<PAGE>   1

===============================================================================
                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-KSB

[X]               ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934
                     For the Fiscal Year Ended June 30,1998

                                       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.
              (Exact name of small business issuer in its charter)

                    DELAWARE                                    75-2615565
        (State or other jurisdiction of                      (I.R.S. Employer
         incorporation or organization)                     Identification No.)

            3500 OAK LAWN, SUITE 380
                 DALLAS, TEXAS                                  75219-4398
   (Address of principal executive offices)                     (Zip Code)

(Issuer's telephone number, including area code)              (214) 521-9959

           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)

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

         Check whether the Issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past
ninety (90) days.
         YES [X]           NO  [ ]

         Check if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment of this Form 10-KSB. [ ]

         Issuer's revenues for the fiscal year ended June 30, 1998 were
$10,878,066.

         The number of shares of Common Stock, par value $0.0015 per share, of
the registrant outstanding on September 17, 1998, was 30,924,918. The aggregate
market value of the voting and non-voting common equity held by nonaffiliates
(all directors, officers and 5% or more shareholders are presumed to be
affiliates) of the registrant on September 17, 1998, was $140,211,599 based on
the closing bid price per share of the Common Stock on such date.

                       DOCUMENTS INCORPORATED BY REFERENCE

         Portions of the registrant's Proxy Statement for the 1998 Annual
Meeting of Stockholders, expected to be filed on or prior to October 28, 1998,
are incorporated by reference into Part III.

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

<PAGE>   2



                                TABLE OF CONTENTS

<TABLE>
<CAPTION>

                                                                                                               Page
                                                                                                               ----
<S>           <C>          <C>                                                                                 <C>
PART I............................................................................................................1
              Item 1.      Description of Business................................................................1
              Item 2.      Description of Properties.............................................................25
              Item 3.      Legal Proceedings.....................................................................26
              Item 4.      Submission of Matters to a Vote of Security Holders...................................26

PART II..........................................................................................................27
              Item 5.      Market for the Common Equity and Related Stockholder Matters..........................27
              Item 6.      Management's Discussion and Analysis or Plan of Operation.............................28
              Item 7.      Financial Statements..................................................................41
              Item 8.      Changes in and Disagreements with Accountants on
                           Accounting and Financial Disclosure...................................................41

PART III.........................................................................................................43
              Item 9.      Directors, Executive Officers, Promoters and Control Persons;
                           Compliance with Section 16(a) of the Exchange Act.....................................43
              Item 10.     Executive Compensation................................................................43
              Item 11.     Security Ownership of Certain Beneficial Owners and Management........................43
              Item 12.     Certain Relationships and Related Transactions........................................43

PART IV..........................................................................................................44
              Item 13.     Exhibits and Reports on Form 8-K......................................................44

GLOSSARY.........................................................................................................48
</TABLE>




                                        i

<PAGE>   3



                           QUEEN SAND RESOURCES, INC.

                                     PART I

FORWARD-LOOKING STATEMENTS

     This Annual Report on Form 10-KSB includes "forward-looking statements"
within the meaning of Section 27A of the Securities Act of 1933, as amended (the
"Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), which can be identified by the use of
forward-looking terminology such as, "may," "believe," "expect," "intend,"
"plan," "seek," "anticipate," "estimate" or "continue" or the negative thereof
or other variations thereon or comparable terminology. All statements other than
statements of historical fact included in this Annual Report on Form 10-KSB,
including without limitation, the statements under "Item 1. Description of
Business " and "Item 6. Management's Discussion and Analysis or Plan of
Operation" and located elsewhere herein regarding the financial position and
liquidity of the Company (defined below), the volume or discounted present value
of its oil and natural gas reserves, its ability to service its indebtedness,
its strategic plans including its ability to locate and complete acquisitions
of, and to develop, oil and natural gas assets and other matters, are
forward-looking statements. Although the Company believes that the expectations
reflected in such forward-looking statements are reasonable, it can give no
assurance that such expectations will prove to have been correct. Important
factors with respect to any such forward-looking statements, including certain
risks and uncertainties that could cause actual results to differ materially
from the Company's expectations ("Cautionary Statements") are disclosed in this
Annual Report on Form 10-KSB, including, without limitation, in conjunction with
the forward-looking statements included in this Annual Report on Form 10-KSB.
Important factors that could cause actual results to differ materially from
those in the forward-looking statements herein include, but are not limited to,
the timing and extent of changes in commodity prices for oil and natural gas,
the need to develop and replace reserves, environmental risks, drilling and
operating risks, risks related to exploitation and development, uncertainties
about the estimates of reserves, competition, government regulation and the
ability of the Company to meet its stated business goals. All subsequent written
and oral forward-looking statements attributable to the Company or persons
acting on its behalf are expressly qualified in their entirety by the Cautionary
Statements. As used herein, references to the "Company" are to Queen Sand
Resources, Inc., a Delaware corporation ("Queen Sand Resources") and its
subsidiaries.


ITEM 1.       DESCRIPTION OF BUSINESS

GENERAL

     Queen Sand Resources is an independent energy company which emphasizes
growth in oil and natural gas reserves and production volumes through the
acquisition, exploitation and development of on-shore oil and natural gas
properties located in the United States. Since August 1994, the Company has
grown primarily through 19 acquisitions of oil and natural gas properties for
aggregate consideration of approximately $166.7 million. As a result of the
Company's activities to date, it has assembled a geographically and geologically
diverse property base, characterized by long-lived production and multiple
opportunities for further development, exploitation and exploration. For the
year ended June 30, 1998, the Company had revenues of $10.9 million and earnings
before interest, taxes, depreciation, depletion and amortization ("EBITDA") of
$4.1 million. As of August 31, 1998, the officers and directors of the Company
collectively had a beneficial interest in or had a proxy for approximately 20.1%
of the Company's voting capital stock, and Joint Energy Development Investments
Limited Partnership ("JEDI"), an affiliate of Enron Corp. ("Enron"),
beneficially owned approximately 33.0% of the Company's voting capital stock.

     The Company's objective is to increase its reserves, production, earnings,
cash flow and net asset value through a growth strategy that seeks to maintain a
diversified portfolio of oil and natural gas reserves with stable production and
operating characteristics. The Company seeks to achieve this objective through a
balanced mix of oil and natural gas property acquisitions coupled with the
development and exploitation of its reserve base. The Company evaluates
potential acquisition properties based on their particular impact upon the
Company's portfolio of reserves. The Company focuses on low reserve replacement
costs, long reserve life, an inventory of attractive development and




<PAGE>   4


exploitation projects, and the potential for reserve and production growth. In
aggregate, the Company has currently identified over 252 potential development
locations and exploitation projects on its properties. The Company currently
plans to spend approximately $17 million through June 30, 1999 to further
develop and exploit its existing properties.

     At June 30, 1998, the Company had interests in 1,003 wells (inclusive of 69
service wells), proved reserves of 176 Bcf of natural gas and 7.9 MMBbls of oil
(aggregating approximately 224 Bcfe) with a SEC PV-10 of $165 million, and a
Reserve Life Index of 12 years. Approximately 69% of the Company's reserves was
classified as proved developed producing and approximately 79% of the Company's
total proved reserves was natural gas. The Company's average daily net
production was 47.7 MMcfe for the month of June 1998.

     The Company's properties are diversified across 114 producing fields which
are located principally in the southwestern United States. The Company's
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 62% of its proved reserves (on a SEC
PV-10 basis) as of June 30, 1998. In addition, the Company has substantial
properties in Oklahoma and Louisiana. At June 30, 1998, the Company held
interests in leases covering approximately 259,016 gross (121,129 net) acres.

     The Company was incorporated under the laws of the state of Delaware on May
11, 1989 under the name "Park Avenue Capital Corp." Prior to March 1995, the
Company had no substantive operations. The Company operates its business through
three subsidiaries, Queen Sand Resources, Inc., a Nevada corporation ("QSRn"),
Northland Operating Co., a Nevada corporation ("Northland"), and Corrida
Resources, Inc., a Nevada corporation ("Corrida").

BUSINESS STRATEGY

     The Company's strategy is to increase its reserves, production, earnings,
cash flow and net asset value by (i) acquiring strategic oil and natural gas
properties in a disciplined manner, (ii) developing, exploiting and exploring
its properties, (iii) achieving low operating costs and (iv) maintaining
financial flexibility.

    o    Strategic Acquisitions. The Company has a successful track record of
         increasing its reserves through acquisitions, having added an estimated
         257.4 Bcfe of proved reserves from 19 acquisitions for aggregate
         consideration of $166.7 million or $0.65 per Mcfe since commencing
         operations in August 1994 through the date of this Annual Report on
         Form 10-KSB. The Company seeks to expand its diversified, long-lived
         portfolio of oil and natural gas properties by acquiring producing
         properties with (i) identified development and exploitation potential,
         (ii) controlled-risk exploration potential, (iii) historically low
         operating expenses, or the opportunity to reduce operating expenses,
         and (iv) geological, geophysical and other technical and operating
         characteristics with which management of the Company has expertise. The
         Company applies strict economic and reserve risk criteria in evaluating
         acquisitions of oil and natural gas properties.

    o    Development, Exploitation and Exploration. The Company seeks to
         maximize the value and cash flow of its oil and natural gas properties
         through development drilling, workovers, recompletions, enhanced
         recovery techniques and reductions in operating costs. The Company has
         identified over 252 potential development locations and exploitation
         projects on its existing portfolio of properties. The Company currently
         plans to spend approximately $12 million to drill or participate in the
         drilling of approximately 118 wells through June 30, 1999. The Company
         also continually evaluates and pursues exploitation opportunities,
         including workover and recompletion projects. The Company expects to
         spend approximately $5 million on these exploitation projects through
         June 30, 1999. Although the Company could increase its exploration
         drilling activity in the future, its current strategy includes only
         limited investments in exploratory projects.

     o   Low Operating Costs. The Company's goal is to achieve a lower operating
         expense on a per unit (Mcfe) basis than that of its peers. The Company
         is pursuing this objective by emphasizing cost controls in its field
         operating expenses and acquiring properties with low operating costs
         while increasing existing production through development drilling and
         effective workover and well maintenance programs. Through these
         efforts, the Company has reduced lease operating expenses from $1.52
         per Mcfe during the year ended June 30, 1997 to $1.07 per Mcfe for the
         year ended June 30, 1998.


                                        2

<PAGE>   5



    o    Financial Flexibility. The Company is committed to maintaining
         financial flexibility, which management believes is important for the
         successful implementation of its growth strategy. In implementing this
         strategy, the Company intends to continue using a mixture of debt and
         equity. Consistent with this financial strategy, the Company raised an
         aggregate of approximately $65.2 million in equity capital from August
         9, 1994 through June 30, 1998. On July 8, 1998 and July 20, 1998 the
         Company issued an aggregate of 3,428,574 shares of Common Stock for $24
         million cash and two holders of warrants exercised their warrants and
         certain maintenance rights to purchase an aggregate of 3,074,236 shares
         of stock for an aggregate exercise and purchase price of $8.5 million.
         As of August 31, 1998, the Company had approximately $14.7 million
         available under its Amended and Restated Credit Agreement (the "Credit
         Agreement") and $10.0 million available under its revolving credit
         facility (the "ECT Revolving Credit Agreement") with Enron Capital &
         Trade Resources Corp. ("ECT"). In general, the Company strives to
         maintain a balanced asset/liability management program by matching
         long-lived reserves with extended maturity liabilities. Furthermore,
         the Company seeks to mitigate the effect of decreases in commodity
         prices by utilizing hedging instruments. The Company has also entered
         into, and may in the future utilize, interest rate hedges.

RECENT PROPERTY ACQUISITIONS

Morgan Property Acquisition

     General. On April 20, 1998, the Company acquired various non-operated net
profits interests ("NPIs") and royalty interests revenues ("RIs," and together
with the NPIs, the "Morgan Properties") for gross cash consideration of $150.0
million (net consideration of approximately $137.9 million after adjustments for
net profits interests and royalty interests revenues and capital expenditures
since October 1, 1997, the effective date of the purchase) 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 the two subordinated bridge credit facilities (the "Bridge
Facilities"). The oil and natural gas properties burdened by the Morgan
Properties (collectively, the "Underlying Properties") are primarily located in
East Texas, South Texas and the mid-continent region of the United States.
According to Ryder Scott Company ("Ryder Scott"), independent petroleum
engineers, as of June 30, 1998, the Morgan Properties contained proved reserves
of 116 Bcf of natural gas and 3.4 MMBbls of oil (aggregating 137 Bcfe), of which
approximately 77% was classified as proved developed producing. The Morgan
Properties had a SEC PV-10 of $119 million as of June 30, 1998. The Company 
estimates that as of the effective date of the Morgan Property Acquisition, the 
proved reserves attributed to the Morgan Properties were 149.5 Bcfe.

     The Company believes that the Morgan Property Acquisition provides it with
certain benefits, including (i) the enhancement of the Company's portfolio of
high quality reserves with long production histories and low operating costs,
(ii) additional cash flow to fund development and exploitation projects, (iii)
the enhancement of its operational base to grow through further acquisitions,
(iv) significant additional development and exploitation opportunities and (v)
additional geographic core concentration of the Company's existing properties
and operational capabilities. Although the Company did not directly acquire
working interests in the wells located on the Underlying Properties, the Company
believes that its significant interests in certain key Underlying Properties
will enable the Company to influence the timing and manner of development and
exploitation of such key properties. Such influence results from the relatively
large size of the Applicable Percentage (as defined in the applicable ancillary
agreements pertaining to each Conveyance of a NPI (the "Ancillary Agreements"))
in a number of Morgan Properties, and the desire of the assignor (the
"Assignor") and/or the operators of particular Underlying Properties to have the
Company pay the Applicable Percentage of the costs of drilling, completing and
equipping new wells or other significant capital assets; if the Company does not
agree to pay such amounts according to the terms of the Ancillary Agreements,
then the Assignor, the operator and/or the other working interest owners must
pay the Applicable Percentage of such costs. Accordingly, the ability of the
Company to select those operations it will choose to fund gives it significant
influence over the development of certain key Underlying Properties. See "Item
1. Description of Business -- Risk Factors -- Nature of the Net Profits
Interests and Royalty Interests."

     Form of Property Ownership. The Morgan Properties burden the Underlying
Properties. The Morgan Properties were conveyed to the Company by means of
various conveyances ("Conveyances"). Each Conveyance burdens a working interest
in a field or group of fields. Since tax exempt investors such as the pension
funds managed by J.P.

                                        3

<PAGE>   6



Morgan Investments could not own working interests without incurring income
taxes, the NPIs were structured to yield many of the same economic benefits and
burdens as a working interest owner without the liabilities associated with
leasehold ownership. An NPI is an ownership in the gross production of oil,
natural gas or other minerals attributable to the burdened working interest.
Each NPI is created in a particular Conveyance; each Conveyance contains a
description of the procedure for calculating the monthly payments to the
Company. These Conveyances were intended to convey the Morgan Properties as real
property interests under applicable law. See "Item 1. Description of Business --
Risk Factors -- Nature of the Net Profits Interests and Royalty Interests."

     The various Assignors of NPIs own the Underlying Properties subject to and
burdened by the NPIs conveyed to the Company. Each Assignor receives all
payments relating to the Underlying Properties and is required to pay to the
Company the portion thereof attributable to the NPI. Under each Conveyance, the
amounts payable with respect to the Morgan Properties are computed and paid
monthly. Each Assignor is entitled to retain any amounts attributable to the
Underlying Properties which are not required to be paid to the Company with
respect to the Morgan Properties.

     Similarly, the RIs generally entitle the Company to receive a certain
percentage of all of the proceeds of production sold from the particular
Underlying Property, free and clear of all costs of development and operations,
but subject, in certain situations, to its proportionate share of certain
processing and transportation costs. The RI is calculated and paid to the
Company by either the applicable Assignor, the operator or, in some cases, the
purchaser of production from the applicable Underlying Property.

     In general, the NPIs provide that the monthly cash amount paid for lease
operating expenses, severance and ad valorem taxes, workover costs, overhead per
well, and other identified expenses be subtracted from the production revenue
received by the burdened working interest (the "net profit" or "Net Cash Flow").
While the Company has audit rights with respect to the proper calculation of Net
Cash Flow, the calculation of Net Cash Flow and payment of the NPI is dependent
upon the financial integrity and competence of the Assignors. Each Assignor is
then required to pay a specified percentage of the Net Cash Flow to the Company
along with a summary of the monthly accounting. Should the Net Cash Flow for a
particular month be negative, the working interest owner recoups any deficit
from future Net Cash Flow before resuming payments to the Company. The Company
elects whether or not to participate in new wells, recompletions and other
capital items proposed by the working interest owners. A related document, the
Ancillary Agreement, provides a procedure allowing such elections. If the
Company elects to participate, it pays a percentage of the capital cost to
drill, complete, and equip new wells for production. These capital costs are
invoiced directly to the Company. The NPIs require that Assignor provide all
geologic and economic data necessary to assess new well elections. With this
data, the Company's engineering personnel can develop the technical and
operational understanding of the properties that is necessary to make
suggestions and to influence on-going development activities.

     The NPIs are interests in minerals only. The Company does not own any of
the equipment on the leases or the Underlying Properties. Investments in new
wells drilled on the Underlying Properties will likely have to be fully
capitalized and depleted, i.e., there may be no current deductions for
intangible drilling or completion costs.

     The owner of the Morgan Properties should not be personally liable for
costs and expenses, losses or damages arising from the extraction of minerals
from the Underlying Properties. In addition, each Conveyance contains a
provision that the owner of the NPI will not be liable for expenses or
liabilities incurred in connection with the operations and provides an indemnity
by the Assignor to the NPI owner against any such cost or liabilities. Although
the NPI owner is not liable for payment of costs, losses or damages described
above, certain of such costs, losses or damages may qualify as a deduction in
calculating Net Cash Flow. However, unlike non-operated working interests, the
NPI owner is not personally liable for these costs, losses or damages. As an
extra measure of protection, the NPI requires that the working interest owner
maintain specified types of insurance and the NPI owner be an additional named
insured on those policies. See also "-- Title to Oil and Natural Gas Properties"
and "-- Litigation."



                                        4

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NASGAS Property Acquisition

     On March 9, 1998 (with an effective date of January 1, 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
(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"). According to H.J. Gruy and Associates, Inc. ("H.J. Gruy"),
independent petroleum engineers, the proved reserves attributed to the NASGAS
Properties as of June 30, 1998 were 36.7 Bcf, 100% of which was natural gas, and
12% proved developed producing, with a SEC PV-10 of $9.4 million. The Company
believes the NASGAS Property Acquisition provides it with certain benefits,
including a large inventory of low-cost, low-risk development drilling
opportunities.

Collins and Ware Property Acquisition

     On August 1, 1997, the Company purchased certain operated oil and natural
gas properties for cash consideration (net of production subsequent to the
February 1, 1997 effective date) of approximately $6.0 million and 1,000,000
shares of the Company's Common Stock (the "Collins and Ware Property
Acquisition"). The acquired properties were comprised of interests in 77 gross
(12.4 net) wells located in New Mexico, Texas and Oklahoma (the "Collins and
Ware Properties"). According to H.J. Gruy, the proved reserves attributed to the
Collins and Ware Properties as of June 30, 1998 were 6.6 Bcfe, 19% of which was
natural gas, and 77% proved developed producing, with a SEC PV-10 of $5.6
million.

