      1999               1998
                                                  -------------      -------------
<S>                                               <C>                <C>
Oil and gas properties - proved                   $ 178,421,000      $ 176,943,000
Accumulated depreciation and amortization           (81,469,000)       (34,628,000)
                                                  -------------      -------------
Net capitalized costs                             $  96,952,000      $ 142,315,000
                                                  =============      =============
</TABLE>

COSTS INCURRED

The following sets forth certain information with respect to costs incurred,
whether expensed or capitalized, in oil and gas activities for the years ended
June 30, 1999, 1998 and 1997:

<TABLE>
<CAPTION>
                                       1999             1998             1997
                                   ------------     ------------     ------------
<S>                                <C>              <C>              <C>
Property acquisition costs         $    580,000     $153,196,000     $  7,382,000
                                   ============     ============     ============
Development costs                  $ 10,340,000     $  6,031,000     $  1,238,000
                                   ============     ============     ============
</TABLE>

10.  SUPPLEMENTARY OIL AND GAS DATA (UNAUDITED)

RESERVE QUANTITY INFORMATION

The following table presents the Company's estimate of its proved oil and gas
reserves, all of which are located in the United States. The Company emphasizes
that reserve estimates are inherently imprecise and that estimates of new
discoveries are more imprecise than those of producing oil and gas properties.
Accordingly, the estimates are expected to change as future information becomes
available. The estimates have been prepared by independent petroleum reservoir
engineers.


                                      F-36
<PAGE>   84

                   Queen Sand Resources, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)


10.  SUPPLEMENTARY OIL AND GAS DATA (UNAUDITED) (CONTINUED)

<TABLE>
<CAPTION>
                                                             OIL (Bbls)         GAS (Mcf)
                                                            ------------      ------------
        <S>                                                 <C>               <C>
        Proved reserves:
           Balance at June 30, 1996                            6,932,000        12,984,000
           Purchases of minerals in place                        916,000         7,730,000
           Revisions of previous estimates and other            (988,000)          805,000
           Production                                           (151,000)         (546,000)
                                                            ------------      ------------
           Balance at June 30, 1997                            6,709,000        20,973,000
           Purchases of minerals in place                      4,301,000       158,528,000
           Revisions of previous estimates and other          (2,736,000)          (38,000)
           Production                                           (325,000)       (3,368,000)
                                                            ------------      ------------
           Balance at June 30, 1998                            7,949,000       176,095,000
           Sales of minerals in place                         (2,735,000)      (18,243,000)
           Revisions of previous estimates and other             (90,000)       (7,329,000)
           Production                                           (500,000)      (12,962,000)
                                                            ------------      ------------
           Balance at June 30, 1999                            4,624,000       137,561,000
                                                            ============      ============
        Proved developed reserves:
           Balance at June 30, 1997                            2,188,000        12,412,000
                                                            ============      ============
           Balance at June 30, 1998                            5,298,000       120,998,000
                                                            ============      ============
           Balance at June 30, 1999                            2,138,000        94,614,000
                                                            ============      ============
</TABLE>

STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS RELATING TO PROVED OIL
  AND GAS RESERVES (UNAUDITED)

The Standardized Measure of Discounted Future Net Cash Flows Relating to Proved
Oil and Gas Reserves (Standardized Measure) is a disclosure requirement under
Statement of Financial Accounting Standards No. 69.

The Standardized Measure of discounted future net cash flows does not purport to
be, nor should it be interpreted to present, the fair value of the Company's oil
and gas reserves. An estimate of fair value would also take into account, among
other things, the recovery of reserves not presently classified as proved, the
value of unproved properties, and consideration of expected future economic and
operating conditions.

Under the Standardized Measure, future cash flows are estimated by applying
year-end prices, adjusted for fixed and determinable escalations, to the
estimated future production


                                      F-37
<PAGE>   85

                   Queen Sand Resources, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)


10. SUPPLEMENTARY OIL AND GAS DATA (UNAUDITED) (CONTINUED)

of year-end proved reserves. Future cash inflows are reduced by estimated future
production and development costs based on period-end costs to determine pretax
cash inflows. Future income taxes are computed by applying the statutory tax
rate to the excess of pretax cash inflows over the Company's tax basis in the
associated properties. Tax credits, net operating loss carryforwards, and
permanent differences are also considered in the future tax calculation. Future
net cash inflows after income taxes are discounted using a 10% annual discount
rate to arrive at the Standardized Measure.

The Standardized Measure of discounted future net cash flows relating to proved
oil and gas reserves as of June 30, 1999 and 1998, are as follows:

<TABLE>
<CAPTION>
                                                           1999                1998
                                                       -------------      -------------
<S>                                                    <C>                <C>
Future cash inflows                                    $ 415,013,000      $ 524,585,000
Future costs and expenses:
   Production expenses                                  (124,209,000)      (176,633,000)
   Development costs                                     (18,811,000)       (29,289,000)
Future income taxes                                      (33,933,000)       (43,938,000)
                                                       -------------      -------------
Future net cash flows                                    238,060,000        274,725,000
10% annual discount for estimated timing of
   cash flows                                           (123,642,000)      (132,410,000)
                                                       -------------      -------------
Standardized measure of discounted future net
   cash flows                                          $ 114,418,000      $ 142,315,000
                                                       =============      =============
</TABLE>

The weighted average price of oil and gas at June 30, 1999 and 1998, used in
calculating the Standardized Measure were $17.11 and $12.80 per barrel,
respectively, and $2.44 and $2.40 per MCF, respectively.

Changes in the Standardized Measure of discounted future net cash flows relating
to proved oil and gas reserves for the years ended June 30, 1999, 1998, and
1997, are as follows:


                                      F-38
<PAGE>   86

                   Queen Sand Resources, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)


10. SUPPLEMENTARY OIL AND GAS DATA (UNAUDITED) (CONTINUED)

<TABLE>
<CAPTION>
                                                    1999               1998               1997
                                                -------------      -------------      -------------
<S>                                             <C>                <C>                <C>
Beginning balance                               $ 142,315,000      $  30,146,000      $  23,971,000
Purchases of minerals in place                           --          139,292,000         14,531,000
Sales of minerals in place                        (16,035,000)              --                 --
Developed during the period                        10,340,000          6,031,000          1,238,000
Net change in prices and costs                      2,187,000        (15,593,000)         5,055,000
Revisions of previous estimates                   (22,121,000)       (13,784,000)       (13,405,000)
Accretion of discount                              14,232,000          3,015,000          2,397,000
Net change in income taxes                          6,452,000           (461,000)        (1,767,000)
Sales of oil and gas produced, net of
   production expenses                            (22,952,000)        (6,331,000)        (1,874,000)
                                                -------------      -------------      -------------
Balance at June 30                              $ 114,418,000      $ 142,315,000      $  30,146,000
                                                =============      =============      =============
</TABLE>

The future cash flows shown above include amounts attributable to proved
undeveloped reserves requiring approximately $18,811,000 of future development
costs. If these reserves are not developed, the future net cash flows shown
above would be significantly reduced.

Estimates of economically recoverable gas and oil reserves and of future net
revenues are based upon a number of variable factors and assumptions, all of
which are to some degree speculative and may vary considerably from actual
results. Therefore, actual production, revenues, taxes, development, and
operating expenditures may not occur as estimated. The reserve data are
estimates only, are subject to many uncertainties, and are based on data gained
from production histories and on assumptions as to geologic formations and other
matters. Actual quantities of gas and oil may differ materially from the amounts
estimated.