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, 1998.

<TABLE>
<CAPTION>

                                                                           PROVED RESERVES (1)
                                              -----------------------------------------------------------------------------
                                   TOTAL                                  TOTAL       PERCENT
                                 GROSS OIL                  NATURAL       PROVED      OF TOTAL       SEC        PERCENT
                                  AND GAS        OIL          GAS        RESERVES      PROVED       PV-10       OF TOTAL
                                   WELLS       (MBBLS)      (MMCF)        (BCFE)      RESERVES      (000S)     SEC PV-10
                                 ----------   ----------   ----------   ----------   ----------    ----------   ----------
<S>                              <C>         <C>           <C>          <C>          <C>           <C>          <C>  
EAST TEXAS
    Gilmer Field .............           42          496       56,631         59.6         26.6%   $   50,944         30.9%
    Other ....................          119          953       18,607         24.3         10.9        20,573         12.4
                                 ----------   ----------   ----------   ----------   ----------    ----------   ----------
          Total East Texas ...          161        1,449       75,238         83.9         37.5        71,517         43.3

SOUTH TEXAS

    J.C. Martin Field ........           72            0       19,124         19.1          8.5        23,220         14.1
    Lopeno and Volpe Fields ..           16            0       19,832         19.8          8.9        13,626          8.3
    Other ....................          141          211        2,650          4.0          1.8         3,511          2.0
                                 ----------   ----------   ----------   ----------   ----------    ----------   ----------
        Total South Texas ....          229          211       41,606         42.9         19.2        40,357         24.4
KENTUCKY (APPALACHIAN BASIN)
    Meade Field ..............           21            0       36,681         36.7         16.4         9,384          5.7
NEW MEXICO
    Caprock (Queen) Field ....           74        2,527            0         15.2          6.8         4,697          2.8
    Other ....................            1            0            6            0            0             3            0
                                 ----------   ----------   ----------   ----------   ----------    ----------   ----------
        Total New Mexico .....           75        2,527            6         15.2          6.8         4,700          2.8
OTHER ........................          448        3,762       22,560         45.1         20.1        39,161         23.8
                                 ----------   ----------   ----------   ----------   ----------    ----------   ----------
TOTAL ........................          934        7,949      176,095        223.8        100.0%   $  165,119        100.0%
                                 ==========   ==========   ==========   ==========   ==========    ==========   ==========
</TABLE>

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

(1)  The proved reserves and SEC PV-10 with respect to the Morgan Properties
     were estimated by Ryder Scott. The proved reserves and SEC PV-10 other than
     with respect to the Morgan Properties were estimated by H.J. Gruy.




                                        5

<PAGE>   8



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

East Texas

     Gilmer Field. The Gilmer Field was part of the Morgan Property Acquisition
and consists of 42 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.

     The Gilmer Field is located on the northwestern flank of the Sabine Uplift.
The initial well in the field was drilled in 1966 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.

     The Morgan Properties in the Gilmer Field were initially conveyed in 1991
in conjunction with Goldston Oil Corporation and its related entities
("Goldston") and two industry participants. The Company's interest is a 47.5%
NPI in Goldston's working interest in 13 gas units in the heart of the Gilmer
Field. Goldston has an 80% working interest and is operator of the units. Well
spacing is currently four wells per 640 acre block for most of the units in the
field.

     At June 30, 1998, the Gilmer Field contained 59.6 Bcfe of proved reserves,
which represented approximately 26.6% of the Company's total proved reserves and
30.9% of the Company's SEC PV-10. The Company's average daily net production
from the Gilmer Field in June 1998 was approximately 12 MMcf of natural gas and
135 Bbls, aggregating 12.8 MMcfe.

     Goldston drilled and completed an infill well in January 1998 which tested
4,000 Mcf/d of natural gas and 40 Bbls/d of oil. Another well was spudded in
March 1998 and was completed in July 1998, testing 2,750 Mcf/d and 81 Bbls/d.
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 is scheduled to be installed and operating in
September 1998. Management believes that development of the three wells
discussed above along with central compression will lower gathering system
pressure and will allow the field to sustain a higher production rate through
1998.

South Texas

     J.C. Martin Field. The J.C. Martin Field consists of 72 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 and was part of the Morgan Property Acquisition. The Company's 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. The
Company's RI in this property is the subject of litigation involving the
predecessor owner. See "Item 1. Description of Business -- Legal Proceedings."

     At June 30, 1998, the J.C. Martin Field contained 19.1 Bcfe of proved
reserves, which represented approximately 8.5% of the Company's total proved
reserves and approximately 14.1% of the Company's SEC PV-10. The Company's
average daily net production from the J.C. Martin Field in June 1998 was 6.2
MMcfe.

     During 1997, Coastal drilled nine wells in this field. From January 1, 1998
through June 30, 1998 Coastal drilled an additional seven wells, three of which
have been completed and are on production and four of which are being completed.

     The first well drilled during 1998 in this field tested natural gas from a
deeper Cretaceous zone. The well is currently on production and is commingled
with the Lobo formation and is producing in excess of 3.7 MMcf/d. This 


                                        6

<PAGE>   9


zone previously had not produced on the lease but has produced significant
volumes to the north. Management believes that there may be additional potential
on the west end of the Mecom Ranch for this zone as only a few wells have
actually penetrated the Cretaceous zone. A second completion in the Cretaceous
zone tested 5.1 MMcf/d. Management also believes 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 and were also part of the Morgan Property Acquisition. These
fields consist of 13 wells with 16 separate completions. All of the wells
produce from multiple reservoirs in the Upper Wilcox formation. The Morgan
Properties in these fields were initially conveyed in 1995 in association with
Mustang Oil & Gas Corporation, a subsidiary of Gulf Resources Corporation ("Gulf
Resources"). In April 1998, Choctaw II Oil & Gas Ltd. ("Choctaw") acquired Gulf
Resources' working interests in these fields and is now the operator of 10 of
the 13 wells with Pioneer Resources Corporation operating the remainder.

     The Company's 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. Three proved undeveloped locations have been
identified in this field.

     At June 30, 1998, the Lopeno and Volpe Fields contained an estimated 19.8
Bcfe of proved reserves, which represented approximately 8.9% of the Company's
total proved reserves and approximately 8.3% of the Company's SEC PV-10. The
Company's average daily net production from the fields in June 1998 was 2.4
MMcf/d of natural gas.

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

Kentucky

     Meade Field. The Company has a 60% working interest in approximately 61,421
gross acres in Meade, Hardin and Breckinridge Counties, Kentucky. There are
currently 20 gross producing and 1 gross shut-in natural gas wells located on
the Company's leases in Meade County. Four of the wells were drilled in 1995, 14
in 1996 and the remainder in 1997. 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, the Company also owns an interest in one salt-water
disposal well and a related natural gas gathering system.

     At June 30, 1998, these properties contained 36.7 Bcfe of net proved
reserves, which represents approximately 16.4% of the Company's total proved
reserves and approximately 5.7% of the Company's SEC PV-10. The Company acquired
these properties because management believes 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. The Company's
average daily net production from the Meade Field in June 1998 was 151 Mcf.

New Mexico

     Caprock (Queen) Field. The Caprock (Queen) Field was the Company's first
acquisition and consists of 74 oil wells, 39 water injection wells, 30 shut-in
wells and 77 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"


                                        7

<PAGE>   10


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.

     The Company has 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, 1998, the Caprock Field contained an estimated 2,526 MBbls
(15.2 Bcfe) of net proved reserves, which represented approximately 6.8% of the
Company's total proved reserves and 2.8% of the Company's SEC PV-10. For the
month of June 1998 the Company's average daily net production was 101 Bbls of
oil.

     The Company has recently focused its efforts to improve the reservoir
management of the field. Recent capital expenditures have included replacing
flowlines and injection lines, replacing rod strings and downhole production
equipment, repairing pumping units, major overhauls of injection lines,
installing test headers and equipment, installing injection meters and returning
out of service wells to injection and production status.

     A pilot program, as the initial step toward redeveloping the waterflood
pattern, has been designed and the Company anticipates the program will be
implemented in the first half of fiscal year 1999. The Company is the operator.

DEVELOPMENT, EXPLOITATION AND EXPLORATION ACTIVITIES

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

     The objective of the Company's 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. The Company currently intends only
limited investments in exploratory drilling projects.

     During the period ended June 30, 1998, the Company participated in drilling
26 gross (9.6 net) wells, of which approximately 85% gross (78% net) were
productive. However, there can be no assurance that this past rate of drilling
success will continue in the future. The Company is currently pursuing
development drilling projects in 18 different fields and anticipates continued
growth in its drilling activities.

     At June 30, 1998, the Company had identified approximately 252 development
locations and exploitation projects on its acreage. The Company expects to spend
approximately $17 million on development locations and exploitation projects 
through June 30, 1999.

     The following is a brief discussion of the primary areas of development and
exploitation activity for the Company:


                                        8

<PAGE>   11


East Texas

     Segno Field. The Company intends 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. 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, 1999 include
drilling two proved undeveloped locations and six workovers/deepenings at a
total cost to the Company of approximately $425,000. In addition, several
significant new prospects have been identified utilizing 2-D seismic data. The
Company is participating in leasing of the acreage covering these prospects,
identified as "Segno West."

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. The Company anticipates at least nine
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
the Company of approximately $1.3 million. In addition, the Company participated
in a state lease sale with the operator on acreage offsetting its current
acreage and was the successful bidder on the tract. The Company also expects to
propose a Middle Wilcox test be drilled later this year to test this unproven
shallower zone.

     Lopeno/Volpe Fields. The Company believes significant potential exists in
the Lopeno/Volpe Fields to increase production. Several workovers have been
identified in the Lopeno Field to reopen zones which were completed and
stimulated, but due to lack of funds from the previous operator are not
producing. 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 to the Company that
it intends to pursue the necessary workovers and additional drilling. The
Company anticipates its share of capital expenditures in the Lopeno/Volpe fields
will be approximately $1.4 million through June 1999.

Kentucky

     Meade Field. The Company believes that the Meade Field presents
opportunities for low cost developmental drilling at depths of less than 1,000
feet. The Company expects that the field will be developed in five phases. Phase
1, consisting of 20 wells, was completed in 1996. A delineation well, the Gohl
No. 2, was drilled in late 1997 and extended the proven limits of the field four
miles to the southwest. Phases 2 through 5 are scheduled to occur between August
1998 and October 1999 with 10 wells drilled per month every other month for a
total of 101 wells at an average cost to the Company of $54,000 per well. The
total capital expenditures for the project are estimated at $5.4 million.

New Mexico

     Caprock (Queen) Field. Exploitation efforts at the Caprock (Queen) Field
include a coordinated program of workovers, waterflood redevelopment and infill
drilling. The Company, with the assistance of independent engineering
consultants, has evaluated several alternate development options. The Company
intends to redevelop the Rock Queen Unit with the drilling of infill development
wells establishing a modified seven spot pattern. It is anticipated that a total
of 55 producing wells and 14 water injection wells will be drilled, 59 wells
will be worked over, 24 wells will be returned to production and 19 wells will
be returned to injection. The Company plans 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. A pilot program has been designed
which consists of four horizontal water injection wells and one dual lateral
horizontal producer with an associated water injection plant and production
facility. The pilot will fully develop one 640 acre section of the Drickey Queen
Unit. The Company anticipates the pilot program will be implemented in the first
half of fiscal 1999 and will cost $2.1 million.


                                        9

<PAGE>   12


MARKETING

     The Company's oil and natural gas production is sold to various purchasers
typically in the areas where the oil or natural gas is produced. The Company
does not refine or process any of the oil and natural gas it produces. The
Company is currently able to sell, under contract or in the spot market, all of
the oil and the natural gas it is capable of producing at current market prices.
Substantially all of the Company's oil and natural gas is sold under short term
contracts or contracts providing for periodic adjustments or in the spot market;
therefore, its revenue streams are highly sensitive to changes in current market
prices. The Company's market for natural gas is pipeline companies as opposed to
end users. See "Item 1. Description of Business -- Risk Factors -- Volatility of
Oil and Natural Gas Prices" 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 the Company's operations and cash flow, management has
adopted a policy of hedging oil and natural gas prices whenever market prices
are in excess of the prices anticipated in the Company's operating budget and
financial plan through the use of commodity futures, options and swap
agreements. The Company does not engage in speculative hedging. See "Item 6.
Management's Discussion and Analysis or Plan of Operation -- Changes in Prices
and Hedging Activities."

     For the year ended June 30, 1998, Big Run Production and Goldston Oil
Corporation accounted for approximately 13% and 17%, respectively, of the
Company's 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 the Company's oil and natural 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. However, short term disruptions
could occur while the Company sought alternative buyers or while lines were
being connected to other pipelines.

     The market for oil and natural gas produced by the Company depends on
factors beyond its control, including the extent of domestic production and
imports of oil and natural gas, the proximity and capacity of natural gas
pipelines and other transportation facilities, weather, demand for oil and
natural gas, the marketing of competitive fuels and the effects of state and
federal regulation. 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 the Company's
estimated proved oil and natural gas reserves as of June 30, 1996, 1997, and
1998. All such reserves are located in the United States. The estimates relating
the Company's proved oil and natural gas reserves and future net revenues of oil
and natural gas reserves at June 30, 1998 with respect to the Morgan Properties
included in this Annual Report on Form 10-KSB are based upon reports prepared by
Ryder Scott. The estimates at June 30, 1997 and, other than with respect to the
Morgan Properties, at June 30, 1998 included in this Annual Report are based
upon reports prepared by H.J. Gruy. Such estimates at June 30, 1996 included in
this Annual Report are based upon reports prepared by Harper and Associates. 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
properties. The Company's 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,
                                         -----------------------------------------
                                             1996          1997           1998
                                         -----------   ------------   ------------
<S>                                        <C>           <C>            <C>      
Natural gas (per Mcf)...................   $    2.39     $    2.25      $    2.40
Oil (per Bbl)...........................       19.65         17.43          12.80
</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

                                       10

<PAGE>   13

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, there can be no assurance 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 Company
emphasizes with respect to the estimates prepared by independent petroleum
engineers that 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 the Company, 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 contract 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 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 the Consolidated Financial Statements of the Company, which is
calculated after provision for future income taxes. There can be no assurance
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 the Company's oil and natural
gas reserves and estimates of future net revenues attributable thereto, see Note
9 of the Notes to Consolidated Financial Statements.

Company Reserves

     The following tables set forth the proved reserves of oil and natural gas
of the Company and the SEC PV-10 thereof on an actual basis for each year in the
three-year period ended June 30, 1998.

                     PROVED OIL AND NATURAL GAS RESERVES(1)
<TABLE>
<CAPTION>

                                                                  JUNE 30,
                                                   ------------------------------------
                                                      1996         1997         1998
                                                   ----------   ----------   ----------
<S>                                                <C>          <C>          <C>    
NATURAL GAS RESERVES (MMCF):
    Proved Developed Producing Reserves ........        4,712        8,627      102,136
    Proved Developed Non-Producing Reserves ....        4,662        3,785       18,862
    Proved Undeveloped Reserves ................        3,610        8,561       55,097
                                                   ----------   ----------   ----------
         Total Proved Reserves of natural gas ..       12,984       20,973      176,095
                                                   ==========   ==========   ==========
OIL RESERVES (MBBL):
    Proved Developed Producing Reserves ........          751        1,181        3,814
    Proved Developed Non-Producing Reserves ....        1,514        1,007        1,484
    Proved Undeveloped Reserves ................        4,667        4,521        2,651
                                                   ----------   ----------   ----------
         Total Proved Reserves of oil ..........        6,932        6,709        7,949
                                                   ----------   ----------   ----------
TOTAL PROVED RESERVES (MMCFE) ..................       54,574       61,224      223,788
                                                   ==========   ==========   ==========
</TABLE>


                                       11

<PAGE>   14




                         SEC PV-10 OF PROVED RESERVES(1)
<TABLE>
<CAPTION>

                                                                   JUNE 30,
                                                   -------------------------------------

                                                      1996          1997           1998
                                                   ----------   ----------   ----------
<S>                                                <C>          <C>          <C>       
SEC PV-10 (THOUSANDS)(2):
     Proved Developed Producing Reserves .......   $    9,002   $   13,810   $  113,539
     Proved Developed Non-Producing Reserves ...        8,144        7,850       17,661
     Proved Undeveloped Reserves ...............       14,307       19,558       33,920
                                                   ----------   ----------   ----------

         TOTAL SEC PV-10 .......................   $   31,453   $   41,218   $  165,120
                                                   ==========   ==========   ==========
</TABLE>



     (1) The historical data at June 30, 1996 is based upon reserve reports
         prepared by Harper and Associates. The data shown at June 30, 1997 and
         June 30, 1998 (excluding data with respect to the Morgan Properties at
         June 30, 1998) is based upon reports prepared by H.J. Gruy. The data
         included with respect to the Morgan Properties at June 30, 1998 is
         based upon reserve reports prepared by Ryder Scott.
     (2) SEC PV-10 differs from the Standardized Measure set forth in the notes
         to the Consolidated Financial Statements of the Company, 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 the Company's proved reserves since
June 30, 1998.

     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 the Company with, or
included in any report to, any United States authority or agency pertaining to
the Company's individual reserves since the beginning of the Company's last
fiscal year. Reserves reported on Form EIA 23 are comparable to the reserves
reported by the Company herein.

OPERATIONS DATA

Productive Wells

     The following table sets forth the number of total gross and net productive
wells in which the Company owned an interest as of June 30, 1998.

<TABLE>
<CAPTION>

                                GROSS                             NET
                   ------------------------------   ------------------------------
                      OIL        GAS       TOTAL       OIL        GAS       TOTAL
                   --------   --------   --------   --------   --------   --------
<S>                <C>        <C>        <C>        <C>        <C>        <C>  
Texas ..........        335        221        556      124.5       78.9      203.4
New Mexico .....         75          2         77       73.6        0.6       74.2
Louisiana ......         35          4         39       15.2        0.4       15.6
Mississippi ....         24          0         24       17.1        0.0       17.1
Oklahoma .......         28        153        181        7.4       21.4       28.8
Kentucky .......          0         21         21          0       12.6       12.6
Other(1) .......          3         33         36        0.3        7.5        7.8
                   --------   --------   --------   --------   --------   --------
     Total .....        500        434        934      238.1      121.4      359.5
                   ========   ========   ========   ========   ========   ========
</TABLE>



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


     As of June 30, 1998, the Company had an interest in 934 gross (360 net)
productive oil and natural gas wells.


                                       12

<PAGE>   15
Production Economics

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


<TABLE>
<CAPTION>

                                                              YEAR ENDED JUNE 30,          
                                                     ------------------------------------
                                                                  HISTORICAL              
                                                     ------------------------------------
                                                        1996         1997         1998     
                                                     ----------   ----------   ----------
<S>                                                  <C>          <C>          <C>  
OPERATING DATA:
Production volumes:
   Natural gas (MMcf) ............................          154          546        3,368
   Oil (MBbl) ....................................          103          151          325
      Total (MMcfe) ..............................          769        1,430        5,318
Average sales price:
   Natural gas (per Mcf) .........................   $     2.43   $     2.31   $     2.27
   Oil (per Bbl) .................................        18.26        20.73        15.52
   Natural gas equivalent (per Mcfe) .............         2.70         3.02         2.39
Selected expenses (per Mcfe):
   Production taxes ..............................   $     0.22   $     0.21   $     0.06
   Lease operating expense .......................         1.31         1.52         1.07
   General and administrative ....................         1.45         1.00         0.43
   Depreciation, depletion and amortization(1) ...         0.82         0.68         0.91
</TABLE>


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







Drilling Activity

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

<TABLE>
<CAPTION>


                                                       FOR THE YEAR ENDED JUNE 30,
                                -------------------------------------------------------------------------

                                         1996                    1997                     1998
                                -------------------------------------------------------------------------

                                   GROSS        NET        GROSS        NET        GROSS         NET
                                -----------  ----------  ----------  ----------  ----------  -----------
<S>                             <C>          <C>         <C>         <C>         <C>         <C>
EXPLORATORY:
    Oil........................           4         2.0           1         0.5           1          0.0
    Gas........................           0         0.0           0         0.0           1          0.3
    Dry........................           2         1.0           0         0.0           1          0.7
                                -----------  ----------  ----------  ----------  ----------  -----------
       Total...................           6         3.0           1         0.5           3          1.0
                                ===========  ==========  ==========  ==========  ==========  ===========
DEVELOPMENT:
    Oil........................           0         0.0           0         0.0           5          2.1
    Gas........................           0         0.0           0         0.0          10          2.6
    Dry........................           0         0.0           0         0.0           1          0.4
                                -----------  ----------  ----------  ----------  ----------  -----------
       Total...................           0         0.0           0         0.0          16          5.1
                                ===========  ==========  ==========  ==========  ==========  ===========
TOTAL:
    Oil........................           4         2.0           1         0.5           6          2.1
    Gas........................           0         0.0           0         0.0          11          2.9
    Dry........................           2         1.0           0         0.0           2          1.1
                                -----------  ----------  ----------  ----------  ----------  -----------
       Total...................           6         3.0           1         0.5          19          6.1
                                ===========  ==========  ==========  ==========  ==========  ===========
</TABLE>


                                       13

<PAGE>   16

DEVELOPED AND UNDEVELOPED ACREAGE

     The following table sets forth the approximate gross and net acres in which
the Company owned an interest as of June 30, 1998.

<TABLE>
<CAPTION>

                                      DEVELOPED                  UNDEVELOPED
                              -------------------------  -------------------------
                                 GROSS          NET          GROSS         NET
                              ------------  -----------  ------------  -----------
<S>                           <C>           <C>          <C>              <C>   
Texas........................       73,074       38,027        39,833       17,273
New Mexico...................       14,440       14,170             0            0
Louisiana....................        5,865        2,334             0            0
Mississippi..................        1,633        1,323             0            0
Oklahoma.....................       42,240        5,954             0            0
Kentucky.....................          424          260        60,997       36,598
Other(1).....................       20,510        5,190             0            0
     Total...................      158,186       67,258       100,830       53,871
</TABLE>

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



MARKETS AND COMPETITION

     The oil and natural gas industry is highly competitive. 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 those of the Company. In
addition, the Company encounters substantial competition in acquiring oil and
natural gas properties, marketing oil and natural gas and securing trained
personnel. When possible, the Company tries 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 the Company to state accurately its position
in the oil and natural gas industry, the Company believes that it represents a
minor competitive factor.

     The market for oil and natural gas produced by the Company depends on
factors beyond its 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 natural gas industry as
a whole also competes with other industries in supplying the energy and fuel
requirements of industrial, commercial and individual consumers. See "Item 1.
Description of Business -- Risk Factors -- Volatility of Oil and Natural Gas
Prices."

TITLE TO OIL AND NATURAL GAS PROPERTIES

     The Company has acquired interests in producing and non-producing acreage
in the Form of working interests, RIs, overriding royalty interests and NPIs.
Substantially all of the Company's property interests, and the Assignors'
interests in 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 the Company's
non-producing acreage is held under leases from mineral owners or a government
entity which expire at varying dates. The Company is obligated to pay annual
delay rentals to the lessors of certain properties in order to prevent the
leases from terminating. Title to

                                       14

<PAGE>   17


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, the Company generally acquires oil and
natural gas acreage without any warranty of title except as to claims made by,
through or under the transferor. Although the Company has 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
the Company's 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: (i) royalties and other burdens and
obligations, expressed and implied, under oil and gas leases; (ii) overriding
royalties and other burdens created by Assignor or its predecessors in title;
(iii) 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; (iv) 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; (v) pooling,
unitization and communitization agreements, declarations and orders; and (vi)
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 the Company's interests and in
estimating the size and value of the reserves attributable to the Morgan
Properties.

REGULATION

General Federal and State Regulation

     The Company's 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 the Company's cost of doing business and affects its
profitability. Because such rules and regulations are frequently amended or
reinterpreted, the Company is unable to predict the future cost or impact of
complying with such laws.

     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 the Company for sales of its
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 the
Company. Generally, Order 636 has eliminated or substantially reduced the
interstate pipelines' traditional role as wholesalers of natural gas, and has
substantially increased competition and volatility in natural gas markets.


                                       15

<PAGE>   18




     The price the Company receives 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. The Company is 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. Description of Business -- Risk Factors --
Government Laws and Regulations."

Environmental Regulation

     The Company's exploration, development and production of oil and natural
gas, including its 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. The Company's 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. The Company also
is 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 the Company 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 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, the
Company's 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. The Company generates 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



                                       16

<PAGE>   19





a significant impact on the Company's operating costs. While state laws vary on
this issue, state initiatives to further regulate oil and natural gas wastes
could have a similar impact.

     Because oil and natural gas exploration and production, and possibly other
activities, have been conducted at some of the Company's properties by previous
owners and operators, materials from these operations remain on some of the
properties and in some instances require remediation. In addition, the Company
has agreed to indemnify sellers of producing properties from whom the Company
has acquired reserves against certain liabilities for environmental claims
associated with such properties. While the Company does not believe that costs
to be incurred by the Company 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 the Company's routine oil and natural gas
operations, surface spills and leaks, including casing leaks, of oil or other
materials occur, and the Company incurs costs for waste handling and
environmental compliance. Moreover, the Company is able to control directly the
operations of only those wells for which it acts as the operator.
Notwithstanding the Company's lack of control over wells owned by the Company
but operated by others, the failure of the operator to comply with the
applicable environmental regulations may, in certain circumstances, be
attributable to the Company.

     Is it not anticipated that the Company will be required in the near future
to expend amounts that are material in relation to its total capital
expenditures program by reason of environmental laws and regulations, but
inasmuch as such laws and regulations are frequently changed, the Company is
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 the Company will not otherwise incur material expenses in
connection with environmental laws and regulations in the future. See "Item 1.
Description of Business -- Risk Factors -- Government Laws and Regulations."

EMPLOYEES

     As of September 14, 1998, the Company had 22 full-time employees consisting
of 10 officers and 12 support staff. Four of the employees are in Ottawa,
Canada, 13 of the employees are located in the Dallas office, 3 are on site in
New Mexico, one is on site in Kentucky and 1 is on site in East Texas. In
addition, the Company regularly engages technical consultants and independent
contractors to provide specific advice or to perform certain administrative or
technical functions.

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. Description of Business -- Risk
Factors -- Nature of the Net Profits Interests and Royalty Interests --
Litigation."

     No other legal proceedings are pending other than ordinary routine
litigation incidental to the Company business, the outcome of which management
believes will not have a material adverse effect on the Company.

RISK FACTORS

Effects of Leverage

     At June 30, 1998, the Company's ratio of total indebtedness to total
capitalization was 104.4% (on a pro forma basis 86.3%). At June 30, 1998, the
Company's consolidated total interest coverage ratio was 1.0:1.0. The Company
intends to incur additional indebtedness in the future as it executes its
acquisition and exploitation strategy. See "Item 1. Description of Business --
Risk Factors -- Substantial Capital Requirements."

     The Company's ability to meet its debt service obligations will be
dependent upon the Company's future performance, which will be subject to oil
and natural gas prices, the Company's level of production, general

                                       17

<PAGE>   20


economic conditions and to financial, business and other factors affecting the
operations of the Company, many of which are beyond its control. There can be no
assurance that the Company's future performance will not be adversely affected
by some or all of these factors. See "Item 6. Management's Discussion and
Analysis or Plan of Operation -- Liquidity and Capital Resources."

     The Company's level of indebtedness will have several important effects on
its future operations, including (i) a substantial portion of the Company's cash
flow from operations must be dedicated to the payment of interest on its
indebtedness and will not be available for other purposes, (ii) covenants
contained in the Company's debt obligations will require the Company to meet
certain financial tests, and other restrictions will limit its ability to borrow
additional funds or to dispose of assets and may affect the Company's
flexibility in planning for, and reacting to, changes in its businesses,
including possible acquisition activities and (iii) the Company's ability to
obtain additional financing in the future may be impaired. The Company has
experienced financial covenant defaults under the Credit Agreement, which
defaults were waived by its lender. While the Credit Agreement reflects revised
financial covenant terms which the Company believes it can meet for the
foreseeable future, there can be no assurance that the Company will not default
on its financial covenants under the Credit Agreement or the ECT Revolving
Credit Agreement or that the lenders will waive any such defaults. A default
under the Credit Agreement or the ECT Revolving Credit Agreement would permit
the lenders to accelerate repayments of their loans and to foreclose on the
collateral securing the loans, including the Company's oil and natural gas
properties.

Holding Company Structure

     Queen Sand Resources is a holding company, the principal assets of which
consist of equity interests in its subsidiaries. Accordingly, Queen Sand
Resources derives all of its revenues from the operations of its subsidiaries.
As a result, Queen Sand Resources will be dependent on the earnings and cash
flow of, and dividends and distributions or advances from, its subsidiaries to
provide the funds necessary to meet its debt service obligations. The payment of
dividends from the subsidiaries to Queen Sand Resources and the payment of any
interest on or the repayment of any principal of any loans or advances made by
Queen Sand Resources to any of its subsidiaries may be subject to statutory
restrictions and are contingent upon the earnings of such subsidiaries.

Volatility of Oil and Natural Gas Prices

     The Company's financial condition, operating results and future growth are
substantially dependent upon commodity prices and demand for oil and natural
gas. Historically, the markets for oil and natural gas have been volatile and
are likely to continue to be volatile in the future. Prices for oil and natural
gas are subject to wide fluctuation in response to market uncertainty, changes
in supply and demand and a variety of additional factors, all of which are
beyond the control of the Company. These factors include domestic and foreign
political conditions, the overall supply of, and demand for, oil and natural
gas, the price of imports of oil and natural gas, weather conditions, the price
and availability of alternative fuels and overall economic conditions. The
Company's future financial condition and results of operations will be
dependent, in part, upon the prices received for the Company's oil and natural
gas production, as well as the costs of acquiring, finding, developing and
producing reserves. In order to reduce its exposure to price risks in the sale
of its oil and natural gas, the Company has entered into and may in the future
enter into hedging contracts. See "Item 6. Management's Discussion and Analysis
or Plan of Operation -- Changes in Prices and Hedging Activities" and "Item 1.
Description of Business -- Risk Factors -- Risks of Hedging Activities."
Furthermore, the prices paid for the Company's share of oil and natural gas
production depends in part upon the availability, proximity and capacity of
gathering systems. The Company's current production is predominantly weighted
toward natural gas, making earnings and cash flow more sensitive to natural gas
price fluctuations. For the fiscal year ended June 30, 1998, the Company has
estimated that a $0.10 per Mcf decline in natural gas prices would have resulted
in a $505,000 decrease in the Company's EBITDA, and a $1.00 per Bbl decline in
oil prices would have resulted in a $572,000 decrease in the Company's EBITDA.
For the fiscal year ended June 30, 1998, the Company estimated that a $0.10 per
Mcf increase in natural gas prices would have resulted in a $505,000 increase in
the Company's EBITDA. For the fiscal year ended June 30, 1998, the Company
estimated that a $1.00 per Bbl increase in oil prices would have resulted in a
$931,000 increase in the Company's EBITDA. The Company's ability to repay
outstanding amounts under the Credit Agreement, the ECT Revolving Credit
Agreement and the Notes, as well as the Company's ability to maintain or
increase its borrowing capacity and to 


                                       18

<PAGE>   21


obtain additional capital on attractive terms, are also substantially dependent
upon oil and natural gas prices. See "Item 1. Description of Business -- Risk
Factors -- Substantial Capital Requirements" and " Item 6. Management's
Discussion and Analysis or Plan of Operation."

Replacement and Expansion of Reserves

     The Company's financial condition and results of operations depend
substantially upon its ability to acquire or find and successfully develop
additional oil and natural gas reserves. The proved reserves of the Company will
generally decline as its reserves are produced, except to the extent that the
Company acquires properties containing proved reserves or conducts successful
development, exploitation or exploration activities. The decline rate varies
depending upon reservoir characteristics and other factors. Without reserve
additions in excess of production through acquisition or exploitation and
development activities, the Company's reserves and production will decline over
time. There can be no assurance that the Company will be able to economically
find and develop or acquire additional reserves to replace its current and
future production.

Acquisition Risks

     The Company expects to continue to evaluate and pursue acquisition
opportunities, primarily in the mid-continent and southwest regions of the
United States. The successful acquisition of producing properties requires an
assessment of recoverable reserves, future oil and natural gas prices, operating
costs, potential environmental and other liabilities and other factors beyond
the Company's control. This assessment is necessarily inexact and its accuracy
is inherently uncertain. In connection with such an assessment, the Company
performs a review it believes to be generally consistent with industry
practices. This review, however, will not reveal all existing or potential
problems, nor will it permit the Company to become sufficiently familiar with
the properties to fully assess their deficiencies and capabilities. Inspections
generally are not performed on every well, and structural and environmental
problems are not necessarily observable even when an inspection is undertaken.
Even when problems are identified, the seller may not be willing or financially
able to give contractual protection against such problems, and the Company may
decide to assume environmental and other liabilities in connection with acquired
properties. There can be no assurance that the Company's acquisitions will be
successful. Any unsuccessful acquisition could have a material adverse effect on
the Company's financial condition and results of operations.

     The Morgan Property Acquisition represents the largest acquisition
undertaken by the Company to date and represents a major step in the Company's
growth strategy. However, the increased size of the Company and its scope of
operations will present significant challenges to the Company due to the
increased time and resources required in the management effort. Accordingly,
there can be no assurance that the future operations of the Company can be
effectively managed to realize the goals anticipated of the Property
Acquisitions. In addition, the management of the existing asset base and the
continued growth and expansion of the Company will depend, among other factors,
on the Company's ability to recruit and retain skilled and experienced
management and technical personnel. There can be no assurance that the Company
will be successful in such efforts.

Drilling and Operating Risks

     The Company's oil and natural gas business is also subject to all of the
operating risks associated with the drilling for and production and secondary
recovery of oil and natural gas, including, but not limited to, uncontrollable
flows of oil, natural gas, brine or well fluids (including fluids used in
waterflood activities) into the environment (including groundwater
contamination), fires, explosions, pollution and other risks, any of which could
result in substantial losses to the Company. Drilling activities are subject to
many risks, including the risk that no commercially productive oil or natural
gas reservoirs will be encountered. The Company anticipates drilling or
participating in the drilling of a substantially greater number of wells over
the next 12 to 18 months than it has in the past. There can be no assurance that
new wells drilled or participated in by the Company will be productive or that
the Company will recover all or any portion of its investment. Drilling for oil
and natural gas may involve unprofitable efforts, not only from dry wells, but
from wells that are productive but do not produce sufficient net revenues to
return a profit after drilling, operating and other costs. The cost of drilling,
completing and operating wells is often uncertain. The Company's drilling
operations may be curtailed, delayed or canceled as a result of a 

                                       19

<PAGE>   22


variety of factors, many of which are beyond its control, including economic
conditions, mechanical problems, pressure or irregularities in formations, title
problems, weather conditions, compliance with governmental requirements and
shortages in or delays in the delivery of equipment and services. The Company's
future drilling activities may not be successful. Lack of drilling success could
have a material adverse effect on the Company's financial conditions and results
of operations.

     In addition to the substantial risk that wells drilled will not be
productive, hazards such as unusual or unexpected geologic formations,
pressures, downhole fires, mechanical failures, blowouts, cratering, explosions,
uncontrollable flows of oil, natural gas or wells fluids, pollution and other
environmental risks are inherent in oil and natural gas development,
exploitation, exploration, production and gathering. These hazards could result
in substantial losses to the Company 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. The Company carries insurance
that it believes is in accordance with customary industry practices, but, as is
common in the oil and natural gas industry, the Company does not fully insure
against all risks associated with its business either because such insurance is
not available or because the cost thereof is considered prohibitive. The
occurrence of an event that is not covered, or not fully covered by insurance,
could have a material adverse effect on the Company's financial condition and
results of operations.

     There are certain risks associated with secondary recovery operations,
especially the use of waterflooding techniques, and drilling activities in
general. Waterflooding involves significant capital expenditures and uncertainty
as to the total amount of secondary reserves that can be recovered. In
waterflood operations, there is generally a delay between the initiation of
water injection into a formation containing hydrocarbons and any increase in
production that may result. The unit production costs per barrel of waterflood
projects are generally higher during the initial phases of such projects due to
the purchase of injection water and related costs, as well as during the later
stages of the life of the project. The 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.

Substantial Capital Requirements

     The Company's strategy of acquiring, developing and exploiting oil and
natural gas properties is dependent upon its ability to obtain financing for any
such expenditures. The Company expects to utilize its Credit Agreement and the
ECT Revolving Credit Agreement to borrow a significant portion of the funds
required. The Credit Agreement limits the amounts the Company may borrow
thereunder to amounts, determined by the lenders in their sole discretion, based
upon projected net revenues from the Company's oil and natural gas properties
and restricts the amounts the Company may borrow under other credit facilities.
As of August 31, 1998, the Company believes it would be able to borrow up to
approximately $25.0 million (of which approximately $10.3 million was
outstanding) under the Credit Agreement. The lenders can adjust the borrowings
permitted to be outstanding under the Credit Agreement and under the ECT
Revolving Credit Agreement semi-annually. The lenders require that outstanding
borrowings in excess of the borrowing limit be repaid ratably over a period no
longer than six months. No assurances can be given that the Company will be able
to make any such mandatory principal payments required by the lenders. The
Company could, under certain circumstances, borrow under the ECT Revolving
Credit Agreement up to the lesser of $10.0 million or 40% of the borrowing base
established under the Credit Agreement.

     Any future acquisition by the Company requiring financing in excess of the
amount then available under the Credit Agreement or the ECT Revolving Credit
Agreement will depend upon the lenders' evaluations of the properties proposed
to be acquired.