11. QUARTERLY FINANCIAL RESULTS (UNAUDITED)

Subsequent to March 31, 1999, the Company determined that the costs associated
with the termination of the LIBOR interest rate swap agreement in the first
quarter of fiscal year 1999 should have been expensed upon termination. The
following interim financial information has been restated from the information
contained in the Company's Form 10-Q's as filed with the Securities and Exchange
Commission as if the costs of the LIBOR interest rate swap termination were
expensed during the first quarter:


                                      F-39
<PAGE>   87

                   Queen Sand Resources, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)


11. QUARTERLY FINANCIAL RESULTS (UNAUDITED) (CONTINUED)

<TABLE>
<CAPTION>
                                                          THREE MONTHS ENDED
                                   SEPTEMBER 30      DECEMBER 31         MARCH 31          JUNE 30
                                   ------------      ------------      ------------      ------------
<S>                                <C>               <C>               <C>               <C>
YEAR ENDED JUNE 30, 1999:

Total revenues                     $  7,353,000      $  6,984,000      $  6,734,000      $  6,986,000
Writedowns of oil and gas
   properties                              --        $(35,033,000)             --                --
Operating income                   $  6,188,000      $  6,295,000      $  6,015,000      $  6,363,000
Loss before extraordinary item     $ (2,104,000)     $(37,678,000)     $ (1,977,000)     $ (2,183,000)
Extraordinary loss                 $ (3,549,000)             --                --                --
Net loss                           $ (5,653,000)     $(37,678,000)     $ (1,977,000)     $ (2,183,000)

Loss before extraordinary item
   per common share                $      (0.07)     $      (1.25)     $      (0.06)     $      (0.07)
Net loss per common share          $      (0.19)     $      (1.25)     $      (0.06)     $      (0.07)
</TABLE>

<TABLE>
<CAPTION>
                                                          THREE MONTHS ENDED
                                   SEPTEMBER 30      DECEMBER 31         MARCH 31          JUNE 30
                                   ------------      ------------      ------------      ------------
<S>                                <C>               <C>               <C>               <C>
YEAR ENDED JUNE 30, 1998:

Total revenues                     $  1,619,000      $  1,763,000      $  1,572,000      $  6,029,000
Writedowns of oil and gas
   properties                              --                --                --        $(28,166,000)
Operating income                   $    515,000      $    794,000      $    464,000      $  4,664,000
Net loss                           $   (783,000)     $   (662,000)     $   (693,000)     $(30,616,000)

Net loss per common share          $      (0.04)     $      (0.02)     $      (0.03)     $      (1.30)
</TABLE>


                                      F-40
<PAGE>   88
                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

     The information required by this item will be set forth under the captions
"Election of Directors," "Section 16(a) Beneficial Ownership Reporting
Compliance," and "Executive Officers" of our proxy statement for our 1999 Annual
Meeting of Stockholders (the "Proxy Statement") which will be filed with the
Commission pursuant to Regulation 14A under the Exchange Act and is incorporated
herein by reference. The Proxy Statement is expected to be filed on or prior to
October 28, 1999.


ITEM 11. EXECUTIVE COMPENSATION

     The information required by this item is set forth under the caption
"Executive Compensation" of our Proxy Statement which will be filed with the
Commission pursuant to Regulation 14A under the Exchange Act and is incorporated
herein by reference.


ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The information required by this item is set forth under the caption
"Security Ownership of Certain Beneficial Owners and Management" of our Proxy
Statement which will be filed with the Commission pursuant to Regulation 14A
under the Exchange Act and is incorporated herein by reference.


ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     The information required by this item is set forth under the captions
"Executive Compensation", " Director Compensation" and "Certain Relationships
and Related Party Transactions" of our Proxy Statement which will be filed with
the Commission pursuant to Regulation 14A under the Exchange Act and is
incorporated herein by reference.




                                                                              47
<PAGE>   89


                                     PART IV

    ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

         (a) (1)  FINANCIAL STATEMENTS

         See Index to Consolidated Financial Statements following the signature
         page to this annual report on Form 10-K.

         (a) (2) FINANCIAL STATEMENT SCHEDULES

         All Schedules are omitted because the information is not required under
         the related instructions or is inapplicable or because the information
         is included in the Consolidated Financial Statements or related notes.

                               EXHIBIT DESCRIPTION

         (a) (3) EXHIBITS

                3.1          Restated Certificate of Incorporation, filed as
                             Exhibit 4.5 to the Company's Registration Statement
                             on Form S-3 (No. 333-47577) filed with the
                             Securities and Exchange Commission on March 9,
                             1998, which Exhibit is incorporated herein by
                             reference.

                3.2          Certificate of Designation of Series C Convertible
                             Preferred Stock, filed as an exhibit to the
                             Company's Current Report on Form 8-K dated December
                             24, 1997, which Exhibit is incorporated herein by
                             reference.

                3.3          Amended and Restated Bylaws, filed as an Exhibit to
                             the Company's Current Report on Form 8-K dated May
                             6, 1997, which Exhibit is incorporated herein by
                             reference.

                4.1          Stockholders' Agreement dated as of May 6, 1997,
                             among the Company, Bruce I. Benn, Edward J. Munden,
                             Ronald I. Benn, Robert P. Lindsay, EIBOC
                             Investments Ltd. and Joint Energy Development
                             Investments Limited Partnership (AJEDI@), filed as
                             an Exhibit to the Company's Current Report on Form
                             8-K dated May 6, 1997, which Exhibit is
                             incorporated herein by reference.

                4.2          Indenture, dated July 1, 1998, in regard to 122%
                             Senior Notes due 2008 by and among the Company and
                             certain of its subsidiaries and Harris Trust and
                             Savings Bank, as Trustee, filed as an Exhibit to
                             the Company's Current Report on Form 8-K dated July
                             8, 1998, which Exhibit is incorporated herein by
                             reference.

                4.3          Form of 12% Notes due July 15, 2001, filed as an
                             Exhibit to the Company's Registration Statement on
                             Form 10-SB filed with the Securities and Exchange
                             Commission on August 12, 1996, which Exhibit is
                             incorporated herein by reference.

                4.4          Form of Common Stock Purchase Warrant dated
                             December 24, 1997 and issued to certain
                             institutional investors, filed as an Exhibit to the
                             Company's Current Report on Form 8-K dated December
                             24, 1997, which Exhibit is incorporated herein by
                             reference.

                4.5          Form of Common Stock Purchase Warrant dated as of
                             July 8, 1998 issued to certain institutional
                             investors, filed as an Exhibit to the Company's
                             Current Report on Form 8-K dated July 8, 1998,
                             which Exhibit is incorporated herein by reference.




                                                                              48
<PAGE>   90

         (a) (3) EXHIBITS

                4.6          Registration Rights Agreement among the Company and
                             certain institutional investors named therein,
                             dated December 24, 1997, filed as an Exhibit to the
                             Company's Current Report on Form 8-K dated December
                             24, 1997, which Exhibit is incorporated herein by
                             reference.

                4.7          Registration Rights Agreement by and between the
                             Company and JEDI dated May 6, 1997, filed as an
                             Exhibit to the Company's Current Report on Form 8-K
                             dated May 6, 1997, which Exhibit is incorporated
                             herein by reference.

                4.8          Registration Rights Agreement dated as of December
                             29, 1997 among the Company, the ECT Agent and JEDI,
                             filed as an Exhibit to the Company's Quarterly
                             Report on Form 10-QSB for the quarter ended
                             December 30, 1997, which Exhibit is incorporated
                             herein by reference.

                4.9          Registration Rights Agreement dated as of July 8,
                             1998 among the Company and the buyers signatory
                             thereto, filed as an Exhibit to the Company's
                             Current Report on Form 8-K dated July 8, 1998,
                             which Exhibit is incorporated herein by reference.

                4.10         Common Stock Purchase Warrant Representing Right to
                             Purchase 80,108 Shares of Common Stock of the
                             Company dated as of November 30, 1998 issued to
                             JEDI, filed as an Exhibit to the Company's
                             Registration Statement on Form S-3 initially filed
                             on January 22, 1999 (No. 333-70993), which Exhibit
                             is incorporated by reference.