Uncertainty of Estimates of Proved Reserves and Future Net Revenues

     There are numerous uncertainties in estimating quantities of proved
reserves and in projecting future rates of production and the timing of
development expenditures, including many factors beyond the control of the
Company. The reserve data set forth in this Annual Report on Form 10-KSB are
only estimates. Although the Company believes such estimates to be reasonable,
reserve estimates are imprecise and may be expected to change as additional


                                       20

<PAGE>   23



information becomes available. 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 exactly
measured. Therefore, estimates of the economically recoverable quantities of oil
and natural gas attributable to any particular group of properties,
classifications of such reserves based on risk of recovery and such estimate is
a function of the quality of available data and of engineering and geological
interpretation and judgment and the future net cash flows expected therefrom,
prepared by different engineers or by the same engineers at different times may
vary substantially. There also can be no assurance that the reserves set forth
herein will ultimately be produced or that the proved undeveloped reserves will
be developed within the periods anticipated. Actual production, revenues and
expenditures with respect to the Company's reserves will likely vary from
estimates, and such variances may be material. In addition, the estimates of
future net revenues from proved reserves of the Company and the present value
thereof are based upon certain assumptions about future production levels,
prices and costs that may not be correct. The Company emphasizes with respect to
the estimates prepared by independent petroleum engineers that SEC PV-10 should
not be construed as representative of the fair market value of the proved oil
and natural gas properties belonging to the Company since discounted future net
cash flows are based upon projected cash flows which do not provide for changes
in oil and natural gas prices or for escalation of expenses and capital costs.
The meaningfulness of such estimates is highly dependent upon the accuracy of
the assumptions upon which they are based. Actual future prices and costs may
differ materially from those estimated.

Nature of the Net Profits Interests and Royalty Interests

     General. As a result of the Morgan Property Acquisition, a substantial
portion of the Company's oil and natural gas property interests are in the form
of NPIs and RIs. The NPIs were conveyed by various assignors to the Company from
such Assignor's net revenue interest (generally, a leasehold working interest
less lease burdens) in the Underlying Properties. These various Conveyances were
designed to be conveyances of interests in real property. As the owner of NPIs,
the Company does 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 a well on the
Underlying Properties, then each respective Assignor is obligated to give the
Company notice of such proposal. Under the applicable Ancillary Agreements, the
Company will then have the option to pay the Applicable Percentage (as defined
in the Ancillary Agreement) of the respective Assignor's working interest share
of the expenses of any well that is proposed, and thereby become entitled to a
NPI equal to the Applicable 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, the Company will be denied the opportunity 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 with respect to such
well elect not to participate in the well, the well will not be drilled unless a
means of funding the costs allocable to the working interest owners who do not
elect to participate in the well is effectuated. 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 NPIs were created subsequent and
subject to the various operating agreements that cover and govern operations on
the properties. Possible consequences of the NPIs being subject to the
applicable operating agreements include: (i) if an Assignor elects not to
participate in a major operation, the entire original interest of the Assignor
(including the NPI) 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 (ii) if an Assignor
fails to pay its share of costs arising under an operating agreement, the entire
original interest of the Assignor (including the NPIs) will be encumbered by the
operator's lien. Because the NPI may not burden every well covered by an
operating agreement, the NPI could arguably be encumbered by the operator's lien
securing obligations incurred by an Assignor on wells in which the Company does
not own a NPI. See "Item 1. Description of Business -- Recent Property
Acquisitions."

     In the past, certain of the operators and/or Assignors on the Morgan
Properties have experienced financial difficulties, including bankruptcy.
Further, in at least one instance an operator has claimed a right to setoff
against

                                       21

<PAGE>   24


the Company's revenue stream from certain properties for unpaid bills arising
from the nonpayment by a bankrupt Assignor.

     The RIs are comprised largely of term royalty interests, the duration of
which is the same as the oil and natural gas lease to which it pertains. A
smaller group of RIs are perpetual royalty interests which entitle the owner
thereof to a share of production from the Underlying Properties under both the
current oil and gas lease and any replacement or successor oil and natural gas
lease. In all cases, the RIs are non-operating interests, have little or no
influence over oil and natural gas development or operation on the lands they
burden and should be free of costs or liabilities arising from operations by the
working interest owners.

     Sale and Abandonment of Underlying Properties. An Assignor (and any
subsequent transferee of an Assignor) has the right to abandon any well or
working interest included in the Underlying Properties if, in its opinion, such
well or property ceases to produce or is not capable of producing in
commercially paying quantities. The Company may not control the timing of
plugging and abandoning wells. The Conveyances provide that Assignor's working
interest share of the costs of plugging and abandoning uneconomic wells will be
deducted in calculating net cash flow from the property.

     The Assignor may sell the Underlying Properties, subject to and burdened by
the RIs, without the consent of the Company. Accordingly, there exists the risk
that 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 regarding the Company's title
to its royalty interest. The Company believes the suit is without merit and a
favorable order of summary judgment has been rendered in favor of the pension
funds managed by J.P. Morgan Investments. However, that order may be appealed.
The purchase agreement for the purchase of the Morgan Properties provides for
the escrow of $8.0 million of the purchase price. In the event the summary
judgment is later overturned and a judgment is later entered against the pension
funds managed by J.P. Morgan Investments (or the Company as successor owner)
rescinding the original transaction whereby the pension funds managed by J.P.
Morgan Investments acquired their interest, the escrowed monies would be
returned to the Company and the Company would convey its property interest to
the plaintiff.

     Certain Bankruptcy Issues. Although the matter is not entirely free from
doubt, the Company believes that the Morgan Properties should constitute real
property interests under applicable state law. Consistent therewith, the
Conveyances state that the NPIs constitute real property interests and were
recorded in the appropriate real property records of the states in which the
Underlying Properties are located. If, during the term of the NPIs, an Assignor
becomes involved as a debtor in bankruptcy proceedings, it is not entirely clear
that all of the NPIs would be treated as real property interests under the laws
of such states. If in such a proceeding a determination were made that the NPIs
constitute real property interests, the NPIs should be unaffected in any
material respect by such bankruptcy proceeding. If in such a proceeding a
determination were made that the NPIs constitute an executory contract (a term
used, but not defined, in the United States Bankruptcy Code to refer to a
contract under which the obligations of both the debtor and the other party to
such contract are so unsatisfied that the failure of either to complete
performance would constitute a material breach excusing performance by the
other) and not a real property interest under applicable state law, and if such
contract were not to be assumed in a bankruptcy proceeding involving an
Assignor, the Company would be treated as an unsecured creditor of such Assignor
with respect to such NPI in the pending bankruptcy.

Financial Reporting Impact of Full Cost Method of Accounting

     The Company uses the full cost method of accounting for its investment in
oil and natural gas properties. Under the full cost method of accounting, all
costs of acquisition, exploration and development of oil and natural gas
reserves are capitalized into a "full cost pool" as incurred, and properties in
the pool are depleted and charged to operations using the unit-of-production
method based on the ratio of current production to total proved oil and natural
gas reserves. To the extent that such capitalized costs (net of accumulated
depreciation, depletion and amortization) less deferred taxes exceed the SEC
PV-10 of estimated future net cash flow from proved reserves of oil and natural


                                       22

<PAGE>   25


gas, and the lower of cost or fair value of unproved properties after income tax
effects, such excess costs are charged to operations. Once incurred, a
write-down of oil and natural gas properties is not reversible at a later date
even if oil or natural gas prices increase. At June 30, 1998, the Company
recorded a write-down of its oil and gas properties of $28.2 million.
Significant downward revisions of quantity estimates or declines in oil and
natural gas prices from those in effect on June 30, 1998 which are not offset by
other factors could result in further write-downs for impairment of oil and
natural gas properties.

Competition

     The Company encounters substantial competition in acquiring properties,
marketing oil and natural gas, securing equipment and personnel, and operating
its properties. The competitors in acquisitions, development, exploration and
production include major oil companies, numerous independent oil and natural gas
companies, individual proprietors and others. Many of these competitors have
financial and other resources which substantially exceed those of the Company
and have been engaged in the energy business for a much longer time than the
Company. Therefore, 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 the financial or personnel resources of the Company will permit. See "Item
1. Description of Business -- Markets and Competition."

Government Laws and Regulations

     The Company's operations are affected from time to time in varying degrees
by political developments and federal and state laws and regulations. In
particular, oil and natural gas production, operations and economics are or have
been affected by price controls, taxes and other laws relating to the oil and
natural gas industry, by changes in such laws and by changes in administrative
regulations. The Company cannot predict how existing laws and regulations may be
interpreted by enforcement agencies or court rulings, whether additional laws
and regulations will be adopted, or the effect such changes may have on its
business or financial condition. See "Item 1. Description of Business --
Regulation."

     The Company's operations are subject to complex and constantly changing
environmental laws and regulations adopted by federal, state and local
governmental authorities. The Company believes that compliance with such laws
has had no material adverse effect upon the Company's operations to date, and
that the cost of such compliance has not been material. Nevertheless, the
discharge of oil, natural gas or other pollutants into the air, soil or water
may give rise to liabilities on the part of the Company to the government and
third parties and may require the Company to incur costs of remediation.
Additionally, from time to time the Company has agreed to indemnify both sellers
of producing properties from whom the Company acquires reserves and purchasers
of properties from the Company against certain liabilities for environmental
claims associated with the properties being purchased or sold by the Company. No
assurance can be given that existing environmental laws or regulations, as
currently interpreted or reinterpreted in the future, or future laws or
regulations, will not materially adversely affect the Company's operations and
financial condition or that material indemnity claims will not arise against the
Company with respect to properties acquired or sold by the Company. See "Item 1.
Description of Business -- Regulation -- Environmental Regulation."

Risks of Hedging Activities

     In order to reduce its exposure to price risks in the sale of its oil and
natural gas, the Company has entered into and may in the future enter into
hedging contracts. The Company's hedging contracts apply to only a portion of
its production and provide only limited price protection against fluctuations in
the oil and natural gas markets. If the Company's reserves are not produced at
rates equivalent to the hedged position, the Company would be required to
satisfy its obligations under its hedging contracts on potentially unfavorable
terms without the ability to hedge that risk through sales of comparable
quantities of its own production. Further, the terms under which the Company
enters into hedging contracts are based on assumptions and estimates of numerous
factors such as cost of production and pipeline and other transportation costs
to delivery points. Substantial variations between the assumptions and estimates
used by the Company and actual results experienced could materially adversely
affect the Company's anticipated profit margins and its ability to manage the
risks associated with fluctuations in oil and natural gas prices. 

                                       23

<PAGE>   26


See "Item 1. Description of Business -- Risk Factors -- Uncertainty of Estimates
of Proved Reserves and Future Net Revenues." Additionally, to the extent that
the Company enters into hedging contracts, it may be prevented from realizing
the benefits of price increases above the level of the hedges. Such hedging
contracts are also subject to the risk that the other party may prove unable or
unwilling to perform its obligations under such contracts. Any significant
nonperformance could have a material adverse effect on the Company's financial
condition and results of operations. See "Item 6. Management's Discussion and
Analysis or Plan of Operation -- Changes in Prices and Hedging Activities."

Significant Number of Authorized but Unissued Shares

     The Board of Directors has total discretion in the issuance of any shares
of common stock, par value $0.0015 per share, of the Company (the "Common
Stock"), and preferred stock, par value $0.01 per share of the Company (the
"Preferred Stock"), which may be issued in the future. The Company is authorized
to issue 100,000,000 shares of its Common Stock (30,924,918 shares were issued
and outstanding as at August 31, 1998). The Company is authorized to issue
50,000,000 shares of its Preferred Stock (9,609,700 shares of preferred stock
were issued and outstanding as at August 31, 1998).

Potential Conflicts of Interest

     JEDI, an affiliate of Enron, owns 9,600,000 shares of the Company's Series
A Participating Convertible Preferred Stock, par value $0.01 per share (the
"Series A Preferred Stock"), warrants to acquire an aggregate of 1,774,648
shares of the Company's Common Stock and 2,634,951 shares of Common Stock (as of
August 31, 1998: 6.5% of the outstanding voting capital stock and, assuming the
exercise of its warrants and the conversion of its Series A Preferred Stock,
33.0% of the voting capital stock). In addition, upon the occurrence of certain
defaults under the Certificate of Designation governing the Series A Preferred
Stock, JEDI would have the right to appoint
a majority of the Company's Board of Directors. As the holder of a significant
portion of the Company's voting stock, JEDI, as well as its affiliates
(including Enron), may have the ability to exercise significant influence over
the management of the Company. Enron and certain of its subsidiaries and other
affiliates collectively participate in nearly all phases of the oil and natural
gas industry and are, therefore, competitors of the Company. Effective December
29, 1997, the Company entered into the ECT Revolving Credit Agreement with ECT,
a wholly-owned subsidiary of Enron. In addition, Enron and certain of its
affiliates have provided, or assisted in providing, and may in the future
provide or assist in arranging, financing to or for non-affiliated participants
in the oil and natural gas industry who are or may become competitors of the
Company.

Control by Certain Stockholders

     As of August 31, 1998, the current officers and directors of the Company as
a group had a beneficial interest in or held a proxy for approximately 20.1% of
the voting capital stock, and JEDI beneficially owned approximately 33.0% of the
voting capital stock. Consequently, these stockholders, should they determine to
act together, may be in a position to effectively control the affairs of the
Company, including the election of all of the Company's directors and the
approval or prevention of certain corporate transactions which require majority
stockholder approval.

Dependence on Key Personnel

     The Company is dependent upon 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, Operations and Ronald
Idom, Vice President, Acquisitions, for its various activities, and the loss of
any one of these individuals for any reason may adversely affect the Company.
The Company holds key man insurance on the lives of each of Edward J. Munden,
Robert P. Lindsay, Bruce I. Benn and Ronald I. Benn. The Company also has
employment agreements with each of these officers (other than Mr. Idom) through
2002.


                                       24

<PAGE>   27

Repurchase Obligations in Connection with Private Equity Placement

     In connection with the private equity placement completed by the Company as
of July 8 and July 20, 1998, the Company granted to those purchasers acquiring
shares pursuant to the Purchase Agreement (defined herein) (the "Buyers") the
right to require the Company to repurchase such Buyer's shares of Common Stock
and rights to acquire additional shares of Common Stock after the occurrence of
certain major transactions or triggering events, including, without limitation,
certain consolidations or mergers, the sale or transfer of all or substantially
all of the Company's assets, a tender offer for more than 40% of the outstanding
shares of Common Stock, and certain defaults by the Company under its covenants
to the Buyers. The Company would be required to obtain the consent of the
lenders under the Credit Agreement and the ECT Revolving Credit Agreement and
the consent of the holders of the Notes before repurchasing such shares and
rights. If the Company could not obtain such consents, the Company would be in
default under its agreement with the Buyers, and such default could trigger
cross defaults under the Credit Agreement or the ECT Revolving Credit Agreement.
In addition, if the Company fails to repurchase the shares of Common Stock and
repricing rights as required, the Company could be liable to the Buyers for
damages.

Preferred Stock; Anti-takeover Provisions

     The Common Stock is subordinate to all outstanding classes of Preferred
Stock of the Company in the payment of dividends and other distributions made
with respect to the stock, including distributions upon liquidation or
dissolution of the Company. The Board of Directors of the Company is authorized
to issue up to 30,631,257 additional shares of Preferred Stock (excluding
9,609,700 shares currently outstanding and 9,600,000 reserved for issuance in
exchange for shares of Series A Participating Convertible Preferred Stock)
without first obtaining stockholder approval except in limited circumstances.
The designation and issuance of other series of Preferred Stock will create
additional securities that will have dividend and liquidation preferences over
the Common Stock or, in the case of convertible preferred stock, may have the
effect of diluting the current stockholders' interest in the Company upon
conversion.

     The Company's Restated Certificate of Incorporation and Amended and
Restated Bylaws include certain provisions that may have the effect of
encouraging persons considering unsolicited tender offers or other unilateral
takeover proposals to negotiate with the Board of Directors rather than pursue
non-negotiated takeover attempts. These provisions include authorized "blank
check" Preferred Stock, and the availability of authorized but unissued Common
Stock. The issuance of Preferred Stock may have the effect of delaying or
preventing a change in control of the Company without further stockholder action
and may adversely affect the rights and powers, including voting rights, of the
holders of Common Stock. In certain circumstances the issuance of Preferred
Stock could depress the market price of the Common Stock.


ITEM 2.       DESCRIPTION OF PROPERTIES

GENERAL

     The Company occupies approximately 3,475 square feet of office space at
3500 Oak Lawn Avenue, Suite 380, Dallas, Texas, under a lease that expires in
November 1999. The Company is in the process of locating additional space to
lease in Dallas. The Company also occupies 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. The Company leases
property for a rig yard in New Mexico.

OTHER

     For a description of the Company's oil and natural gas properties, oil and
gas reserves, acreage, wells, production and drilling activity, see "Item 1.
Description of Business."



                                       25

<PAGE>   28




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. Description of Business -- Risk
Factors -- Nature of the Net Profits Interests and Royalty Interests --
Litigation."

     No other legal proceedings are pending other than ordinary routine
litigation incidental to the Company business, the outcome of which management
believes will not have a material adverse effect on the Company's 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, 1998, no matter
was submitted by the Company to a vote of its stockholders through the
solicitation of proxies or otherwise.




                                       26




<PAGE>   29
                                    PART II

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

MARKET INFORMATION

     The Company's shares of preferred stock are not publicly traded. The
Company's Common Stock is principally traded on the Nasdaq SmallCap Market
under the symbol "QSRI." 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, 1998, 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
                                                                              ----------   ---------

Fiscal Year Ended June 30, 1997
<S>                                                                           <C>          <C>      
     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   $   4.125
     Second Quarter........................................................        6.344       5.250
     Third Quarter.........................................................        7.625       6.125
     Fourth Quarter........................................................        7.625       7.125

</TABLE>

TRANSFER AGENT

     The Transfer Agent for the Company's Common Stock is Continental Stock
Transfer & Trust Company, 2 Broadway, New York, New York 10004.

HOLDERS

     The approximate number of record holders of the Company's Common Stock as
of September 1, 1998 was 1,083, inclusive of those brokerage firms and/or
clearing houses holding the Company's Common Stock for their clientele (with
each such brokerage house and/or clearing house being considered as one
holder).

DIVIDENDS

     The Company has not declared or paid any cash dividends on its Common
Stock during the two year period ended June 30, 1998, and does not anticipate
paying cash dividends on its Common Stock in the foreseeable future. In
addition, the Company's Credit Agreement and the Indenture (the "Indenture")
dated as of July 1, 1998 among the Company, certain of its subsidiaries and
Harris Trust and Savings Bank, as Trustee (the "Trustee") currently prohibit it
from paying cash dividends. The Company anticipates that any income generated
in the foreseeable future will be retained for the development and expansion of
its business. Furthermore, dividends on the Common Stock are limited by the
terms of the Company's Series A Participating Convertible Preferred Stock, par
value $0.01 per share, and the terms of the Company's 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 the Company's
Credit Agreement, the Indenture and the Company's Restated Certificate of
Incorporation, as amended, business conditions, the financial condition of the
Company and other factors that the Board of Directors deems relevant.