                4.11         Common Stock Purchase Warrant Representing Right to
                             Purchase 206,340 Shares of Common Stock of the
                             Company dated as of November 23, 1998 issued to
                             JEDI, filed as an Exhibit to the Company's
                             Registration Statement on Form S-3 initially filed
                             on January 22, 1999 (No. 333-70993), which Exhibit
                             is incorporated by reference.

                4.12         Common Stock Purchase Warrant Representing Right to
                             Purchase 18,836 Shares of Common Stock of the
                             Company dated as of November 27, 1998 issued to
                             JEDI, filed as an Exhibit to the Company's
                             Registration Statement on Form S-3 initially filed
                             on January 22, 1999 (No. 333-70993), which Exhibit
                             is incorporated by reference.

                4.13         Common Stock Purchase Warrant Representing Right to
                             Purchase 3,160 Shares of Common Stock of the
                             Company dated as of November 25, 1998 issued to
                             JEDI, filed as an Exhibit to the Company's
                             Registration Statement on Form S-3 initially filed
                             on January 22, 1999 (No. 333-70993), which Exhibit
                             is incorporated by reference.

                4.14         Common Stock Purchase Warrant Representing Right to
                             Purchase 162,955 Shares of Common Stock of the
                             Company dated as of November 30, 1998 issued to
                             JEDI, filed as an Exhibit to the Company's
                             Registration Statement on Form S-3 initially filed
                             on January 22, 1999 (No. 333-70993), which Exhibit
                             is incorporated by reference.

                4.15         Registration Rights Agreement dated November 10,
                             1998 among Queen Sand Resources, Inc. and the
                             buyers signatory thereto, filed as an Exhibit to
                             the Company's Current Report on Form 8-K dated
                             November 24, 1998, which Exhibit is incorporated
                             herein by reference.

                4.16         Form of Common Stock Purchase Warrant issued to
                             certain investors as of November 10, 1998, filed as
                             an Exhibit to the Company's Current Report on Form
                             8-K dated November 24, 1998, which Exhibit is
                             incorporated herein by reference.



                                                                              49
<PAGE>   91

         (a) (3) EXHIBITS

                4.17         Common Stock Purchase Warrant Representing Right to
                             Purchase 22,033 Shares of Common Stock of the
                             Company dated as of December 28, 1998 issued to
                             JEDI, filed as an Exhibit to the Company's
                             Registration Statement on Form S-3 initially filed
                             on January 22, 1999 (No. 333-70993), which Exhibit
                             is incorporated by reference.

                4.18         Common Stock Purchase Warrant Representing Right to
                             Purchase 12,380 Shares of Common Stock of the
                             Company dated as of December 15, 1998 issued to
                             JEDI, filed as an Exhibit to the Company's
                             Registration Statement on Form S-3 initially filed
                             on January 22, 1999 (No. 333-70993), which Exhibit
                             is incorporated by reference.

                4.19         Common Stock Purchase Warrant Representing Right to
                             Purchase 133,708 Shares of Common Stock of the
                             Company dated as of December 14, 1998 issued to
                             JEDI, filed as an Exhibit to the Company's
                             Registration Statement on Form S-3 initially filed
                             on January 22, 1999 (No. 333-70993), which Exhibit
                             is incorporated by reference.

                4.20         Common Stock Purchase Warrant Representing Right to
                             Purchase 37,141 Shares of Common Stock of the
                             Company dated as of December 11, 1998 issued to
                             JEDI, filed as an Exhibit to the Company's
                             Registration Statement on Form S-3 initially filed
                             on January 22, 1999 (No. 333-70993), which Exhibit
                             is incorporated by reference.

                4.21         Common Stock Purchase Warrant Representing Right to
                             Purchase 8,360 Shares of Common Stock of the
                             Company dated as of December 9, 1998 issued to
                             JEDI, filed as an Exhibit to the Company's
                             Registration Statement on Form S-3 initially filed
                             on January 22, 1999 (No. 333-70993), which Exhibit
                             is incorporated by reference.

                4.22         Common Stock Purchase Warrant Representing Right to
                             Purchase 10,973 Shares of Common Stock of the
                             Company dated as of December 7, 1998 issued to
                             JEDI, filed as an Exhibit to the Company's
                             Registration Statement on Form S-3 initially filed
                             on January 22, 1999 (No. 333-70993), which Exhibit
                             is incorporated by reference.

                4.23         Common Stock Purchase Warrant Representing Right to
                             Purchase 8,180 Shares of Common Stock of the
                             Company dated as of December 4, 1998 issued to
                             JEDI, filed as an Exhibit to the Company's
                             Registration Statement on Form S-3 initially filed
                             on January 22, 1999 (No. 333-70993), which Exhibit
                             is incorporated by reference.

                4.24         Common Stock Purchase Warrant Representing Right to
                             Purchase 13,335 Shares of Common Stock of the
                             Company dated as of December 4, 1998 issued to
                             JEDI, filed as an Exhibit to the Company's
                             Registration Statement on Form S-3 initially filed
                             on January 22, 1999 (No. 333-70993), which Exhibit
                             is incorporated by reference.

                4.25         Common Stock Purchase Warrant Representing Right to
                             Purchase 8,180 Shares of Common Stock of the
                             Company dated as of December 2, 1998 issued to
                             JEDI, filed as an Exhibit to the Company's
                             Registration Statement on Form S-3 initially filed
                             on January 22, 1999 (No. 333-70993), which Exhibit
                             is incorporated by reference.

                4.26         Common Stock Purchase Warrant Representing Right to
                             Purchase 21,331 Shares of Common Stock of the
                             Company dated as of December 2, 1998 issued to
                             JEDI, filed as an Exhibit to the Company's
                             Registration Statement on Form S-3 initially filed
                             on January 22, 1999 (No. 333-70993), which Exhibit
                             is incorporated by reference.

                4.27         Common Stock Purchase Warrant Representing Right to
                             Purchase 18,372 Shares of Common Stock of the
                             Company dated as of November 30, 1998 issued to
                             JEDI, filed as an Exhibit to the



                                                                              50
<PAGE>   92

         (a) (3) EXHIBITS

                             Company's Registration Statement on Form S-3
                             initially filed on January 22, 1999
                             (No. 333-70993), which Exhibit is incorporated by
                             reference.

                4.28         Form of Common Stock Purchase Warrant issued to
                             Northern Tier Asset Management, Inc. issued by the
                             Company on April 9, 1999 and filed as an exhibit to
                             the Company's Registration Statement on form S-3
                             (No. 333-78001) which exhibit is incorporated by
                             reference.

                4.29         Registration Rights Agreement dated as of April 9,
                             1999 between the Company and Northern Tier Asset
                             Management, Inc. and filed as an exhibit to the
                             Company's Registration Statement on form S-3 (No.
                             333-78001) which exhibit is incorporated by
                             reference.

                10.1         Purchase and Sale Agreement between Eli Rebich and
                             Southern Exploration Company, a Texas corporation,
                             and Queen Sand Resources, Inc., a Nevada
                             corporation, dated April 10, 1996, filed as an
                             Exhibit to the Company's Registration Statement on
                             Form 10-SB filed with the Securities and Exchange
                             Commission on August 12, 1996, which Exhibit is
                             incorporated herein by reference.

                10.2         Purchase and Sale Agreement dated March 19, 1998
                             among the Morgan commingled pension funds and Queen
                             Sand Resources, Inc., a Nevada corporation, filed
                             as an Exhibit to the Company's Current Report on
                             Form 8-K dated March 19, 1998, which Exhibit is
                             incorporated herein by reference.

                10.3         Securities Purchase Agreement dated as of March 27,
                             1997 between JEDI and the Company, filed as an
                             Exhibit to the Company's Current Report on Form 8-K
                             dated March 27, 1997, which Exhibit is incorporated
                             herein by reference.

                10.4         Securities Purchase Agreement among the Company and
                             certain institutional investors named therein,
                             dated December 22, 1997, filed as an Exhibit to the
                             Company's Current Report on Form 8-K dated December
                             24, 1997, which Exhibit is incorporated herein by
                             reference.

                10.5**       Queen Sand Resources 1997 Incentive Equity Plan,
                             filed as an Exhibit to the Company's Registration
                             Statement on Form S-4 filed with the Securities and
                             Exchange Commission on August 13, 1998, which
                             Exhibit is incorporated herein by reference.

                10.6**       Employment Agreement dated December 15, 1997
                             between the Company and Robert P. Lindsay, filed as
                             an Exhibit to the Company's Registration Statement
                             on Form S-4 filed with the Securities and Exchange
                             Commission on August 13, 1998 (No. 333-61403) which
                             Exhibit is incorporated herein by reference.

                10.7**       Employment Agreement dated December 15, 1997 among
                             the Company, Queen Sand Resources (Canada) Inc. and
                             Bruce I. Benn, filed as an Exhibit to the Company's
                             Registration Statement on Form S-4 filed with the
                             Securities and Exchange Commission on August 13,
                             1998, (No. 333-61403) which Exhibit is incorporated
                             herein by reference.

                10.8**       Employment Agreement dated December 15, 1997 among
                             the Company, Queen Sand Resources (Canada) Inc. and
                             Ronald Benn, filed as an Exhibit to the Company's
                             Registration Statement on Form S-4 filed with the
                             Securities and Exchange Commission on August 13,
                             1998, (No. 333-61403) which Exhibit is incorporated
                             herein by reference.

                10.9**       Employment Agreement dated December 15, 1997 among
                             the Company, Queen Sand Resources (Canada) Inc. and
                             Edward J. Munden, filed as an Exhibit to the
                             Company's Registration Statement on Form S-4 filed
                             with the Securities and Exchange Commission on
                             August 13, 1998, (No. 333-61403) which Exhibit is
                             incorporated herein by reference.



                                                                              51
<PAGE>   93

         (a) (3) EXHIBITS

                10.10        Subordinated Revolving Credit Loan Agreement dated
                             as of December 29, 1997, executed by Queen Sand
                             Resources, Inc., certain lenders now or hereafter
                             parties thereto, and Enron Capital & Trade
                             Resources Corp. ("ECT"), as agent ("ECT Agent") for
                             the lenders ("ECT Lenders"), filed as an Exhibit to
                             the Company's Quarterly Report on Form 10-QSB for
                             the quarter ended December 30, 1997, which Exhibit
                             is incorporated herein by reference.

                10.11        First Amendment to Loan Agreement among Queen Sand
                             Resources, Inc. as borrower, ECT Agent, and ECT
                             Lenders, effective as of June 30, 1998, filed as an
                             Exhibit to the Company's Registration Statement on
                             Form S-4 filed with the Securities and Exchange
                             Commission on August 13, 1998, (No. 333-61403)
                             which Exhibit is incorporated herein by reference.

                10.12*       Second Amendment to Loan Agreement among Queen Sand
                             Resources, Inc. as borrower, ECT Agent, and ECT
                             Lenders, effective as of November 24, 1998, filed
                             as an Exhibit to the Company's Registration
                             Statement on Form S-3 filed with the Securities and
                             Exchange Commission on June 9, 1999, (No.
                             333-78001) which Exhibit is incorporated herein by
                             reference.

                10.13        Guaranty dated as of December 29, 1997, executed by
                             Queen Sand Resources, Inc., a Delaware corporation,
                             in favor of ECT Agent and the ECT Lenders, filed as
                             an Exhibit to the Company's Quarterly Report on
                             Form 10-QSB for the quarter ended December 30,
                             1997, which Exhibit is incorporated herein by
                             reference.

                10.14        Guaranty dated as of December 29, 1997, executed by
                             Corrida Resources, Inc., a Nevada corporation, and
                             Northland Operating Co., a Nevada corporation, in
                             favor of ECT Agent and the ECT Lenders, filed as an
                             Exhibit to the Company's Quarterly Report on Form
                             10-QSB for the quarter ended December 30, 1997,
                             which Exhibit is incorporated herein by reference.

                10.15        Subordination Agreement dated as of December 29,
                             1997, executed by the Agent in favor of the Bank of
                             Montreal as agent for the senior lenders, Queen
                             Sand Resources, Inc. and the Guarantors, filed as
                             an Exhibit to the Company's Registration Statement
                             on Form S-4 filed with the Securities and Exchange
                             Commission on August 13, 1998 (No. 333-61403) which
                             Exhibit is incorporated herein by reference.

                10.16        Amended and Restated credit agreement, dated as of
                             April 17, 1998, among the Company, Queen Sand
                             Resources, Inc., a Nevada corporation, the Bank of
                             Montreal and the lenders signatory thereto, filed
                             as an Exhibit to the Company's Registration
                             Statement on Form S-4 filed with the Securities and
                             Exchange Commission on August 13, 1998 (No.
                             333-61403) which Exhibit is incorporated herein by
                             reference.

                10.17        First Amendment to Amended and Restated credit
                             agreement dated effective as of July 1, 1998, among
                             the Company, Queen Sand Resources, Inc., a Nevada
                             corporation, the Bank of Montreal and the lenders
                             signatory thereto, filed as an Exhibit to the
                             Company's Registration Statement on Form S-4 filed
                             with the Securities and Exchange Commission on
                             August 13, 1998 (No. 333-61403) which Exhibit is
                             incorporated herein by reference.

                10.18*       Second Amendment to Amended and Restated credit
                             agreement dated effective as of November 10, 1998,
                             among the Company, Queen Sand Resources, Inc., a
                             Nevada corporation, the Bank of Montreal and the
                             lenders signatory thereto, which Exhibit is
                             attached hereto.

                10.19*       Third Amendment to Amended and Restated credit
                             agreement dated effective as of November 13, 1998,
                             among the Company, Queen Sand Resources, Inc., a
                             Nevada corporation, the Bank of Montreal and the
                             lenders signatory thereto, which Exhibit is which
                             Exhibit is attached hereto.



                                                                              52
<PAGE>   94

         (a) (3) EXHIBITS

                10.20        Fourth Amendment to Amended and Restated credit
                             agreement dated effective as of April 16, 1998,
                             among the Company, Queen Sand Resources, Inc., a
                             Nevada corporation, the Bank of Montreal and the
                             lenders signatory thereto, filed as an Exhibit to
                             the Company's Quarterly Report on form 10-Q for the
                             quarter ended March 31, 1999, which Exhibit is
                             incorporated herein by reference.

                10.21        Amended and Restated Guaranty Agreement executed by
                             the Company, in favor of the Bank of Montreal, as
                             agent, dated as of April 17, 1998, filed as an
                             Exhibit to the Company's Registration Statement on
                             Form S-4 filed with the Securities and Exchange
                             Commission on August 13, 1998 (No. 333-61403),
                             which Exhibit is incorporated herein by reference.

                10.22        Amended and Restated Guaranty Agreement executed by
                             Northland Operating Co. in favor of the Bank of
                             Montreal, as agent, dated as of April 17, 1998,
                             filed as an Exhibit to the Company's Registration
                             Statement on Form S-4 filed with the Securities and
                             Exchange Commission on August 13, 1998 (No.
                             333-61403), which Exhibit is incorporated herein by
                             reference.