                                       27

<PAGE>   30

ISSUANCES OF EQUITY SECURITIES

     On May 5, 1998, pursuant to Section 4(2) of the Securities Act, the
Company issued 198,086 shares of Common Stock to JEDI, an institutional
accredited investor and significant equity holder of the Company, pursuant to
the exercise of warrants held by JEDI for an aggregate exercise price of
$495,215. On May 5, 1998, pursuant to Section 4(2) of the Securities Act, the
Company issued 49,521 shares of Common Stock to JEDI pursuant to the exercise
of warrants held by JEDI for an aggregate exercise price of $173,324. On May
15, 1998, pursuant to Section 4(2) of the Securities Act, the Company issued
614,064 shares of Common Stock to JEDI pursuant to the exercise of warrants
held by JEDI for an aggregate exercise price of $2,149,224. On June 11, 1998,
pursuant to Section 4(2) of the Securities Act, the Company issued 49,522
shares of Common Stock to JEDI pursuant to its "maintenance rights" for an
aggregate purchase price of $123,805.


ITEM 6.  MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

SELECTED FINANCIAL DATA

     The following table sets forth selected financial data for the Company.
The financial data was derived from the consolidated financial statements of
the Company and should be read in conjunction with the Consolidated Financial
Statements and related Notes thereto included herein.


<TABLE>
<CAPTION>
                                                            YEAR ENDED            YEAR ENDED
                                                           JUNE 30, 1998         JUNE 30, 1997
                                                           -------------         -------------
OPERATIONS DATA:
<S>                                                           <C>                    <C>  
                                                              ($,000)               ($,000)

Total revenues ......................................         10,983                 4,681
Oil and gas production expenses .....................          4,547                 2,507
EBITDA ..............................................          4,073                   422
Interest and financing costs ........................          3,957                   878
Depreciation, depletion and amortization ............          4,809                   982
Ceiling test write-down .............................         28,166                    --
Net loss ............................................        (32,754)               (1,309)

CASH FLOWS DATA:
Net cash from in operating activities ...............          1,041                   263
Net cash used in investing activities ...............       (154,392)               (4,305)
Net cash provided by financing activities ...........        154,021                 3,752
Net increase (decrease) in cash .....................            720                  (290)

PRO-FORMA BALANCE SHEET DATA (AT END OF PERIOD)(1):
Total current assets ................................         11,555                 1,066
Property and equipment, net .........................        142,467                25,312
Total assets ........................................        166,819                26,378
Total current liabilities ...........................          6,836                 1,772
Long-term obligations, net of current portion .......        136,263                15,049
Total stockholders' equity ..........................         23,720                 9,557

</TABLE>

     (1) Reflects the pro forma effect of certain transactions entered into in
July 1998 for the June 30, 1998 Balance Sheet (See Note 11 to the Consolidated
Financial Statements) and the acquisition of the Collins and Ware Properties in
August 1997 for the June 30, 1997 Balance Sheet (See Note 2 to the Consolidated
Financial Statements).

     The Company's financial condition and results of operations have been
significantly impacted by acquisitions.



                                       28

<PAGE>   31



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

<TABLE>
<CAPTION>

                                                    YEAR ENDED       YEAR ENDED
                                                   JUNE 30, 1998   JUNE 30, 1997
                                                  --------------- --------------

PRODUCTION DATA:
<S>                                               <C>             <C>    
Gas (Mcf) .....................................       3,368,000         546,282
Oil (Bbls) ....................................         325,000         150,546
Mcfe ..........................................       5,318,000       1,449,558

AVERAGE SALES PRICE:
Gas ($/Mcf) ...................................    $       2.27    $       2.31
Oil ($/Bbl) ...................................    $      15.52    $      20.73
BOE ($/BOE) ...................................    $       2.39    $       3.02

AVERAGE COST ($/MMCFE) DATA:
Production and operating costs ................    $       1.07    $       1.52
Production and severance taxes ................    $       0.12    $       0.21
General and administrative costs ..............    $       0.43    $       1.00
Interest expense ..............................    $       0.75    $       0.61
Depreciation, depletion and amortization ......    $       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, 1998 COMPARED TO THE YEAR ENDED JUNE 30, 1997

     RESULTS OF OPERATIONS

     Revenues. Total revenue during the year ended June 30, 1998 was $11.0
million, an increase of $6.3 million over 1997. Operating revenue from the sale
of gas and oil was $6.5 million in 1998, while revenues from net profits
interests and royalty interests acquired during 1998 provided additional
revenues of $4.4 million. The Company's revenues are derived from the sale of
3.4 Bcf of gas, at an average price per Mcf of $2.71, and 324,557 barrels of
oil, at an average price per barrel of $15.52. During the year ended June 30,
1997 the Company generated operating revenue of $4.4 million from the sale of
gas and oil. The 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 the Company experienced during the years ended June 30, 1998 and
1997. Production from properties owned throughout both periods was 467.2 MMcf
of 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 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 gas production is a
reflection of the successful exploitation and development programs implemented
by the Company 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 was 2.9 Bcf of gas and 238,262 barrels of oil during
1998 as compared to 139.2 MMcf of gas and 46,569 barrels of oil during 1997.

     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 $15.6 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


                                      29
<PAGE>   32

June 30, 1997 were $5.8 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 the Company's
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 $806,000 as a result of
the increased size of the Company 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 the Company's
increased level of oil and 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 the Company 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 $0.21 per Mcfe (31%).

      Pursuant to SEC regulations, the Company recorded a $28.2 million non-cash
write-down of the carrying value of its oil and natural gas properties to
reflect the impact of low oil and natural gas prices at June 30, 1998. The
Company was not required to record a similar write-down at June 30, 1997.

     Net Loss. The Company has 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 the Company's crude oil
and natural gas production activities. The Company believes, but cannot assure,
that as a result of the acquisitions it has made during the year ended June 30,
1998 that its revenues from natural gas and oil are sufficient to cover its
production costs and operating expenses, subject to prevailing prices for crude
oil and natural gas and the volumes thereof produced by the Company. The
Company entered the 1999 fiscal year (July 1, 1998 to June 30, 1999) with a
plan to improve production from the properties it 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. The Company's 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 the
Company. In addition, the Company's proved reserves will decline as crude oil
and natural gas are produced unless the Company is 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, 1998 the Company 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 the growth
of the Company 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 the growth of the Company as it
incurred higher expenses. In comparison, during the year ended June 30, 1997
the Company generated $263,000 from operations.

     Investing Activities. During the year ended June 30, 1998 the Company
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 $8.1 million was spent on developing existing properties. A further
$99,000 was invested in operating equipment and office equipment during the
year. During the year ended June 30, 1997 the Company 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 the Company
raised $14.4 million by issuing preferred and common stock and $152.5 million
in short-term loans. The Company also issued $121,000 in 


                                       30
<PAGE>   33
Deutchemark denominated subordinated bonds. During the year the Company repaid
$8.1 million of bank debt and $70,000 of a capital lease. Between July 8 and 20,
1998 the Company 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 was added to the working capital of the
Company.

     During the year ended June 30, 1997 the Company 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 the Company entered into a loan agreement with Bank of Montreal. The
Company 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 was retained for working capital
purposes, with some of the funds used to reduce accounts payable. During the
year ended June 30, 1997 the Company raised $5.0 million in preferred share
equity and $4.0 million in common stock equity. Additionally, the Company
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). The Company 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 the Company had 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 the Company 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 the Company had a negative
Stockholders' Equity 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 the Company 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 the Company 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,
the Company issued 150,000 common shares in consideration for professional
services rendered, which it valued at $2.00 per share ($300,000). The Company
also issued 10,400 shares of Series "C" preferred stock for $9.5 million, net of
costs.

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

THE YEAR ENDED JUNE 30, 1997 COMPARED TO THE YEAR ENDED JUNE 30, 1996

     RESULTS OF OPERATIONS

     Revenues. During the year ended June 30, 1997 operating revenue from crude
oil and natural gas was $4.4 million. This consisted of 150,546 barrels of crude
oil, at an average price per barrel of $20.73 and 546,282 Mcf of natural gas, at
an average price per Mcf of $2.31. During the year ended June 30, 1996 the
Company generated operating revenue of $2.1 million from crude oil and natural
gas. This consisted of 102,536 barrels of


                                       31

<PAGE>   34



crude oil, at an average price per barrel of $18.26, and 153,833 Mcf of natural
gas, at an average price per Mcf of $2.43.

     The two periods are not readily comparable because of the significant
growth that the Company has experienced since inception. During the year ended
June 30, 1996 the Company owned certain properties that it acquired on April
10, 1996 in East Texas (the "East Texas Properties") for only 81 days compared
to a full 12 months during the year ended June 30, 1997. During the year ended
June 30, 1997 the Company produced 20,009 barrels of crude oil and 347,656 Mcf
of natural gas from these East Texas properties, compared to only 4,966 barrels
of crude oil and 85,457 Mcf of natural gas during the 81 days of the year ended
June 30, 1996 that it owned these East Texas properties. During the year ended
June 30, 1997 the Company produced 46,569 barrels of crude oil and 139,231 Mcf
of natural gas from properties that it acquired during the year ended June 30,
1997. There is no comparable production from these properties for the year
ended June 30, 1996. During the year ended June 30, 1997 the Company produced
83,968 barrels of crude oil and 59,395 Mcf of natural gas from properties that
it also owned throughout the year ended June 30, 1996. The production from
these comparable properties during the year ended June 30, 1996 was 97,570
barrels of crude oil and 68,376 Mcf of natural gas. This decrease in production
of 13,602 barrels (14%) of crude oil and 8,981 Mcf (13%) of natural gas is
consistent with the annual rate of depletion of the reservoirs associated with
these properties.

     Costs and Expenses. Operating costs and expenses for the year ended June
30, 1997 were $5.5 million. Of this total, lease operating expenses were $2.2
million ($1.52 per Mcfe) and depletion, depreciation and amortization costs
were $1.0 million ($0.68 per Mcfe). General and administrative costs for the
year ended June 30, 1997 were $1.5 million ($1.00 per Mcfe), interest charges
were $878,000 ($0.61 per Mcfe) and the Company recorded gains on changes in
foreign exchange rates of $300,000. Additionally, the Company incurred an
extraordinary loss of $171,000 when it renegotiated the terms of two notes
payable pursuant to the arrangement of the Bank of Montreal loan facility.
Operating costs and expenses for the year ended June 30, 1996 were $3.3
million. Of this total, lease operating costs were $1.2 million ($1.53 per
Mcfe) and depletion, depreciation and amortization costs were $630,000 ($0.82
per Mcfe). General and administrative expenses for the year were $1.1 million
($1.45 per Mcfe). Interest and financing charges during the year were $421,000
($0.55 per Mcfe). The Company generated a further $10,000 in interest income
and $62,000 in unrealized gains in foreign exchange.

     The increase in lease operating expenses is a result of the increase in
production over the comparative periods. When lease operating expenses are
compared on a cost per Mcfe basis, the cost of producing a Mcfe decreased by
$0.01 per Mcfe (0.6%). The decrease per Mcfe is the result of lower lease
operating expenses per Mcfe for properties acquired during the year offset by
higher lease operating expenses per Mcfe arising from the significant workover
expenses on properties acquired during the period from August 9, 1994
(inception) to June 30, 1995 and the reduced production related to the
depletion of some of those properties. The increase in depletion, depreciation
and amortization costs is a result of the increased volume of crude oil and
natural gas produced by the Company. On a cost per Mcfe of reserves the
depletion, depreciation and amortization costs declined by $0.14 per Mcfe. This
decrease in depletion, depreciation and amortization is primarily a result of a
revision to the Company's proposed future development program for its crude oil
producing properties in New Mexico. The increase of $339,000 of general and
administrative expenses are a result of the increased management support
requirements of the Company, particularly in light of the amount of time and
effort expended in closing the JEDI transaction. As a function of Mcfe
produced, the general and administrative expenses for the year ended June 30,
1997 decreased by $0.50 per Mcfe (34%). This decline in general and
administrative expenses as a function of the Mcfe's produced is consistent with
expectations. The Company believes that its general and administrative
infrastructure is capable of servicing a significantly larger revenue base than
that which was in place at June 30, 1997.

     Net Loss. The Company has incurred losses since its inception, including
$1.3 million ($0.05 per voting share) for the year ended June 30, 1997,
compared to $1.2 million ($0.05 per share) for the year ended June 30, 1996.
These losses are a reflection of the start-up nature of the Company's crude oil
and natural gas production activities. The Company believes, but cannot assure,
that as a result of the acquisitions it has made during the year ended June 30,
1997 and the acquisition of certain crude oil and natural gas producing
properties on August 1, 1997 that its revenues from crude oil and natural gas
are sufficient to cover its production costs and operating expenses, subject
to prevailing prices for crude oil and natural gas and the volumes thereof
produced by the Company. The Company


                                       32

<PAGE>   35

entered the 1998 fiscal year (July 1, 1997 to June 30, 1998) with a plan to
improve production from the properties it had acquired through June 1997 and to
acquire additional oil and natural gas producing properties to provide the
revenue base required to generate additional positive cash flow from operations.
The Company's 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 the Company. In addition,
the Company's proved reserves will decline as crude oil and natural gas are
produced unless the Company is successful in acquiring properties containing
proved reserves or conducts successful exploration and development activities.

     CASH FLOW DATA

     From Operations. During the year ended June 30, 1997 the Company generated
$263,000 from operations. The growth in the accounts receivable of $317,000 (a
net consumption of cash from operations) is indicative of the growth of the
Company and the related increase in demand for working capital. Similarly, the
growth of $949,000 in accounts payable (a net source of cash from operations)
is also an indicator of the growth of the Company as it incurred higher
expenses and had to temporarily extend its typical payment terms with its
vendors from typically 45 days to 60 days. Since entering into the loan
agreement with the Bank of Montreal on August 1, 1997 the Company has brought
its accounts payable back to between 30 and 45 days. In comparison, during the
year ended June 30, 1996 the Company used $620,000 from operations.

     Investing Activities. During the year ended June 30, 1997 the Company
invested $4.2 million in acquiring additional crude oil and natural gas
producing properties and developing existing properties. Of this amount, a
total of $3.0 million was expended in four acquisition transactions. The
remaining $1.2 million was spent on developing existing properties. A further
$125,000 was invested in operating equipment and office equipment during the
year. During the year ended June 30, 1996 the Company invested a net $5.4
million in acquiring additional oil and gas producing properties, with $4.25
million being used to acquire certain properties in East Texas and $900,000 to
develop existing properties.

     Financing Activities. During the year ended June 30, 1997 the Company
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 the Company entered into a loan agreement with Bank
of Montreal. The Company 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 the loans with
Comerica Bank Texas. The remaining $1.1 million was retained for working
capital purposes, with some of the funds used to reduce the accounts payable.
During the year ended June 30, 1997 the Company raised $5 million in preferred
share equity and $4.1 million in common stock equity. Additionally, the Company
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). The Company used $5.1 million of the cash equity raised to
repurchase 9.6 million common shares, for a net increase in cash equity of $4.4
million. The Company has raised an additional $1.6 million of common stock
equity between July 1 and September 24, 1997.

     During the year ended June 30, 1996, the Company raised $7.5 million while
repaying $918,000, thus netting $6.6 million of incremental cash from financing
activities. The major components were $4.6 million of senior secured debt with
Comerica Bank, $1.9 million of unsecured, subordinated bonds (DEM 2.9 million)
and $1 million from the issuance of 400,000 common shares. The Company repaid a
$262,000 (DEM 300,000) revolving line of credit, a $600,000 short-term note
payable that arose from the acquisition of an oil producing property and
$56,000 of a capital lease.

     BALANCE SHEET DATA

      Total Assets. At June 30, 1997 the Company 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 $15.9 million and oil field and office equipment, net of
accumulated depreciation, of $239,000. At June 30, 1996, the Company had assets
of $11.3 million, comprised of current assets of $1.5 million, investments


                                       33
<PAGE>   36


in oil and gas producing properties, net of accumulated depletion, depreciation
and amortization, of $9.5 million, and oil field and other equipment, net of
accumulated depreciation, of $210,000.

     Stockholders' Equity. At June 30, 1997 the Company had total stockholders'
equity of $6.4 million. During the year ended June 30, 1997 the Company
privately placed and issued 1,560,000 common shares for $2.50 per share, less
10% in commissions, ($3.5 million) and 200,000 common shares for $3.05 per
share, less 10% in commissions, ($549,000). Between July 1 and September 24,
1997 the Company issued 250,000 common shares for $3.05 per share, less 10% in
commissions ($686,250) and 200,000 common shares for $3.50 per share, less 10%
in commissions ($630,000). Additionally, during the year ended June 30, 1997
the Company issued 192,000 common shares pursuant to acquisitions which it
valued at $0.18 per share ($34,560) for purposes of those transactions, and
1,237,500 common shares pursuant to acquisitions which it valued at $0.50 per
share ($618,750) for purposes of those transactions. Additionally, the Company
issued 116,000 common shares in partial settlement of obligations which it
valued at $0.18 per share ($20,880) for purposes of those transactions.

LIQUIDITY AND CAPITAL RESOURCES

General

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

     The Company's general financial strategy is to use cash flow from
operations, debt financings and the issuance of equity securities to service
interest on the Company's indebtedness, to pay ongoing operating expenses, and
to contribute limited amounts toward further development of the Company's
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.

     The Company has planned development and exploitation activities for all of
its major operating areas. In addition, the Company is continuing to evaluate
oil and natural gas properties for future acquisition. Historically, the
Company has used the proceeds from the sale of its securities in the private
equity market and borrowings under its credit facilities to raise cash to fund
acquisitions or repay indebtedness incurred for acquisitions, and the Company
has also used its 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 the Company to meet its budgeted capital
spending. Furthermore, the Company's ability to borrow other than under the
Credit Agreement is subject to restrictions imposed by such Credit Agreement.
If the Company cannot secure additional funds for its planned development and
exploitation activities, then the Company will be required to delay or reduce
substantially both of such activities.

Sources of Capital

     The Company's principal sources of capital for funding its business
activities have been cash flow from operations, debt financings and the issuance
of equity securities. The Company's sources of funds from debt financings
include funds available under the Credit Agreement, the ECT Revolving Credit
Agreement, the Bridge Facilities, certain bonds issued to certain European
investors and a capital lease. 

                                       34

<PAGE>   37
         On April 17, 1998, the Company amended and restated its 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 August 31, 1998, the Company was able to borrow up
to $25.0 million under the Credit Agreement, of which $10.3 million was
outstanding as of August 31, 1998. The loan under the Credit Agreement matures
on April 17, 2003. In the event of a default on the indebtedness under the
Credit Agreement, not subsequently waived by the lenders, it is unlikely that
the Company would be able to continue its business.

         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. There is no margin applicable for base rate pricing options.

         The loan under the Credit Agreement is secured by a first lien on the
oil and natural gas properties of QSRn and the stock of two subsidiaries of
QSRn. In addition, Queen Sand Resources and its operating subsidiaries (other
than QSRn which is the borrower) entered into guaranty agreements guaranteeing
the repayment of the indebtedness under the Credit Agreement.