                10.23        Amended and Restated Guaranty Agreement dated as of
                             August 1, 1997 executed by Corrida Resources, Inc.,
                             a Nevada corporation, in favor of the Bank of
                             Montreal, as agent, filed as an Exhibit to the
                             Company's Registration Statement on Form S-4 filed
                             with the Securities and Exchange Commission on
                             August 13, 1998, which Exhibit is incorporated
                             herein by reference.

                10.24        Amended and Restated Security Agreement dated as of
                             April 17, 1998 executed by Queen Sand Resources,
                             Inc., a Nevada corporation, in favor of the Bank of
                             Montreal, filed as an Exhibit to the Company's
                             Registration Statement on Form S-4 filed with the
                             Securities and Exchange Commission on August 13,
                             1998, which Exhibit is incorporated herein by
                             reference.

                10.25**      Directors' Non-Qualified Stock Option Plan filed as
                             Appendix A to the Company's Definitive Proxy
                             Statement on Schedule 14A dated October 23, 1998,
                             which Exhibit is incorporated herein by reference.

                10.26        Amended and Restated Securities Purchase Agreement
                             dated as of July 8, 1998 among the Company and the
                             buyers signatory thereto, filed as an Exhibit to
                             the Company's Current Report on Form 8-K dated July
                             8, 1998, as amended by the Current Report on Form
                             8-K/A-1 dated July 8, 1998, which Exhibit is
                             incorporated herein by reference.

                10.27        Securities Purchase Agreement dated as of November
                             10, 1998 among the Company and the buyers signatory
                             thereto, filed as an Exhibit to the Company's
                             Current Report on Form 8-K dated November 24,
                             1998.

                21.1         List of the subsidiaries of the registrant filed as
                             an Exhibit to the Company's Registration Statement
                             on Form S-4 filed with the Securities and Exchange
                             Commission on August 13, 1999 (No. 333-61403) which
                             Exhibit is incorporated by reference

                23.1*        Consent of Ernst & Young LLP.

                23.2*        Consent of H.J. Gruy and Associates, Inc.

                23.3*        Consent of Harper & Associates, Inc.

                23.4*        Consent of Ryder Scott Company.



                                                                              53
<PAGE>   95

         (a) (3) EXHIBITS

                23.5*        Financial Data Schedule

         (b) Reports on Form 8-K filed in the fourth quarter 1998:  None

         (c) See sub-item (a) above.

         (d) See sub-item (a) above.

*  Filed herewith.
**Denotes Management Contract.



                                                                              54
<PAGE>   96

                                    GLOSSARY

     The terms defined in this glossary are used throughout this Annual Report
on Form 10-KSB.

     average NYMEX price. The average of the NYMEX closing prices for the near
month.

     Bbl. One stock tank barrel, or 42 U.S. gallons liquid volume, used herein
in reference to crude oil or other liquid hydrocarbons.

     Bbl/d. Bbl per day.

     Bcf. One billion cubic feet of natural gas.

     Bcfe. One billion cubic feet of natural gas equivalents, converting one Bbl
of oil to six Mcf of natural gas.

     behind-the-pipe. Hydrocarbons in a potentially producing horizon penetrated
by a well bore the production of which has been postponed pending the production
of hydrocarbons from another formation penetrated by the well bore. The
hydrocarbons are classified as proved but non-producing reserves.

     BOE. Barrels of oil equivalent (converting six Mcf of natural gas to one
Bbl of oil).

     development well. A well drilled within the proved boundaries of an oil or
natural gas reservoir to the depth of a stratigraphic horizon known to be
productive.

     dry well. A development or exploratory well found to be incapable of
producing either oil or natural gas in sufficient quantities to justify
completion as an oil or natural gas well.

     exploratory well. A well drilled to find and produce oil or natural gas in
an unproved area, to find a new reservoir in a field previously found to be
productive of oil or natural gas in another reservoir, or to extend a known
reservoir.

     gross acres or gross wells. The total number of acres or wells, as the case
may be, in which a working interest is owned.

     LOE. Lease operating expenses are those expense directly associated with
crude oil and/or natural gas producing or service wells.

     MBbl. One thousand barrels of crude oil or other liquid hydrocarbons.

     MBOE. One thousand barrels of oil equivalent (converting six Mcf of natural
gas to one Bbl of oil).

     Mcf. One thousand cubic feet of natural gas.

     Mcf/d. Mcf per day.

     Mcfe. One thousand cubic feet of natural gas equivalents, converting one
Bbl of oil to six Mcf of gas.

     MMBbl. One million barrels of crude oil or other liquid hydrocarbons.

     MMBOE. One million barrels of all equivalent.

     MMcfe. One million cubic feet of natural gas equivalents, converting one
Bbl of oil to six Mcf of gas.

     MMcf. One million cubic feet of natural gas.



                                                                              55
<PAGE>   97

     net acres or net wells. The sum of the fractional working interests owned
in gross acres or gross wells.

     net profits interest. A share of the gross oil and natural gas production
from a property, measured by net profits from the operation of the property that
is carved out of the working interest. This is a non-operated interest.

     NYMEX. New York Mercantile Exchange.

     producing well, production well, or productive well. A well that is
producing oil or natural gas or that is capable of production.

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

     proved reserves. Proved reserves are the estimated quantities of crude oil,
natural gas and natural gas liquids which geological and engineering data
demonstrate with reasonable certainty to be recoverable in future years from
known reservoirs under existing economic and operating conditions.

     proved undeveloped reserves or PUD. Proved undeveloped reserves are oil and
natural gas reserves that are expected to be recovered from new wells on
undrilled acreage, or from existing wells where a relatively major expenditure
is required for recompletion. Reserves on undrilled acreage shall be limited to
those drilling units offsetting productive units that are reasonably certain of
production when drilled. Proved reserves for other undrilled units can be
claimed only where it can be demonstrated with certainty that there is
continuity of production from the existing productive formation. Under no
circumstances should estimates for proved undeveloped reserves be attributable
to any acreage for which an application of fluid injection or other improved
recovery techniques is contemplated, unless such techniques have been proved
effective by actual tests in the area and in the same reservoir.

     Reserve Life Index. The estimated productive life of a proved reservoir
based upon the economic limit of such reservoir producing hydrocarbons in paying
quantities assuming certain price and cost parameters. For purposes of this
Annual Report on Form 10-K, reserve life is calculated by dividing the proved
reserves (on a Mcfe basis) at the end of the period by production volumes for
the previous 12 months.

     royalty interest. An interest in an oil and natural gas property entitling
the owner to a share of oil and natural gas production free of costs of
production.

     SEC PV-10. The present value of proved reserves is an estimate of the
discounted future net cash flows from each of the properties at June 30, 1998,
or as otherwise indicated. Net cash flow is defined as net revenues less, after
deducting production and ad valorem taxes, future capital costs and operating
expenses, but before deducting federal income taxes. As required by rules of the
Commission, the future net cash flows have been discounted at an annual rate of
10% to determine their 'present value.' The present value is shown to indicate
the effect of time on the value of the revenue stream and should not be
construed as being the fair market value of the properties. In accordance with
Commission rules, estimates have been made using constant oil and natural gas
prices and operating costs, at June 30, 1999, or as otherwise indicated.

     secondary recovery. A method of oil and natural gas extraction in which
energy sources extrinsic to the reservoir are utilized.

     service well. A well used for water injection in secondary recovery
projects or for the disposal of produced water.