         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. The affirmative covenants include,
but are not limited to, covenants to (i) provide annual audited and unaudited
interim financial information, (ii) provide notices of the occurrence of certain
material events affecting the Company, (iii) promptly provide notice of all
legal or arbital proceedings affecting the Company or its subsidiaries which
could reasonably be expected to have a material adverse effect, (iv) maintain
and preserve its existence and oil and gas properties and other material
properties, (v) implement and comply with certain environmental procedures, (vi)
perform its obligations under the Credit Agreement, (vii) provide reserve
reports, (viii) deliver certain title information, (ix) 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 the Company's total proved reserves, and (x) deliver certain
information relating to compliance with ERISA laws and regulations. The negative
covenants include, but are not limited to, covenants (i) not to incur any
indebtedness except as expressly permitted under the Credit Agreement, (ii) not
to incur any lien on any of its properties except as expressly permitted under
the Credit Agreement, (iii) not to make any loans or advances to or investments
in any person except as expressly permitted under the Credit Agreement, (iv)
(with respect to Queen Sand Resources) not to declare or pay any dividends or
redeem or otherwise acquire for value any capital stock of Queen Sand Resources
except for stock dividends and certain permitted repurchases of Series C
Preferred Stock (defined herein), (v) not to enter into sale and leaseback
transactions, (vi) not to materially change the character of its business as an
independent oil and natural gas exploration and production company, (vii) not to
enter into lease agreements except as expressly permitted under the Credit
Agreement, (viii) not to merge with or sell all or substantially all of its
property or assets to any other person; (ix) not to permit the borrowed proceeds
under the Credit Agreement to be used for any purpose except as expressly
permitted under the Credit Agreement, (x) not to violate ERISA laws and
regulations, (xi) not to discount or sell any notes or accounts receivable,
(xii) not to maintain a working capital ratio of less than 1.0 to 1.0, (xiii)
not to maintain a tangible net worth of less than $18.5 million plus the amount
equal to 75% of the net proceeds of any equity offering, (xiv) to pay its trade
accounts payable when due, (xv) not maintain a fixed charge coverage ratio of
less than 1.5 to 1.0, (xvi) not to sell, assign or otherwise transfer any
interest in any oil or natural gas properties except as expressly permitted
under the Credit Agreement, (xvii)




                                       35
<PAGE>   38

not to violate environmental laws and regulations, (xviii) not to enter into
transactions with affiliates other than those entered into in the ordinary
course of business on fair and reasonable terms, (xix) not to create any
additional subsidiaries unless such subsidiaries guarantee the obligations of
QSRn under the Credit Agreement or issue stock of any subsidiaries to third
parties, (xx) not to enter into negative pledge agreements, (xxi) 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, (xxii) not to amend or modify
any material agreements, (xxiii) not to repay other indebtedness except as
expressly permitted under the Credit Agreement and (xxiv) 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 (i) default in payment when due of any principal of or
interest on indebtedness under the Credit Agreement, (ii) 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 the Company to
mandatorily redeem any of its existing preferred stock, (iii) breach of a
representation and warranty under the Credit Agreement, (iv) default in
performance of obligations under the Credit Agreement, (v) the Company shall
admit in writing its inability to pay debts as they become due, (vi) voluntary
or involuntary bankruptcy, (vii) a judgment in excess of $100,000 shall be
entered and not vacated within 30 days, (viii) the security agreements under the
Credit Agreement shall cease to be in full force and effect and (ix) the Company
discontinues its 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 of Queen Sand Resources or
individuals who constitute the Board of Directors of Queen Sand Resources cease
to constitute a majority of the then-current Board of Directors of Queen Sand
Resources. 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 natural 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 so do; or (ii) to acquire additional oil and natural
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.

         On September 30, 1997 and December 31, 1997 the Company was not in
compliance with its interest coverage ratio. Bank of Montreal waived the
September 30, 1997 covenant violation solely with respect to these specific
defaults. On February 10, 1998, Bank of Montreal waived the Company's December
31, 1997 noncompliance with the interest coverage ratio. On the same date, the
Credit Agreement was amended to reduce the interest coverage ratio to 1.75:1 for
the quarter ending March 31, 1998 and 3.0:1 thereafter. In addition, the Company
and its subsidiaries agreed that during calendar 1998, they would not incur,
without the prior written consent of Bank of Montreal, in the aggregate, capital
expenditures in excess of those disclosed to Bank of Montreal in the Company's
operating forecast ($2.6 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.

         From time to time in the future, the Company may submit information to
the lenders in accordance with the procedures provided in the Credit Agreement
to support the Company's request to increase the maximum borrowing base as the
Company believes appropriate. All such applications will be subject to bank
approval. If available, these funds would be allocated toward future development
and acquisition programs.

         Effective December 29, 1997, the Company 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 



                                       36
<PAGE>   39

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 Prospectus. 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 the oil and natural 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) 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 the Company receives
written notice that the lenders and their affiliates beneficially own in the
aggregate less than 10% of the capital stock of the Company entitled to vote in
the election of directors. From March 31, 1998 through the maturity date, 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 Company paid an affiliate of ECT a fee of $200,000 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, except that payment of this fee was waived
for the period from April 12, 1998 until the date on which the Bridge Facilities
are fully repaid.

         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.




                                       37
<PAGE>   40


     In April 1998, the Company entered into the Bridge Facilities with Bank of
Montreal, Enron and an affiliate of Enron (collectively, the "Bridge
Purchasers") to provide financing to complete the Morgan Acquisition. Pursuant
to the Bridge Facilities, the Company issued notes and warrants (the "Bridge
Warrants") to purchase shares of Common Stock. The Company used the proceeds of
the issuance of its 12 1/2% Senior Notes due 2008, the issuance of Common Stock
pursuant to the Private Equity Placement and the borrowings under the Credit
Agreement to repay all indebtedness outstanding under the Bridge Facilities,
whereupon the Bridge Facilities were retired and the Bridge Warrants
terminated.

     As of July 31, 1998 the Company had issued to investors in Europe
Deutschemark denominated (DEM) 12% Bonds (the "12% Bonds") totaling DEM 1.6
million ($.9 million). Under Regulation S of the Securities Act, the Company is
prohibited from selling these Bonds to U.S. persons (as defined in Regulation
S). In January 1998 the Company discontinued its efforts to sell any additional
12% Bonds. The Company is 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 the Company from operations, which Form
the primary source of funds to pay the interest, are denominated in $US. The
Company is 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 the Company having to repay a larger
amount of $US than it received initially. Changes in the $US equivalent of the
DEM bonds arising from changes to the DEM:$US exchange rate are recognized
monthly. At July 31, 1998 the Company had recorded unrealized exchange rate
gains of approximately $141,000 (at June 30, 1997 $300,000). However, there are
no assurances that the Company will continue to realize gains related to
favorable changes in the DEM:$US exchange rates in the future. Unfavorable
changes to the DEM:$US exchange rate will result in the Company recording
unrealized exchange rate losses related to the changes as they occur. The
Company believes it has the opportunity to enter into arrangements to manage
its DEM:$US exchange rate risk. At this time, the Company has not entered into
any such arrangements.

     The Company has issued both preferred stock and Common Stock for cash to
raise equity to finance the working capital of the Company, to repay existing
indebtedness and to fund acquisitions. In December 1997 the Company raised
$10.0 million of gross proceeds through a private institutional placement of
preferred stock. Since July 1, 1997 the Company has 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, the
Company has also issued Common Stock as partial consideration when acquiring
oil and natural gas producing properties.

     On July 8, 1998, the Company completed a private placement (the "Note
Offering") of $125,000,000 principal amount of its 12 1/2% Senior Notes due
2008 (the "Notes"). In addition, on July 8, 1998 and July 20, 1998, the Company
completed the Private Placement. Pursuant to the Note Offering, the Company
issued and sold the Notes to certain institutional buyers pursuant to Rules
144A and Regulation D promulgated under the Securities Act. 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 Company's three operating
subsidiaries. The net proceeds received by the Company 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 $6.9 million were used to
repay indebtedness outstanding under the Company's Credit Agreement, to
repay indebtedness outstanding under the Bridge Facilities, 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. Substantially all
of this indebtedness was incurred to fund the Morgan Property Acquisition.

     The Company believes that it can generate sufficient cash flow from
operations to pay the interest charges on all of its 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, 92% of the
Company's interest-bearing debt is at fixed rates for extended periods,
providing an effective hedge against increases in prevailing interest rates.

     The Company does not have sufficient liquidity or capital to undertake
significant potential acquisition prospects. Therefore, the Company 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 the Company
has been


                                       38

<PAGE>   41


able to obtain such financings and to enter into such sharing arrangements in
certain of its projects to date, there can be no assurance that it will
continue to be able to do so. Alternatively, the Company 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 the Company's 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 the Company is 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 its oil and natural gas operations in August 1994 the
Company has completed 19 acquisitions of oil and natural gas producing
properties. Through June 30, 1998, the Company had expended a total of $176.9
million in acquiring, developing and exploiting oil and natural gas producing
properties. Initially, the operations of the Company represented a net use of
funds. As demonstrated in the operating results for the year ended June 30,
1998, the Company generates a positive cash flow from operations. The Company
expects to spend $17 million on capital expenditures through June 1999 for
exploitation and development projects.

INFLATION

     During the past several years, the Company has 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, 1998, the Company
received somewhat lower commodity prices for the natural resources produced
from its properties. The results of operations and cash flow of the Company
have been, and will continue to be, affected to a certain extent by the
volatility in oil and natural gas prices. Should the Company experience a
significant increase in oil and natural gas prices that is sustained over a
prolonged period, it 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

     Annual average oil and natural gas prices have fluctuated significantly
over the past three years. The Company's weighted average price per Bbl and the
weighted average price per Mcf during the fiscal year ended June 30, 1998 were
$15.52 and $2.31, respectively. For the year ended June 30, 1998, the Company
averaged $2.10 per Bbl less and $0.15 per Mcf less for its oil and natural gas
sales, respectively, than the average NYMEX prices for the same period. The
Company's weighted average price per Bbl and the weighted average price per Mcf
during the fiscal year ended June 30, 1997 were $20.73 and $2.31, respectively.
For the year ended June 30, 1996, the Company averaged $1.56 per Bbl less for
its oil and $0.14 per Mcf for its natural gas sales than the average NYMEX
prices for the same period.

     The Company has 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. On April 21
and 22, 1998 the Company entered into 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 75% of its expected natural gas
production from reserves currently classified as proved developed producing
during the fiscal year ending June 30, 1999. At the same time, the Company is
able to participate completely in upward movements in the Henry Hub Nymex Index
to the extent of approximately 50% of its expected natural gas production for
the fiscal year ending June 30, 1999, and up to $2.70 per MMBtu on
approximately 25% of its expected natural gas production for the fiscal year
ended June 30, 1999. The Company did not enter into any hedging contracts
related to crude oil prices. At such time as the price of WTI Nymex increases
the Company will consider entering into futures agreements that will accomplish
the same objectives as that of the natural gas hedging strategy.



                                       39

<PAGE>   42


     In addition to the natural gas contracts entered into on April 25, 1998,
the Company was 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 the Company participating on 50% of the price of WTI Nymex over $20.40 for
the period from September 1, 1997 through August 31, 1998. The Company also has
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 the Company participating 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.

     The Company has implemented a comprehensive hedging strategy for its
natural gas production over the next five years. The Company has placed 25% of
the expected natural gas production from its PDPs into a swap at $2.40 per
MMBtu. Ten percent of the Company's expected PDP was hedged in a contract with
a floor of $1.90 per MMBtu. The Company also hedged 40% of its expected PDP
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 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.


<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>


                                       40

<PAGE>   43


INTEREST RATE HEDGING

     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. On July 9, 1998, the Company unwound this swap at a cost to the
Company of approximately $3.5 million with borrowings drawn under the Credit
Agreement.

YEAR 2000 COMPUTER ISSUE

     General. The Company is addressing the potential impact of the Year 2000
("Y2K") issue on its operations. A review of internal systems has been
initiated and a review of the state of readiness of significant suppliers and
customers will be undertaken over the next few months. It is believed 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 the financial
condition or results of operations of the Company.

     State of Readiness. The Company currently uses commercially available
software for its 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. The Company
has not taken any steps to independently verify the truth of such warranties
but has no reason to believe that the software is not as warranted. The Company
has begun a review of Non-IT systems which it expects to complete in the next
few months.

     Costs of Compliance. Management believes that the cost of compliance will
be minimal. As its IT systems were warranted to be compliant when purchased,
the Company has not incurred, nor does it 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. Management does 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. The Company's
products do not contain any microprocessors.

     The Company is seeking written verification from its major suppliers and
customers that they will be Y2K compliant. The costs of seeking verification is
minimal. Management believes that it will not be practical to independently
verify the responses because it does not believe that the Company 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
progressed.

     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. The Company plans to establish contingency plans once its
verification program is complete and the risks have been more fully quantified.


ITEM 7.       FINANCIAL STATEMENTS

     For the Financial Statements required by Item 7, see the Consolidated
Financial Statements included elsewhere in this Annual Report on Form 10-KSB.


ITEM 8.       CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
              ACCOUNTING AND FINANCIAL DISCLOSURE

     On March 13, 1997, the Company dismissed KPMG Peat Marwick LLP ("KPMG") as
its certifying accountant and on March 13, 1997, the Company retained Ernst &
Young LLP ("E&Y") as its certifying accountant. KPMG's reports on the Company's
consolidated financial statements for the fiscal years ended June 30, 1996 and
1995 did not contain an adverse opinion or disclaimer of opinion, nor were they
modified as to uncertainty, audit scope or


                                       41

<PAGE>   44



accounting principles. The decision to engage E&Y as set forth above and to
dismiss KPMG was approved by the Board of Directors of the Company. In
connection with the audits of the consolidated financial statements of the
Company for the fiscal year ended June 30, 1996, and for the period from August
9, 1994 (inception) through June 30, 1995, and during the period commencing
July 1, 1996 through March 12, 1997, there were no disagreements with KPMG on
any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedures, which disagreements, if not
resolved to the satisfaction of KPMG, would have caused them to make reference
to the subject matter of the disagreement in connection with its report. See
the Company's Current Report on Form 8-K dated March 19, 1997.


                                       42


<PAGE>   45


                                    PART III

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

     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 the Company's proxy statement for its
1998 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, 1998.


ITEM 10.      EXECUTIVE COMPENSATION

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


ITEM 11.      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 the
Company's 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.      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 the Company's Proxy Statement which will be filed
with the Commission pursuant to Regulation 14A under the Exchange Act and is
incorporated herein by reference.




                                       43

<PAGE>   46



                                     PART IV

ITEM 13.      EXHIBITS AND REPORTS ON FORM 8-K

     (a) Exhibits:


         1.1     Purchase Agreement, dated June 30, 1998 by and among Queen Sand
                 Resources, Inc. (the "Company") and certain of its
                 subsidiaries, and Nesbitt Burns Securities Inc., CIBC
                 Oppenheimer Corp. and Societe Generale Securities Corporation,
                 as Placement Agents, 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.
         3.1     Restated Certificate of Incorporation of the Company, filed as
                 an Exhibit to the Company's Registration Statement on Form S-3
                 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 of the Company, 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 of 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.
         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 ("JEDI"), 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 12 1/2% 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, as amended by the Current Report on Form
                 8-K/A-1 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     Common Stock Purchase Warrant Representing Right to Purchase
                 100,000 Shares of Common Stock of the Company issued to Forseti
                 Investments Ltd. on May 6, 1997 and assigned to CSM GmbH, 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.
         4.5     Common Stock Purchase Warrant Representing Right to Purchase
                 1,000,000 Shares of Common Stock of the Company issued to
                 Forseti Investments Ltd. on May 6, 1997 and assigned to CSM
                 GmbH, 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.
         4.6     Common Stock Purchase Warrant Representing Right to Purchase
                 28,066 Shares of Common Stock of the Company dated July 22,
                 1998 issued to JEDI, 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.
         4.7     Common Stock Purchase Warrant Representing Right to Purchase
                 1,697,881 Shares of Common Stock of the Company dated July 22,
                 1998 issued to JEDI, 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.
         4.8     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.


                                       44

<PAGE>   47




         4.9     Form of Common Stock Purchase Warrant effective
                 July 8, 1998 and issued to certain investors, 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.
         4.10    Registration Rights Agreement between the Company and Collins &
                 Ware, Inc., dated August 1, 1997, 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.
         4.11    Registration Rights Agreement between the Company and Riata
                 Energy, et. al dated April 9, 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, which
                 Exhibit is incorporated herein by reference.
         4.12    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.
         4.13    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.
         4.14    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.
         4.15    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, as amended by the Current Report on Form 8-K/A-1 dated
                 July 8, 1998, which Exhibit is incorporated herein by
                 reference.
         4.16    Registration Rights Agreement, dated July 8, 1998, by and among
                 the Company and certain of its subsidiaries and Nesbitt Burns
                 Securities Inc., CIBC Oppenheimer Corp. and Societe Generale
                 Securities Corporation, as Placement Agents, 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.
         4.17*   Common Stock Purchase Warrant Representing Right to Purchase
                 48,701 Shares of Common Stock of the Company dated August 19,
                 1998 and issued to JEDI.
         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 June 20, 1997 between Queen
                 Sand Resources, Inc., a Nevada corporation, and Collins & Ware,
                 Inc., filed as an Exhibit to the Company's Current Report on
                 Form 8-K dated August 1, 1997, which Exhibit is incorporated
                 herein by reference.
         10.3    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.
         10.4    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.
         10.5    Securities Purchase Agreement dated as of March 27, 1997
                 between Forseti Investments Ltd, a Barbados corporation, 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.
         10.6    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.


                                       45
<PAGE>   48

         10.7**  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.
         10.8**  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, which
                 Exhibit is incorporated herein by reference.
         10.9**  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, which Exhibit is incorporated herein by reference.
         10.10** 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, which Exhibit is incorporated herein by reference.
         10.11** 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, which Exhibit is incorporated herein by reference.
         10.12   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.
         10.13   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, which Exhibit is
                 incorporated herein by reference.
         10.14   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.
         10.15   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.
         10.16   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, which Exhibit is incorporated herein by
                 reference.
         10.17   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, which Exhibit is incorporated
                 herein by reference.
         10.18   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, which
                 Exhibit is incorporated herein by reference.
         10.19   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, which Exhibit is
                 incorporated herein by reference.


                                       46
<PAGE>   49

         10.20   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, which Exhibit is
                 incorporated herein by reference.
         10.21   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.
         10.22   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.
         10.23** Form of Qualified Stock Option Agreement.
         10.24   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.
         11.1    Statement of computation of earnings per share. 16.1 Letter
                 regarding change in certifying accountant.
         21.1    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, 1998, which
                 Exhibit is incorporated herein by reference.
         23.1*   Consent of Ernst & Young LLP.
         23.2*   Consent of Ryder Scott Company.
         23.3*   Consent of H.J. Gruy and Associates, Inc.
         23.4*   Consent of Harper and Associates.
         27.1*   Financial Data Schedule.

     ----------
     *   Filed herewith

     **  Denotes management contract.


     (b) Reports on Form 8-K.

     During the last quarter of the fiscal year ended June 30, 1998, the Company
filed the following reports:

     (i)   A Current Report on Form 8-K, dated March 19, 1998, as amended by
           Current Report on Form 8-K/A filed April 27, 1998 and Current Report
           on Form 8-K/A-2 filed June 8, 1998, pursuant to Items 2 and 7 and
           relating to the Company's acquisition of certain non-operated royalty
           and net profits overriding royalty interests.

     (ii)  A Current Report on Form 8-K, dated May 18, 1998, pursuant to Item 9
           and relating to the issuance of securities pursuant to Regulation S
           promulgated under the Securities Act of 1933, as amended.


                                       47

<PAGE>   50



                                    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 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 with the intention of completing the 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.


                                       48

<PAGE>   51



     MMcf. One million cubic feet of natural gas.

     "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.

     "non-producing reserves." Non-producing reserves consist of (i) reserves
from wells that have been completed and tested but are not yet producing due to
lack of market or minor completion problems that are expected to be corrected,
and (ii) reserves currently behind-the-pipe in existing wells which are expected
to be productive due to both the well log characteristics and analogous
production in the immediate vicinity of the well.

     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." 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. 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-KSB, 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, 1998, or as otherwise indicated.

                                       49

<PAGE>   52



     "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.

     "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.



                                       50

<PAGE>   53



                                 SIGNATURE PAGE


     In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized in the City of Dallas, Texas on the 21st of September, 1998.

                                  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 Exchange Act, this report has been signed below by
the following persons on behalf of the Registrant and in the capacities
indicated on the 21st day of September, 1998.

Signature                   Title
---------                   -----



/s/   EDWARD J. MUNDEN      Chairman of the Board, President, Chief Executive
-------------------------   Officer and Director (principal executive officer)
Edward J. Munden            


/s/   BRUCE I. BENN         Executive Vice President, Secretary and 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


                                       51

<PAGE>   54
                   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, 1998 and 1997........................................    F-3
   Consolidated Statements of Operations for the
     Years ended June 30, 1998 and 1997............................................................    F-4
   Consolidated Statements of Stockholders' Equity (Net Capital Deficiency) for the
     Years ended June 30, 1998 and 1997............................................................    F-5
   Consolidated Statements of Cash Flows for the
     Years ended June 30, 1998 and 1997............................................................    F-6
   Notes to Consolidated Financial Statements......................................................    F-7
</TABLE>





                                      F-1
<PAGE>   55


                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, 1998 and 1997, and the related
consolidated statements of operations, stockholders' equity (net capital
deficiency) and cash flows for each of the two years in the period ended June
30, 1998. 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, 1998 and 1997, and the results
of their operations and their cash flows for each of the two years in the period
ended June 30, 1998, in conformity with generally accepted accounting
principles.


                                          Ernst & Young LLP




Dallas, Texas
September 2, 1998






                                      F-2
<PAGE>   56


                   Queen Sand Resources, Inc. and Subsidiaries

                           Consolidated Balance Sheets

<TABLE>
<CAPTION>
                                                                                       JUNE 30
                                                                                 1998              1997
                                                                            -------------     -------------
<S>                                                                         <C>               <C>          
ASSETS
Current assets:
   Cash                                                                     $   1,029,419     $     309,695
   Accounts receivable                                                          5,251,739           744,923
   Notes receivable from employee                                                  73,077              --
   Other                                                                           56,397            11,169
                                                                            -------------     -------------
Total current assets                                                            6,410,632         1,065,787
                                                                            -------------     -------------

Property and equipment, at cost (Notes 1, 2, 3, and 9):
   Oil and gas properties, based on full cost accounting method               176,942,840        17,540,805
   Other equipment                                                                221,652           390,404
                                                                            -------------     -------------
                                                                              177,164,492        17,931,209

   Less accumulated depreciation, depletion, and amortization                 (34,697,197)       (1,744,000)
                                                                            -------------     -------------
Net property and equipment                                                    142,467,295        16,187,209

Other assets                                                                    4,796,902              --
                                                                            -------------     -------------
                                                                            $ 153,674,829     $  17,252,996
                                                                            =============     =============
LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities:
   Accounts payable                                                         $   5,493,219     $   1,228,510
   Accrued liabilities                                                          1,258,196           360,158
   Current portion of long-term obligations (Note 3)                               84,862         2,080,897
                                                                            -------------     -------------
Total current liabilities                                                       6,836,277         3,669,565

Long-term obligations, net of current portion (Note 3)                        153,619,247         7,151,881

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, 1998 and 1997
     Issued and outstanding shares - 9,610,400 and 9,600,000 at June 30,
       1998 and 1997, respectively                                                 96,104            96,000
     Aggregate liquidation preference - $5,000,000
   Common stock, $.0015 par value:
     Authorized shares - 100,000,000 at June 30, 1998 and 1997
     Issued and outstanding shares - 24,323,767 and 20,825,552
       at June 30, 1998 and 1997, respectively                                     50,882            45,635
   Additional paid-in capital                                                  34,011,501        14,474,844
   Accumulated deficit                                                        (35,939,182)       (3,184,929)
   Treasury stock, 9,600,000 shares of common stock, at cost                   (5,000,000)       (5,000,000)
                                                                            -------------     -------------
Total stockholders' equity (net capital deficiency)                            (6,780,695)        6,431,550
                                                                            -------------     -------------

Total liabilities and stockholders' equity                                  $ 153,674,829     $  17,252,996
                                                                            =============     =============
</TABLE>

See accompanying notes.




                                      F-3
<PAGE>   57



                   Queen Sand Resources, Inc. and Subsidiaries

                      Consolidated Statements of Operations


<TABLE>
<CAPTION>
                                                                             YEAR ENDED JUNE 30
                                                                            1998             1997
                                                                       -------------    -------------
<S>                                                                    <C>              <C>          
Revenues:
   Oil and gas sales                                                   $   6,446,055    $   4,381,035
   Net profits and royalty interests                                       4,432,010             --
   Interest and other (Note 1)                                               105,356          300,271
                                                                       -------------    -------------
                                                                          10,983,421        4,681,306

Expenses:
   Production expenses                                                     4,546,612        2,506,759
   Depreciation, depletion, and amortization (Note 1)                      4,809,322          982,000
   Writedown of oil and gas properties (Note 1)                           28,166,000             --
   General and administrative (Notes 1 and 7)                              2,259,132        1,452,402
   Interest and financing costs                                            3,956,608          877,967
                                                                       -------------    -------------
Loss before extraordinary item                                           (32,754,253)      (1,137,822)

Extraordinary item (Note 3)                                                     --            171,381
                                                                       -------------    -------------
Net loss                                                               $ (32,754,253)   $  (1,309,203)
                                                                       =============    =============

Loss before extraordinary item per common share                        $       (1.44)   $        (.04)
                                                                       =============    =============

Net loss per common share                                              $       (1.44)   $        (.05)
                                                                       =============    =============

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


See accompanying notes.






                                      F-4
<PAGE>   58


                   Queen Sand Resources, Inc. and Subsidiaries

    Consolidated Statements of Stockholders' Equity (Net Capital Deficiency)

                       Years ended June 30, 1998 and 1997


<TABLE>
<CAPTION>
                                                                                                                            
                                                  PREFERRED STOCK                    COMMON STOCK              ADDITIONAL   
                                            -----------------------------    ----------------------------       PAID-IN     
                                               SHARES           AMOUNT          SHARES          AMOUNT          CAPITAL     
                                            ------------     ------------    ------------     -----------     ------------  

<S>                                            <C>           <C>               <C>            <C>             <C>           
Balance at June 30, 1996                            --       $       --        27,020,000     $    40,530     $  4,997,841  
   Issuance of common stock for
     services                                       --               --           116,052             171           20,709  
   Issuance of common stock for oil
     and gas properties (Note 2)
                                                    --               --         1,529,500           2,294          638,852  
   Issuance of common stock for
     cash (Note 5)
                                                    --               --         1,760,000           2,640        4,056,360  
   Issuance of convertible preferred
     stock and warrants to purchase
     common stock for cash (Note 5)
                                               9,600,000           96,000            --               --         4,904,000  
   Repurchase of common stock
     (Note 5)                                       --               --        (9,600,000)            --          (142,918) 
   Net loss                                         --               --              --               --              --    
                                            ------------     ------------    ------------     -----------     ------------  
Balance at June 30, 1997                       9,600,000           96,000      20,825,552          45,635       14,474,844  
   Issuance of common stock for
     services                                       --               --           150,000             225          299,775  
   Issuance of common stock for oil
     and gas properties (Note 2)
                                                    --               --         1,337,500           2,006        4,810,494  
   Issuance of common stock for
     cash (Note 5)
                                                    --               --         2,010,715           3,016        4,882,797  
   Issuance of convertible
     preferred stock and warrants
     to purchase common stock for
     cash (Note 5)
                                                  10,400              104            --               --         9,543,591  
   Net loss                                         --               --              --               --              --    
                                            ------------     ------------    ------------     -----------     ------------  
Balance at June 30, 1998                       9,610,400     $     96,104      24,323,767     $    50,882     $ 34,011,501  
                                            ============     ============    ============     ===========     ============  




<CAPTION>
                                               
                                                                                     TOTAL
                                                                                 STOCKHOLDERS'
                                                                                     EQUITY
                                                                ACCUMULATED      (NET CAPITAL
                                                 TREASURY         DEFICIT         DEFICIENCY)
                                               ------------     ------------     ------------

<S>                                            <C>              <C>              <C>         
Balance at June 30, 1996                       $       --       $ (1,875,726)    $  3,162,645
   Issuance of common stock for
     services                                          --               --             20,880
   Issuance of common stock for oil
     and gas properties (Note 2)
                                                       --               --            641,146
   Issuance of common stock for
     cash (Note 5)
                                                       --               --          4,059,000
   Issuance of convertible preferred
     stock and warrants to purchase
     common stock for cash (Note 5)
                                                       --               --          5,000,000
   Repurchase of common stock
     (Note 5)                                    (5,000,000)            --         (5,142,918)
   Net loss                                            --         (1,309,203)      (1,309,203)
                                               ------------     ------------     ------------
Balance at June 30, 1997                         (5,000,000)      (3,184,929)       6,431,550
   Issuance of common stock for
     services                                          --               --            300,000
   Issuance of common stock for oil
     and gas properties (Note 2)
                                                       --               --          4,812,500
   Issuance of common stock for
     cash (Note 5)
                                                       --               --          4,885,813
   Issuance of convertible
     preferred stock and warrants
     to purchase common stock for
     cash (Note 5)
                                                       --               --          9,543,695
   Net loss                                            --        (32,754,253)     (32,754,253)
                                               ------------     ------------     ------------
Balance at June 30, 1998                       $(35,939,182)    $ (5,000,000)    $ (6,780,695)
                                               ============     ============     ============
</TABLE>


See accompanying notes.






                                      F-5
<PAGE>   59


                   Queen Sand Resources, Inc. and Subsidiaries

                      Consolidated Statements of Cash Flows

<TABLE>
<CAPTION>
                                                                                 YEAR ENDED JUNE 30
                                                                          -------------------------------
                                                                              1998              1997
                                                                          -------------     -------------
<S>                                                                       <C>               <C>           
OPERATING ACTIVITIES
Net loss                                                                  $ (32,754,253)    $  (1,309,203)
Adjustments to reconcile net loss to net cash provided by (used in)
   operating activities:
     Extraordinary item                                                            --             171,381
     Depreciation, depletion, and amortization                                4,809,322           982,000
     Writedown of oil and gas properties                                     28,166,000
     Foreign currency translation gains                                         (18,166)         (300,271)
     Issuance of common stock for services                                      300,000            20,880
     Accretion of debt discount                                                    --              72,032
     Changes in operating assets and liabilities:
       Accounts receivable                                                   (4,579,893)         (316,664)
       Other assets                                                             (45,228)           (6,236)
       Accounts payable and accrued liabilities                               5,162,747           948,951
                                                                          -------------     -------------
Net cash provided by operating activities                                     1,040,529           262,870

INVESTING ACTIVITIES
Additions to oil and gas properties                                        (154,241,990)       (4,179,956)
Additions to other property and equipment                                       (99,868)         (125,107)
                                                                          -------------     -------------
Net cash used in investing activities                                      (154,341,858)       (4,305,063)

FINANCING ACTIVITIES
Proceeds from revolving credit facilities                                   103,000,000           275,982
Proceeds from bridge financing facilities                                    60,000,000              --
Repayments of borrowing from bridge financing facilities                     (1,140,000)             --
Debt issuance costs                                                          (4,897,952)             --
Payments on revolving credit facilities                                     (15,357,993)             --
Proceeds from private debt offerings                                            121,091           526,072
Payments on notes payable                                                    (2,063,876)       (1,407,923)
Collection of stock subscription                                                   --             500,000
Proceeds from sale of convertible preferred stock and warrants to
   purchase common stock                                                      9,543,695         5,000,000
Proceeds from the sales of common stock                                       4,885,813         4,059,000
Repurchase of common stock                                                         --          (5,142,918)
Payments on capital lease obligation                                            (69,725)          (57,946)
                                                                          -------------     -------------
Net cash provided by financing activities                                   154,021,053         3,752,267

Net increase (decrease) in cash                                                 719,724          (289,926)
Cash at beginning of year                                                       309,695           599,621
                                                                          -------------     -------------
Cash at end of year                                                       $   1,029,419     $     309,695
                                                                          =============     =============

Supplemental cash flow information:
   Interest paid in cash                                                  $   3,946,340     $     765,181
                                                                          =============     =============
</TABLE>

See accompanying notes.




                                      F-6
<PAGE>   60



                   Queen Sand Resources, Inc. and Subsidiaries

                   Notes to Consolidated Financial Statements

                                  June 30, 1998

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, 1998, EIBOC Investments
Ltd. (EIBOC) held approximately 6,600,000 shares of the Company's common stock,
par value $.0015 (Common Stock), representing approximately 13.9% 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 33% 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 gas. The Company's business
activities are carried out primarily in Texas, New Mexico, Mississippi,
Louisiana, and Kentucky.

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 $721,160 and $316,070 for the years ended June 30, 1998 and
1997, respectively. Capitalized costs are depleted 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 depletion 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-7
<PAGE>   61

                   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 depreciation, depletion, and 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, depletion, and amortization
expense. During the year ended June 30, 1998, the Company recorded a full cost
ceiling writedown of $28,166,000.

Depreciation, depletion, and amortization expense 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 and amortization 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 expensed
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-8
<PAGE>   62

                   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. 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.

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. Additionally, the Company issued an aggregate of 1,337,500 shares of
Common Stock valued at $4,813,000 in connection with the acquisitions of certain
interests in oil and gas properties during 1998 (see Note 2).





                                      F-9
<PAGE>   63


                   Queen Sand Resources, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)



1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

During 1997, in connection with the acquisitions of interests in oil and gas
properties, the Company issued an aggregate of 1,529,500 shares of Common Stock
valued at $641,146 and issued notes payable to the sellers which were recorded
at $2,473,000 net of issuance discount of $354,000 (see Notes 2 and 3).

NET LOSS PER COMMON SHARE

In 1997, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 128, Earnings per Share. Statement 128 replaced the
previously reported primary and fully diluted earnings per share with basic and
diluted earnings per share. Unlike primary earnings per share, basic earnings
per share excludes any dilutive effects of options, warrants, and convertible
securities. Diluted earnings per share is very similar to the previously
reported fully diluted earnings per share. All earnings per share amounts for
all periods presented have been, where necessary, restated to conform to the
Statement 128 requirements. As the Company incurred net losses during each of
the years ended June 30, 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, 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.




                                      F-10
<PAGE>   64


                   Queen Sand Resources, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)



1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

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.
Translation gains of $18,166 and $300,271 were recognized during the years ended
June 30, 1998 and 1997, respectively, and are included in interest and other
income in the accompanying consolidated statements of operations.

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, 1999. 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, 1999. 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.



                                      F-11
<PAGE>   65


                   Queen Sand Resources, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)



1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

The Company has not yet determined what the effect of Statement 133 will be on
the earnings and financial position of the Company.

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.

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 $16,560.

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 $329,500. 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
$289,250. 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.




                                      F-12
<PAGE>   66


                   Queen Sand Resources, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)



2. ACQUISITIONS (CONTINUED)

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

<S>                                             <C>         
         Revenues                               $  6,318,362
                                                ============
         Net loss                               $   (505,846)
                                                ============
         Loss per common share                  $       (.02)
                                                ============
</TABLE>

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 (see Note 3).

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 $1,687,500 (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 revenues (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 interest, 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
from which the overriding royalties and net profits interests revenues presented
in the accompanying consolidated statement of operations for the year ended June
30, 1998, are derived:




                                      F-13
<PAGE>   67


                   Queen Sand Resources, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)



2. ACQUISITIONS (CONTINUED)

<TABLE>
<CAPTION>
                                                                          1998
                                                                       ----------
<S>                                                                    <C>       
          Oil and gas sales                                            $6,218,660
          Production expenses                                           1,786,650
                                                                       ----------
          Net profits and royalty interest revenues                    $4,432,010
                                                                       ==========
</TABLE>

The following unaudited pro forma summary of the Company's consolidated results
of operations for the year ended June 30, 1998 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, 1997.
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, 1997.

<TABLE>
                                                         1997           1998
                                                     ------------    ------------
<S>                                                  <C>             <C>         
         Revenues                                    $ 42,052,000    $ 34,635,000
                                                     ============    ============
         Net income (loss)                           $  2,316,000    $(31,528,000)
                                                     ============    ============
         Income (loss) per common share:             

                    Basic                            $        .08    $      (1.38)
                                                     ============    ============
                    Diluted                          $        .08           N/A
                                                     ============    
</TABLE>


3. CURRENT AND LONG-TERM DEBT

A summary of current and long-term debt follows:

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

<S>                                                                                          <C>             <C>         
         Prime plus 1.5% Revolving Credit Note                                               $       --      $  4,857,993
         12% unsecured DEM bonds, due July 2000                                                 2,196,200       2,093,275
         9% Acquisition Notes                                                                        --         2,063,876
         Bank of Montreal Revolving Credit Agreement                                           92,500,000            --
         ECT Revolving Credit Facility                                                               --              --
         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                                                                147,909         217,634
                                                                                             ------------    ------------
                                                                                              153,704,109       9,232,778
         Less current portion of debt and capitalized lease obligation                             84,862       2,080,897
                                                                                             ------------    ------------
         Total long-term obligations                                                         $153,619,247    $  7,151,881
                                                                                             ============    ============
</TABLE>

On December 1, 1995, the Company entered into a revolving credit note agreement
with Comerica Bank to provide a revolving line of credit up to $10,000,000,
secured by substantially all of the Company's interests in oil and gas
properties. Effective August 1, 1997, the Company terminated this credit
agreement and entered into a new credit agreement with Bank of Montreal. This
agreement provided for an initial borrowing base



                                      F-14
<PAGE>   68


                   Queen Sand Resources, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)




3. CURRENT AND LONG-TERM DEBT (CONTINUED)

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.

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, 1998,
$92,500,000 was outstanding under the Credit Agreement. The loan under the
Credit Agreement matures on April 17, 2003.

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.
The interest rate at June 30, 1998 was 8.50%. There is no margin applicable for
base rate pricing options.