                                                                              56
<PAGE>   98

     Standardized Measure. Under the Standardized Measure, future cash flows are
estimated by applying year-end prices, adjusted for fixed and determinable
escalations, to the estimated future production of year-end proved reserves.
Future cash inflows are reduced by estimated future production and development
costs based on period-end costs to determine pretax cash inflows. Future income
taxes are computed by applying the statutory tax rate to the excess of pretax
cash inflows over the Company's tax basis in the associated properties. Tax
credits, net operating loss carryforwards, and permanent differences are also
considered in the future tax calculation. Future net cash inflows after income
taxes are discounted using a 10% annual discount rate to arrive at the
Standardized Measure.

     undeveloped acreage. Lease acreage on which wells have not been drilled or
completed to a point that would permit the production of commercial quantities
of oil and natural gas regardless of whether such acreage contains proved
reserves.

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



                                                                              57
<PAGE>   99


                                 SIGNATURE PAGE


     PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY ON THE 13TH OF OCTOBER, 1999.

                              QUEEN SAND RESOURCES, INC.


                              By: /s/   EDWARD J. MUNDEN
                                  ---------------------------------------------
                                  Name:    Edward J. Munden
                                  Title:   Chief Executive Officer, President
                                           and Chairman of the Board


     In accordance with 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 indicated on the 13th day of October, 1999.

<TABLE>
<CAPTION>
SIGNATURE                                                     TITLE
---------                                                     -----

<S>                                                       <C>
/s/   EDWARD J. MUNDEN                                    CHAIRMAN OF THE BOARD, PRESIDENT,
-------------------------------------------               CHIEF EXECUTIVE OFFICER AND
EDWARD J. MUNDEN                                          DIRECTOR (PRINCIPAL EXECUTIVE OFFICER)


/s/   BRUCE I. BENN                                       EXECUTIVE VICE PRESIDENT, DIRECTOR
-------------------------------------------
BRUCE I. BENN


/s/   RONALD I. BENN                                      CHIEF FINANCIAL OFFICER (PRINCIPAL FINANCIAL
-------------------------------------------               OFFICER AND ACCOUNTING OFFICER)
RONALD I. BENN


/s/   ROBERT P. LINDSAY                                   CHIEF OPERATING OFFICER, EXECUTIVE VICE
-------------------------------------------               PRESIDENT AND DIRECTOR
ROBERT P. LINDSAY


/s/  TED COLLINS, JR.                                     DIRECTOR
-------------------------------------------
TED COLLINS, JR.


/s/   ELI REBICH                                          DIRECTOR
-------------------------------------------
ELI REBICH
</TABLE>




                                                                              58
<PAGE>   100


                                  EXHIBIT INDEX



<TABLE>
<CAPTION>
EXHIBIT
 NUMBER                                             DESCRIPTION
--------                                            -----------

<S>              <C>
  3.1            Restated Certificate of Incorporation, filed as Exhibit 4.5 to the Company's
                 Registration Statement on Form S-3 (No. 333-47577) filed with the Securities and
                 Exchange Commission on March 9, 1998, which Exhibit is incorporated herein by
                 reference.

  3.2            Certificate of Designation of Series C Convertible Preferred Stock, filed as an
                 exhibit to the Company's Current Report on Form 8-K dated December 24, 1997, which
                 Exhibit is incorporated herein by reference.

  3.3            Amended and Restated Bylaws, filed as an Exhibit to the Company's Current Report on
                 Form 8-K dated May 6, 1997, which Exhibit is incorporated herein by reference.

  4.1            Stockholders' Agreement dated as of May 6, 1997, among the Company, Bruce I. Benn,
                 Edward J. Munden, Ronald I. Benn, Robert P. Lindsay, EIBOC Investments Ltd. and
                 Joint Energy Development Investments Limited Partnership (AJEDI@), filed as an
                 Exhibit to the Company's Current Report on Form 8-K dated May 6, 1997, which
                 Exhibit is incorporated herein by reference.

  4.2            Indenture, dated July 1, 1998, in regard to 122% Senior Notes due 2008 by and among
                 the Company and certain of its subsidiaries and Harris Trust and Savings Bank, as
                 Trustee, filed as an Exhibit to the Company's Current Report on Form 8-K dated July
                 8, 1998, which Exhibit is incorporated herein by reference.

  4.3            Form of 12% Notes due July 15, 2001, filed as an Exhibit to the Company's
                 Registration Statement on Form 10-SB filed with the Securities and Exchange
                 Commission on August 12, 1996, which Exhibit is incorporated herein by reference.

  4.4            Form of Common Stock Purchase Warrant dated December 24, 1997 and issued to certain
                 institutional investors, filed as an Exhibit to the Company's Current Report on
                 Form 8-K dated December 24, 1997, which Exhibit is incorporated herein by
                 reference.

  4.5            Form of Common Stock Purchase Warrant dated as of July 8, 1998 issued to certain
                 institutional investors, filed as an Exhibit to the Company's Current Report on
                 Form 8-K dated July 8, 1998, which Exhibit is incorporated herein by reference.

  4.6            Registration Rights Agreement among the Company and certain institutional investors
                 named therein, dated December 24, 1997, filed as an Exhibit to the Company's
                 Current Report on Form 8-K dated December 24, 1997, which Exhibit is incorporated
                 herein by reference.

  4.7            Registration Rights Agreement by and between the Company and JEDI dated May 6,
                 1997, filed as an Exhibit to the Company's Current Report on Form 8-K dated May 6,
                 1997, which Exhibit is incorporated herein by reference.

  4.8            Registration Rights Agreement dated as of December 29, 1997 among the Company, the
                 ECT Agent and JEDI, filed as an Exhibit to the Company's Quarterly Report on Form
                 10-QSB for the quarter ended December 30, 1997, which Exhibit is incorporated
                 herein by reference.
</TABLE>


<PAGE>   101

<TABLE>
<CAPTION>
EXHIBIT
 NUMBER                                             DESCRIPTION
--------                                            -----------

<S>              <C>
  4.9            Registration Rights Agreement dated as of July 8, 1998 among the Company and the
                 buyers signatory thereto, filed as an Exhibit to the Company's Current Report on
                 Form 8-K dated July 8, 1998, which Exhibit is incorporated herein by reference.

  4.10           Common Stock Purchase Warrant Representing Right to Purchase 80,108 Shares of
                 Common Stock of the Company dated as of November 30, 1998 issued to JEDI, filed as
                 an Exhibit to the Company's Registration Statement on Form S-3 initially filed on
                 January 22, 1999 (No. 333-70993), which Exhibit is incorporated by reference.

  4.11           Common Stock Purchase Warrant Representing Right to Purchase 206,340 Shares of
                 Common Stock of the Company dated as of November 23, 1998 issued to JEDI, filed as
                 an Exhibit to the Company's Registration Statement on Form S-3 initially filed on
                 January 22, 1999 (No. 333-70993), which Exhibit is incorporated by reference.

  4.12           Common Stock Purchase Warrant Representing Right to Purchase 18,836 Shares of
                 Common Stock of the Company dated as of November 27, 1998 issued to JEDI, filed as
                 an Exhibit to the Company's Registration Statement on Form S-3 initially filed on
                 January 22, 1999 (No. 333-70993), which Exhibit is incorporated by reference.

  4.13           Common Stock Purchase Warrant Representing Right to Purchase 3,160 Shares of Common
                 Stock of the Company dated as of November 25, 1998 issued to JEDI, filed as an
                 Exhibit to the Company's Registration Statement on Form S-3 initially filed on
                 January 22, 1999 (No. 333-70993), which Exhibit is incorporated by reference.

  4.14           Common Stock Purchase Warrant Representing Right to Purchase 162,955 Shares of
                 Common Stock of the Company dated as of November 30, 1998 issued to JEDI, filed as
                 an Exhibit to the Company's Registration Statement on Form S-3 initially filed on
                 January 22, 1999 (No. 333-70993), which Exhibit is incorporated by reference.

  4.15           Registration Rights Agreement dated November 10, 1998 among Queen Sand Resources,
                 Inc. and the buyers signatory thereto, filed as an Exhibit to the Company's Current
                 Report on Form 8-K dated November 24, 1998, which Exhibit is incorporated herein by
                 reference.

  4.16           Form of Common Stock Purchase Warrant issued to certain investors as of November
                 10, 1998, filed as an Exhibit to the Company's Current Report on Form 8-K dated
                 November 24, 1998, which Exhibit is incorporated herein by reference.

  4.17           Common Stock Purchase Warrant Representing Right to Purchase 22,033 Shares of
                 Common Stock of the Company dated as of December 28, 1998 issued to JEDI, filed as
                 an Exhibit to the Company's Registration Statement on Form S-3 initially filed on
                 January 22, 1999 (No. 333-70993), which Exhibit is incorporated by reference.
</TABLE>


<PAGE>   102

<TABLE>
<CAPTION>
EXHIBIT
 NUMBER                                             DESCRIPTION
--------                                            -----------

<S>              <C>
  4.18           Common Stock Purchase Warrant Representing Right to Purchase 12,380 Shares of
                 Common Stock of the Company dated as of December 15, 1998 issued to JEDI, filed as
                 an Exhibit to the Company's Registration Statement on Form S-3 initially filed on
                 January 22, 1999 (No. 333-70993), which Exhibit is incorporated by reference.

  4.19           Common Stock Purchase Warrant Representing Right to Purchase 133,708 Shares of
                 Common Stock of the Company dated as of December 14, 1998 issued to JEDI, filed as
                 an Exhibit to the Company's Registration Statement on Form S-3 initially filed on
                 January 22, 1999 (No. 333-70993), which Exhibit is incorporated by reference.

  4.20           Common Stock Purchase Warrant Representing Right to Purchase 37,141 Shares of
                 Common Stock of the Company dated as of December 11, 1998 issued to JEDI, filed as
                 an Exhibit to the Company's Registration Statement on Form S-3 initially filed on
                 January 22, 1999 (No. 333-70993), which Exhibit is incorporated by reference.

  4.21           Common Stock Purchase Warrant Representing Right to Purchase 8,360 Shares of Common
                 Stock of the Company dated as of December 9, 1998 issued to JEDI, filed as an
                 Exhibit to the Company's Registration Statement on Form S-3 initially filed on
                 January 22, 1999 (No. 333-70993), which Exhibit is incorporated by reference.

  4.22           Common Stock Purchase Warrant Representing Right to Purchase 10,973 Shares of
                 Common Stock of the Company dated as of December 7, 1998 issued to JEDI, filed as
                 an Exhibit to the Company's Registration Statement on Form S-3 initially filed on
                 January 22, 1999 (No. 333-70993), which Exhibit is incorporated by reference.

  4.23           Common Stock Purchase Warrant Representing Right to Purchase 8,180 Shares of Common
                 Stock of the Company dated as of December 4, 1998 issued to JEDI, filed as an
                 Exhibit to the Company's Registration Statement on Form S-3 initially filed on
                 January 22, 1999 (No. 333-70993), which Exhibit is incorporated by reference.

  4.24           Common Stock Purchase Warrant Representing Right to Purchase 13,335 Shares of
                 Common Stock of the Company dated as of December 4, 1998 issued to JEDI, filed as
                 an Exhibit to the Company's Registration Statement on Form S-3 initially filed on
                 January 22, 1999 (No. 333-70993), which Exhibit is incorporated by reference.

  4.25           Common Stock Purchase Warrant Representing Right to Purchase 8,180 Shares of Common
                 Stock of the Company dated as of December 2, 1998 issued to JEDI, filed as an
                 Exhibit to the Company's Registration Statement on Form S-3 initially filed on
                 January 22, 1999 (No. 333-70993), which Exhibit is incorporated by reference.

  4.26           Common Stock Purchase Warrant Representing Right to Purchase 21,331 Shares of
                 Common Stock of the Company dated as of December 2, 1998 issued to JEDI, filed as
                 an Exhibit to the Company's Registration Statement on Form S-3 initially filed on
                 January 22, 1999 (No. 333-70993), which Exhibit is incorporated by reference.

  4.27           Common Stock Purchase Warrant Representing Right to Purchase 18,372 Shares of
                 Common Stock of the Company dated as of November 30, 1998 issued to JEDI, filed as
                 an Exhibit to the Company's Registration Statement on Form S-3 initially filed on
                 January 22, 1999 (No. 333-70993), which Exhibit is incorporated by reference.
</TABLE>


<PAGE>   103

<TABLE>
<CAPTION>
EXHIBIT
 NUMBER                                             DESCRIPTION
--------                                            -----------

<S>              <C>
  4.28           Form of Common Stock Purchase Warrant issued to Northern Tier Asset Management,
                 Inc. issued by the Company on April 9, 1999 and filed as an exhibit to the
                 Company's Registration Statement on form S-3 (No. 333-78001) which exhibit is
                 incorporated by reference.

  4.29           Registration Rights Agreement dated as of April 9, 1999 between the Company and
                 Northern Tier Asset Management, Inc. and filed as an exhibit to the Company's
                 Registration Statement on form S-3 (No. 333-78001) which exhibit is incorporated by
                 reference.

  10.1           Purchase and Sale Agreement between Eli Rebich and Southern Exploration Company, a
                 Texas corporation, and Queen Sand Resources, Inc., a Nevada corporation, dated
                 April 10, 1996, filed as an Exhibit to the Company's Registration Statement on Form
                 10-SB filed with the Securities and Exchange Commission on August 12, 1996, which
                 Exhibit is incorporated herein by reference.

  10.2           Purchase and Sale Agreement dated March 19, 1998 among the Morgan commingled
                 pension funds and Queen Sand Resources, Inc., a Nevada corporation, filed as an
                 Exhibit to the Company's Current Report on Form 8-K dated March 19, 1998, which
                 Exhibit is incorporated herein by reference.

  10.3           Securities Purchase Agreement dated as of March 27, 1997 between JEDI and the
                 Company, filed as an Exhibit to the Company's Current Report on Form 8-K dated
                 March 27, 1997, which Exhibit is incorporated herein by reference.

  10.4           Securities Purchase Agreement among the Company and certain institutional investors
                 named therein, dated December 22, 1997, filed as an Exhibit to the Company's
                 Current Report on Form 8-K dated December 24, 1997, which Exhibit is incorporated
                 herein by reference.

  10.5**         Queen Sand Resources 1997 Incentive Equity Plan, filed as an Exhibit to the
                 Company's Registration Statement on Form S-4 filed with the Securities and Exchange
                 Commission on August 13, 1998, which Exhibit is incorporated herein by reference.

  10.6**         Employment Agreement dated December 15, 1997 between the Company and Robert P.
                 Lindsay, filed as an Exhibit to the Company's Registration Statement on Form S-4
                 filed with the Securities and Exchange Commission on August 13, 1998 (No.
                 333-61403) which Exhibit is incorporated herein by reference.

  10.7**         Employment Agreement dated December 15, 1997 among the Company, Queen Sand
                 Resources (Canada) Inc. and Bruce I. Benn, filed as an Exhibit to the Company's
                 Registration Statement on Form S-4 filed with the Securities and Exchange
                 Commission on August 13, 1998, (No. 333-61403) which Exhibit is incorporated herein
                 by reference.

  10.8**         Employment Agreement dated December 15, 1997 among the Company, Queen Sand
                 Resources (Canada) Inc. and Ronald Benn, filed as an Exhibit to the Company's
                 Registration Statement on Form S-4 filed with the Securities and Exchange
                 Commission on August 13, 1998, (No. 333-61403) which Exhibit is incorporated herein
                 by reference.
</TABLE>



<PAGE>   104

<TABLE>
<CAPTION>
EXHIBIT
 NUMBER                                             DESCRIPTION
--------                                            -----------

<S>              <C>
  10.9**         Employment Agreement dated December 15, 1997 among the Company, Queen Sand
                 Resources (Canada) Inc. and Edward J. Munden, filed as an Exhibit to the Company's
                 Registration Statement on Form S-4 filed with the Securities and Exchange
                 Commission on August 13, 1998, (No. 333-61403) which Exhibit is incorporated herein
                 by reference.