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 and December 31, 1997, 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. 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.

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.




                                      F-15
<PAGE>   69


                   Queen Sand Resources, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)




3. CURRENT AND LONG-TERM DEBT (CONTINUED)

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

Subsequent to June 30, 1998, the Bridge Facilities were retired and
approximately $82,200,000 of borrowings under the Credit Agreement were repaid
(see Note 11), and the borrowing base of the Credit Agreement was revised to
$25,000,000.

Effective December 29, 1997, the Company established the ECT Revolving Credit
Agreement with ECT, an affiliate of Enron, to fund on a revolving basis 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 included
in the borrowing base for the Credit Agreement or financed with longer-term
indebtedness or equal 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 June 30, 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 approximately 95% 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 stock of the Company entitled to vote in the election of
directors. From March 31, 1998 through the maturity date, 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



                                      F-16
<PAGE>   70


                   Queen Sand Resources, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)




3. CURRENT AND LONG-TERM DEBT (CONTINUED)

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.

The company paid ECT a fee of $200,000 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,
except that payment of this fee was waived for the period from April 12, 1998
until the date on which the Bridge Facilities are fully repaid.

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. 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. Subsequent to June 30, 1998, the Company
redeemed notes totaling DEM 2,350,000 for approximately $1,300,000.





                                      F-17
<PAGE>   71


                   Queen Sand Resources, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)




3. CURRENT AND LONG-TERM DEBT (CONTINUED)

In February 1997, in connection with the acquisition of the Core Properties
(Note 2), the Company issued four notes totaling $2,400,000 (the Acquisition
Notes) secured by a first lien on the Core 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 $171,381, the
difference between the carrying value of the original notes (including accreted
discount totaling $72,032) 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 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.

4. HEDGING ACTIVITIES

The Company has entered into 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, call 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 year ended June 30, 1998, the
Company recognized net hedging gains of approximately $120,000 relating to these
agreements, which are included in oil and gas sales.





                                      F-18
<PAGE>   72


                   Queen Sand Resources, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)




4. HEDGING ACTIVITIES (CONTINUED)

The Company has implemented a comprehensive hedging strategy for its natural gas
production over the next five 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 for entering into this agreement. 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>





                                      F-19
<PAGE>   73

                   Queen Sand Resources, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)




4. HEDGING ACTIVITIES (CONTINUED)

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.

<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 year ended June 30, 1998, the Company recognized hedging gains of
approximately $122,000 relating to these agreements, which are included in oil
and gas sales.

The Company has 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 may be unwound at any time at the option of the Company.
Subsequent to June 30, 1998, the Company terminated the agreement at a cost of
approximately $3,500,000 (see Note 11).

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



                                      F-20
<PAGE>   74

                   Queen Sand Resources, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)




5. STOCKHOLDERS' EQUITY (CONTINUED)

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).

The JEDI nondilution rights may result in JEDI receiving warrants, with a one
year term, in connection with certain future Company stock issuances prior to
December 31, 1998. The exercise price of any such warrants will be equal to the
price per share of the future 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.





                                      F-21
<PAGE>   75

                   Queen Sand Resources, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)




5. STOCKHOLDERS' EQUITY (CONTINUED)

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,
1997 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 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.





                                      F-22
<PAGE>   76

                   Queen Sand Resources, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)




5. STOCKHOLDERS' EQUITY (CONTINUED)

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.

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.




                                      F-23
<PAGE>   77

                   Queen Sand Resources, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)




5. STOCKHOLDERS' EQUITY (CONTINUED)

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 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



                                      F-24
<PAGE>   78


                   Queen Sand Resources, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)



5. STOCKHOLDERS' EQUITY (CONTINUED)

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.

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



                                      F-25
<PAGE>   79

                   Queen Sand Resources, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)




5. STOCKHOLDERS' EQUITY (CONTINUED)

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.

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



                                      F-26
<PAGE>   80

                   Queen Sand Resources, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)




5. STOCKHOLDERS' EQUITY (CONTINUED)

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
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), cumulative dividends 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.

WARRANTS

As of June 30, 1998, JEDI held warrants to purchase an aggregate of 1,009,001
shares of Common Stock at prices ranging from $2.00 to $5.00. The warrants held
by JEDI expire at various times from July 27, 1998 through March 9, 1999. In
addition, certain institutional investors hold warrants to purchase an aggregate
of 2,840,138 shares of Common Stock at prices ranging from $2.50 to a floating
rate based on market price at



                                      F-27
<PAGE>   81

                   Queen Sand Resources, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)




5. STOCKHOLDERS' EQUITY (CONTINUED)

the time of exercise. The warrants held by the institutional investors expire at
various times from December 31, 1998 through December 24, 2001. Subsequent to
June 30, 1998, JEDI exercised an aggregate of 1,602,236 warrants and 1,400,000
warrants were exercised by the institutional investors (see Note 11).

The Company has also issued certain contingent floating conversion rate warrants
in connection with the Bridge Facilities arranged to fund the Morgan Property
Acquisition, which terminated upon the repayment of the Bridge facilities
subsequent to June 30, 1998 (see Note 11).

STOCK OPTIONS

In November 1997, the Company granted to certain officers and employees 173,000
options to purchase Common Stock of the Company (Stock Options), all of which
remain outstanding at June 30, 1998. The Stock Options, granted with an exercise
price of $5.25 per share, expire in November of 2007 and vest 50% on the first
anniversary of the grant date, 25% on the second anniversary and 25% on the
third anniversary.

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 5.88%, a dividend yield
of 0%, and a volatility factor of .51. In addition, the fair value of these
options was estimated based on an expected weighted average life of 7.5 years.
The weighted average fair the options as of the grant date using the
Black-Scholes option valuation model was $3.22.

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 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. In addition,



                                      F-28
<PAGE>   82

                   Queen Sand Resources, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)




5. STOCKHOLDERS' EQUITY (CONTINUED)

because SFAS 123 is applicable only to options granted subsequent to December
31, 1994, the pro forma information does not reflect the pro forma effect of all
previous stock option grants of the Company, and thus the pro forma information
is not necessarily indicative of future amounts until SFAS 123 is applied to all
outstanding 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 (in thousands except for earnings per share
information)

<TABLE>
<S>                                                        <C>           
          Pro forma net loss                               $ (32,928,000)
                                                           =============
          Loss per common share                            $       (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, 1998 and 1997, 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 $128,880
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-29
<PAGE>   83

                   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). Commitment fees and interest totaling approximately
$200,000 and $9,000, respectively, were paid to ECT during the year ended June
30, 1998 in connection with this facility.

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

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

The Company has paid approximately $26,000 to a company affiliated with a
director of the Company for operating certain of the Company's properties during
the year ended June 30, 1998.

8. INCOME TAXES

The Company's effective tax rate differs from the U.S. statutory rate 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, 1998 and 1997, follow:

<TABLE>
<CAPTION>
                                                                                  1998             1997
                                                                              ------------     ------------
<S>                                                                           <C>              <C>         
         Deferred income tax assets (liabilities):
            Reverse acquisition costs                                         $     66,379     $     87,967
            Net operating loss carryforwards                                     2,822,586        1,160,646
            Statutory depletion carryforward                                       125,983          125,983
            Oil and gas properties, principally due to differences in
              depreciation, depletion, and amortization                          9,218,664         (273,789)
            Other                                                                  (20,774)         (20,774)
                                                                              ------------     ------------
                                                                                12,212,838        1,080,033
         Less valuation allowance                                              (12,212,838)      (1,080,033)
                                                                              ------------     ------------
         Net deferred income tax asset                                        $       --       $       --
                                                                              ============     ============
</TABLE>




                                      F-30
<PAGE>   84

                   Queen Sand Resources, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)




8. INCOME TAXES (CONTINUED)

The net changes in the total valuation allowance for the years ended June 30,
1998 and 1997, were increases of $11,132,805 and $442,794, 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,
1998 and 1997:

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

<S>                                                                 <C>              <C>         
         Oil and gas sales                                          $  6,446,000     $  4,381,000
         Net profits and royalty interests revenues                    4,432,000             --
         Production expenses                                          (4,547,000)      (2,507,000)
         Depreciation, depletion, and amortization                    (4,736,000)        (915,000)
         Writedown of oil and gas properties                         (28,166,000)            --
                                                                    ------------     ------------
         Results of operations (excludes corporate overhead
            and interest expense)                                   $(26,571,000)    $    959,000
                                                                    ============     ============
</TABLE>

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

CAPITALIZED COSTS

The following table summarizes capitalized costs relating to oil and gas
producing activities and related amounts of accumulated depreciation, depletion,
and amortization at June 30, 1998 and 1997:




                                      F-31
<PAGE>   85

                   Queen Sand Resources, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)




9. OIL AND GAS PRODUCING ACTIVITIES (CONTINUED)

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

<S>                                                       <C>               <C>          
         Oil and gas properties - proved                  $ 176,943,000     $  17,541,000
         Accumulated depreciation, depletion, and
           amortization                                     (34,628,000)       (1,627,000)
                                                          =============     =============
         Net capitalized costs                            $ 142,315,000     $  15,914,000
                                                          =============     =============
</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, 1998 and 1997:

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

<S>                                                  <C>             <C>         
         Property acquisition costs                  $153,196,000    $  7,382,000
                                                     ============    ============
         Development costs                           $  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-32
<PAGE>   86

                   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, l996                              6,932,000       12,984,000
            Purchases of reserves 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 reserves 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
                                                               ============     ============

         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
                                                               ============     ============
</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 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




                                      F-33
<PAGE>   87

                   Queen Sand Resources, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)




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

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, 1998 and 1997, are as follows:

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

<S>                                                            <C>               <C>          
         Future cash inflows                                   $ 524,585,000     $ 164,120,000
         Future costs and expenses:
            Production expenses                                 (176,633,000)      (59,955,000)
            Development costs                                    (29,289,000)      (23,569,000)
         Future income taxes                                     (43,938,000)      (21,649,000)
                                                               -------------     -------------
         Future net cash flows                                   274,725,000        58,947,000
         10% annual discount for estimated timing of
            cash flows                                          (132,410,000)      (28,801,000)
                                                               -------------     -------------
         Standardized measure of discounted future
            net cash flows                                     $ 142,315,000     $  30,146,000
                                                               =============     =============
</TABLE>

The weighted average price of oil and gas at June 30, 1998 and 1997, used in
calculating the Standardized Measure were $12.80 and $17.43 per barrel and $2.40
and $2.25 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, 1998 and 1997, are
as follows:

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

                                      F-34
<PAGE>   88

                   Queen Sand Resources, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)




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

The future cash flows shown above include amounts attributable to proved
undeveloped reserves requiring approximately $22,583,000 of future development
costs. If these reserves are not developed, the standardized measure of
discounted future net cash flows as of June 30, 1998, shown above would be
reduced by approximately $33,920,000.

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. SUBSEQUENT EVENTS

Subsequent to year end, the Company completed a private placement of
$125,000,000 principal amount of 12 1/2% Senior Notes (the Notes) due July 1,
2008 (the Notes Offering) and issued an aggregate of 3,428,574 shares of the
Company's Common Stock at $7 per share (the 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 1,400,000 shares of Common Stock
at $2.50 per share (collectively, the Warrant Exercises).

The net proceeds from the Note Offering ($120,500,000), the Equity Offering
($22,000,000) and the Warrant Exercises ($8,500,000) were used to repay
indebtedness outstanding under the Company's Credit Agreement and the Bridge
Facilities, substantially all of which was incurred to fund the Company's
acquisition of the Morgan Properties. Immediately following such repayments, the
amount of indebtedness under the Credit Agreement outstanding was approximately
$10,300,000.





                                      F-35
<PAGE>   89

                   Queen Sand Resources, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)




11. SUBSEQUENT EVENTS (CONTINUED)

Concurrent with the repayment of the Bridge Facilities, the Company terminated,
at a cost of approximately $3,500,000, the LIBOR Interest Swap Agreement with
the Bank of Montreal (the LIBOR Swap Unwind).

The Company has filed a registration statement on Form S-4 with the Securities
and Exchange Commission (SEC) to exchange the Notes for identical registered
notes. The Company has also filed a registration statement on Form S-3 with the
SEC to register for resale the Common Shares, the Repricing Common Shares and
the Warrant Common Shares. The Company will use its reasonable best efforts to
cause these registration statements to become effective as soon as practicable,
but in no event later than November 4, 1998.

NOTES OFFERING

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.

EQUITY OFFERINGS

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.

Each holder of Common Shares or Repricing Rights has the right to require the
Company to repurchase all or a portion of such holder's Common Shares or
Repricing Rights upon



                                      F-36
<PAGE>   90

                   Queen Sand Resources, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)




11. SUBSEQUENT EVENTS (CONTINUED)

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 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.

PRO FORMA EFFECT

The following unaudited pro forma condensed consolidated balance sheet as of
June 30, 1998 and statement of operations for the year ended June 30, 1998 were
prepared as if the acquisitions of the Collins and Ware Properties, the NASGAS
Properties and the Morgan Properties and the Notes Offering, the Equity
Offering, the Warrant Exercises and the LIBOR Swap Unwind had occurred on July
1, 1997. 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, the Notes Offering, the Equity
Offering, the Warrant Exercises and the LIBOR Swap Unwind had occurred on July
1, 1997, for purposes of the unaudited pro forma condensed consolidated
statement of operations, and on June 30, 1998, for purposes of the unaudited
pro forma condensed consolidated balance sheet.

            UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
                                  JUNE 30, 1998
                                 (in thousands)

<TABLE>
<S>                                                            <C>       
         Current assets                                        $   11,555
         Net property and equipment                               142,467
         Other assets and deferred charges                         12,797
                                                               ----------
         Total assets                                          $  166,819
                                                               ==========

         Current liabilities                                   $    6,836
         Long-term obligations, net of current portion            136,263
                                                               ----------
         Total liabilities                                        143,099
         Total stockholders' equity                                23,720
                                                               ----------
         Total liabilities and stockholders' equity            $  166,819
                                                               ==========
</TABLE>




                                      F-37
<PAGE>   91

                   Queen Sand Resources, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)




11. SUBSEQUENT EVENTS (CONTINUED)

                   UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
                             STATEMENT OF OPERATIONS
                            YEAR ENDED JUNE 30, 1998
                                 (in thousands)

<TABLE>
<S>                                        <C>       
         Revenues                          $   34,635
         Expenses                              68,639
                                           ----------
         Net loss                          $  (34,004)
                                           ==========
         Loss per common share             $    (1.17)
                                           ==========
</TABLE>



                                      F-38

<PAGE>   92



                                INDEX TO EXHIBITS


   Exhibit No.   Item
   -----------   ----


         1.1     Purchase Agreement, dated June 30, 1998 by and among Queen Sand
                 Resources, Inc. (the "Company") and certain of its
                 subsidiaries, and Nesbitt Burns Securities Inc., CIBC
                 Oppenheimer Corp. and Societe Generale Securities Corporation,
                 as Placement Agents, 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.
         3.1     Restated Certificate of Incorporation of the Company, filed as
                 an Exhibit to the Company's Registration Statement on Form S-3
                 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 of the Company, 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 of 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.
         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 ("JEDI"), 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 12 1/2% 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, as amended by the Current Report on Form
                 8-K/A-1 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     Common Stock Purchase Warrant Representing Right to Purchase
                 100,000 Shares of Common Stock of the Company issued to Forseti
                 Investments Ltd. on May 6, 1997 and assigned to CSM GmbH, 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.
         4.5     Common Stock Purchase Warrant Representing Right to Purchase
                 1,000,000 Shares of Common Stock of the Company issued to
                 Forseti Investments Ltd. on May 6, 1997 and assigned to CSM
                 GmbH, 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.
         4.6     Common Stock Purchase Warrant Representing Right to Purchase
                 28,066 Shares of Common Stock of the Company dated July 22,
                 1998 issued to JEDI, 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.
         4.7     Common Stock Purchase Warrant Representing Right to Purchase
                 1,697,881 Shares of Common Stock of the Company dated July 22,
                 1998 issued to JEDI, 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.
         4.8     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.
         4.9     Form of Common Stock Purchase Warrant effective July 8, 1998
                 and issued to certain investors, 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.



<PAGE>   93




   Exhibit No.   Item
   -----------   ----


         4.10    Registration Rights Agreement between the Company and Collins &
                 Ware, Inc., dated August 1, 1997, 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.
         4.11    Registration Rights Agreement between the Company and Riata
                 Energy, et. al dated April 9, 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, which
                 Exhibit is incorporated herein by reference.
         4.12    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.
         4.13    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.
         4.14    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.
         4.15    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, as amended by the Current Report on Form 8-K/A-1 dated
                 July 8, 1998, which Exhibit is incorporated herein by
                 reference.
         4.16    Registration Rights Agreement, dated July 8, 1998, by and among
                 the Company and certain of its subsidiaries and Nesbitt Burns
                 Securities Inc., CIBC Oppenheimer Corp. and Societe Generale
                 Securities Corporation, as Placement Agents, 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.
         4.17*   Common Stock Purchase Warrant Representing Right to Purchase
                 48,701 Shares of Common Stock of the Company dated August 19,
                 1998 and issued to JEDI.
         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 June 20, 1997 between Queen
                 Sand Resources, Inc., a Nevada corporation, and Collins & Ware,
                 Inc., filed as an Exhibit to the Company's Current Report on
                 Form 8-K dated August 1, 1997, which Exhibit is incorporated
                 herein by reference.
         10.3    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.
         10.4    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.
         10.5    Securities Purchase Agreement dated as of March 27, 1997
                 between Forseti Investments Ltd, a Barbados corporation, 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.
         10.6    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.


<PAGE>   94

   Exhibit No.   Item
   -----------   ----

         10.7**  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.
         10.8**  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, which
                 Exhibit is incorporated herein by reference.
         10.9**  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, which Exhibit is incorporated herein by reference.
         10.10** 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, which Exhibit is incorporated herein by reference.
         10.11** 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, which Exhibit is incorporated herein by reference.
         10.12   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.
         10.13   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, which Exhibit is
                 incorporated herein by reference.
         10.14   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.
         10.15   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.
         10.16   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, which Exhibit is incorporated herein by
                 reference.
         10.17   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, which Exhibit is incorporated
                 herein by reference.
         10.18   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, which
                 Exhibit is incorporated herein by reference.


<PAGE>   95

   Exhibit No.   Item
   -----------   ----

         10.19   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, which Exhibit is
                 incorporated herein by reference.
         10.20   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, which Exhibit is
                 incorporated herein by reference.
         10.21   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.
         10.22   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.
         10.23** Form of Qualified Stock Option Agreement.
         10.24   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.
         11.1    Statement of computation of earnings per share. 16.1 Letter
                 regarding change in certifying accountant.
         16.1    Letter regarding change in certifying accountant.
         21.1    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, 1998, which
                 Exhibit is incorporated herein by reference.
         23.1*   Consent of Ernst & Young LLP.
         23.2*   Consent of Ryder Scott Company.
         23.3*   Consent of H.J. Gruy and Associates, Inc.
         23.4*   Consent of Harper and Associates.
         27.1*   Financial Data Schedule.

     -----------
     *               Filed herewith
     **              Denotes management contract.