  10.10          Subordinated Revolving Credit Loan Agreement dated as of December 29, 1997,
                 executed by Queen Sand Resources, Inc., certain lenders now or hereafter parties
                 thereto, and Enron Capital & Trade Resources Corp. ("ECT"), as agent ("ECT Agent")
                 for the lenders ("ECT Lenders"), filed as an Exhibit to the Company's Quarterly
                 Report on Form 10-QSB for the quarter ended December 30, 1997, which Exhibit is
                 incorporated herein by reference.

  10.11          First Amendment to Loan Agreement among Queen Sand Resources, Inc. as borrower, ECT
                 Agent, and ECT Lenders, effective as of June 30, 1998, filed as an Exhibit to the
                 Company's Registration Statement on Form S-4 filed with the Securities and Exchange
                 Commission on August 13, 1998, (No. 333-61403) which Exhibit is incorporated herein
                 by reference.

  10.12*         Second Amendment to Loan Agreement among Queen Sand Resources, Inc. as borrower,
                 ECT Agent, and ECT Lenders, effective as of November 24, 1998, which Exhibit is
                 attached hereto.

  10.13          Guaranty dated as of December 29, 1997, executed by Queen Sand Resources, Inc., a
                 Delaware corporation, in favor of ECT Agent and the ECT Lenders, filed as an
                 Exhibit to the Company's Quarterly Report on Form 10-QSB for the quarter ended
                 December 30, 1997, which Exhibit is incorporated herein by reference.

  10.14          Guaranty dated as of December 29, 1997, executed by Corrida Resources, Inc., a
                 Nevada corporation, and Northland Operating Co., a Nevada corporation, in favor of
                 ECT Agent and the ECT Lenders, filed as an Exhibit to the Company's Quarterly
                 Report on Form 10-QSB for the quarter ended December 30, 1997, which Exhibit is
                 incorporated herein by reference.

  10.15          Subordination Agreement dated as of December 29, 1997, executed by the Agent in
                 favor of the Bank of Montreal as agent for the senior lenders, Queen Sand
                 Resources, Inc. and the Guarantors, filed as an Exhibit to the Company's
                 Registration Statement on Form S-4 filed with the Securities and Exchange
                 Commission on August 13, 1998 (No. 333-61403) which Exhibit is incorporated herein
                 by reference.

  10.16          Amended and Restated credit agreement, dated as of April 17, 1998, among the
                 Company, Queen Sand Resources, Inc., a Nevada corporation, the Bank of Montreal and
                 the lenders signatory thereto, filed as an Exhibit to the Company's Registration
                 Statement on Form S-4 filed with the Securities and Exchange Commission on August
                 13, 1998 (No. 333-61403) which Exhibit is incorporated herein by reference.

  10.17          First Amendment to Amended and Restated credit agreement dated effective as of July
                 1, 1998, among the Company, Queen Sand Resources, Inc., a Nevada corporation, the
                 Bank of Montreal and the lenders signatory thereto, filed as an Exhibit to the
                 Company's Registration Statement on Form S-4 filed with the Securities and Exchange
                 Commission on August 13, 1998 (No. 333-61403) which Exhibit is incorporated herein
                 by reference.
</TABLE>



<PAGE>   105

<TABLE>
<CAPTION>
EXHIBIT
 NUMBER                                             DESCRIPTION
--------                                            -----------

<S>              <C>
  10.18*         Second Amendment to Amended and Restated credit agreement dated effective as of
                 November 10, 1998, among the Company, Queen Sand Resources, Inc., a Nevada
                 corporation, the Bank of Montreal and the lenders signatory thereto, which Exhibit
                 is attached hereto.

  10.19*         Third Amendment to Amended and Restated credit agreement dated effective as of
                 November 13, 1998, among the Company, Queen Sand Resources, Inc., a Nevada
                 corporation, the Bank of Montreal and the lenders signatory thereto, which Exhibit
                 is attached hereto.

  10.20          Fourth Amendment to Amended and Restated credit agreement dated effective as of
                 April 16, 1998, among the Company, Queen Sand Resources, Inc., a Nevada
                 corporation, the Bank of Montreal and the lenders signatory thereto, filed as an
                 Exhibit to the Company's Quarterly Report on form 10-Q for the quarter ended March
                 31, 1999, which Exhibit is incorporated herein by reference.

  10.21          Amended and Restated Guaranty Agreement executed by the Company, in favor of the
                 Bank of Montreal, as agent, dated as of April 17, 1998, filed as an Exhibit to the
                 Company's Registration Statement on Form S-4 filed with the Securities and Exchange
                 Commission on August 13, 1998 (No. 333-61403), which Exhibit is incorporated herein
                 by reference.

  10.22          Amended and Restated Guaranty Agreement executed by Northland Operating Co. in
                 favor of the Bank of Montreal, as agent, dated as of April 17, 1998, filed as an
                 Exhibit to the Company's Registration Statement on Form S-4 filed with the
                 Securities and Exchange Commission on August 13, 1998 (No. 333-61403), which
                 Exhibit is incorporated herein by reference.

  10.23          Amended and Restated Guaranty Agreement dated as of August 1, 1997 executed by
                 Corrida Resources, Inc., a Nevada corporation, in favor of the Bank of Montreal, as
                 agent, filed as an Exhibit to the Company's Registration Statement on Form S-4
                 filed with the Securities and Exchange Commission on August 13, 1998, which Exhibit
                 is incorporated herein by reference.

  10.24          Amended and Restated Security Agreement dated as of April 17, 1998 executed by
                 Queen Sand Resources, Inc., a Nevada corporation, in favor of the Bank of Montreal,
                 filed as an Exhibit to the Company's Registration Statement on Form S-4 filed with
                 the Securities and Exchange Commission on August 13, 1998, which Exhibit is
                 incorporated herein by reference.

  10.25**        Directors' Non-Qualified Stock Option Plan filed as Appendix A to the Company's
                 Definitive Proxy Statement on Schedule 14A dated October 23, 1998, which Exhibit is
                 incorporated herein by reference.

  10.26          Amended and Restated Securities Purchase Agreement dated as of July 8, 1998 among
                 the Company and the buyers signatory thereto, filed as an Exhibit to the Company's
                 Current Report on Form 8-K dated July 8, 1998, as amended by the Current Report on
                 Form 8-K/A-1 dated July 8, 1998, which Exhibit is incorporated herein by reference.

  10.27          Securities Purchase Agreement dated as of November 10, 1998 among the Company and
                 the buyers signatory thereto, filed as an Exhibit to the Company's Current Report
                 on Form 8-K dated November 24, 1998.

  21.1           List of the subsidiaries of the registrant filed as an Exhibit to the Company's
                 Registration Statement on Form S-4 filed with the Securities and Exchange
                 Commission on August 13, 1999 (No. 333-61403) which Exhibit is incorporated by
                 reference
</TABLE>


<PAGE>   106

<TABLE>
<CAPTION>
EXHIBIT
 NUMBER                                             DESCRIPTION
--------                                            -----------

<S>              <C>
  23.1*          Consent of Ernst & Young LLP.

  23.2*          Consent of H.J. Gruy and Associates, Inc.

  23.3*          Consent of Harper & Associates, Inc.

  23.4*          Consent of Ryder Scott Company.

  27.1*          Financial Data Schedule
</TABLE>

*  Filed herewith.
**Denotes Management Contract.