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

                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                                        
                                   FORM 10-K


    [X]           ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934
                    FOR THE FISCAL YEAR ENDED APRIL 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 333-19013
                                        
                             ALLIANCE RESOURCES PLC
             (Exact name of registrant as specified in its charter)

         ENGLAND AND WALES                                   73-1405081
   (State or other jurisdiction of                        (I.R.S. Employer
    incorporation or organization)                       Identification No.)

         4200 EAST SKELLY DRIVE
              SUITE 1000
           TULSA, OKLAHOMA                                      74135
  (Address of principal executive offices)                    (Zip code)

      Registrant's telephone number, including area code:  (918) 491-1100

          SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
                                        
     Title of Each Class          Name of Each exchange on Which Registered
     -------------------          -----------------------------------------
           (NONE)                                    (NONE)


          SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

                                     (NONE)
                                (Title of Class)

     Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.  Yes  X   No
                                               ---     ---

     Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of the Regulation S-K is not contained herein, and will not be contained, to
the best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.

     The aggregate market value of the Registrant's voting stock held by non-
affiliates as of September 15, 1998 was approximately $15,549,782 (based on the
middle market quotation on April 28, 1998, the day prior to the suspension of
listing of its shares by the London Stock Exchange.).

     On September 15, 1998 there were 31,209,408 shares of the Registrant's
common stock issued and outstanding.

                      Documents Incorporated by Reference
                                      NONE

================================================================================
<PAGE>
 
                             ALLIANCE RESOURCES PLC

                                   FORM 10-K
                        FISCAL YEAR ENDED APRIL 30, 1998
                 ---------------------------------------------
                               TABLE OF CONTENTS

                                     PART I
 
Item 1.    Business.................................................  1
Item 2.    Properties...............................................  1
Item 3.    Legal Proceedings........................................  1
Item 4.    Submission of Matters to a Vote of Security Holders......  1

                                    PART II

Item 5.    Market for Registrant's Common Equity and Related
           Stockholder Matters......................................  1
Item 6.    Selected Financial Data..................................  1
Item 7.    Management's Discussion and Analysis of Financial
           Condition and Results of Operations......................  1
Item 8.    Financial Statements and Supplementary Data..............  2
Item 9.    Changes in and Disagreements with Accountants on
           Accounting and Financial Disclosure......................  2

                                    PART III

Item 10.   Directors and Executive Officers of the Registrant.......  3
Item 11.   Executive Compensation...................................  4
Item 12.   Security Ownership of Certain Beneficial Owners
           and Management...........................................  4
Item 13.   Certain Relationship and Related Transactions............  4

                                    PART IV
                                        
Item 14.   Exhibits, Financial Statement Schedules, and Reports
           on Form 8-K                                                5
 
Signatures                                                            6

     Certain statements in this Report under the captions "Item 1. Business",
"Item 2. Properties" and "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations," and elsewhere in this Report
constitute "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995 (the "Reform Act").  Such forward
looking statements involve known and unknown risks, uncertainties and other
factors that may cause the actual results, performance or achievements of the
Company, or industry trends and results, to be materially different from any
future results, trends, performance, or achievements expressed or implied by
such forward-looking statements.  Such risks, uncertainties and other factors
include, among others, the following: general economic and business conditions;
oil and gas and other industry conditions and trends, including supply and
demand; fluctuations in the prices for oil, gas and refined products;
competition; import protection and regulation (including the implementation of
the World Trade Organization and North American Free Trade Agreement); the loss
of any significant customers; changes in business strategy or development plans;
quality of management; availability, terms and deployment of debt and equity
capital; business abilities and judgement of personnel; availability of
qualified personnel; changes in or the failure to comply with government
regulations and other factors referenced in this Report.  See "Item 1. Business
and Item 2. Properties-Cautionary Statement and Risk Factors."

 
<PAGE>
 
                                     PART I
                                        
ITEM 1. BUSINESS AND ITEM 2. PROPERTIES.

     Information for these items relating to Alliance can be found in the Proxy
Statement submitted to Securities and Exchange Commission on July 13, 1998.  The
Proxy Statement has been included with this filing as Exhibit 99.1, refer to
pages 42 through 48.

     On July 30, 1998, the Board of Alliance announced that the $100 million of
Senior Subordinated Notes due in 2008 to be issued by the Company as part of the
financing arrangements for the acquisition of the East Irish Sea Interests and
related acquisition of Difco Limited have not been raised on acceptable terms
and therefore the proposed resolutions to approve, inter alia, the Acquisitions
were not put to shareholders at the Extraordinary General Meeting scheduled for
that day.

     The Board is in discussions with Difco Limited in connection with the
Acquisitions and is considering alternative methods of financing.  As a result,
the listing of the ordinary shares of Alliance remains suspended.
 
ITEM 3. LEGAL PROCEEDINGS

     Information for this item relating to Alliance can be found in the Proxy
Statement submitted to the Securities and Exchange Commission on July 13, 1998.
The Proxy Statement has been included with this filing as Exhibit 99.1, refer to
pages 48 and 49.

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

     None.

                              PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

     Information for this item relating to Alliance can be found in the Proxy
Statement submitted to the Securities and Exchange Commission on July 13, 1998.
The Proxy Statement has been included with this filing as Exhibit 99.1, refer to
page 26.

ITEM 6. SELECTED FINANCIAL DATA

     Information for this item relating to Alliance can be found in the Proxy
Statement submitted to the Securities and Exchange Commission on July 13, 1998.
The Proxy Statement has been included with this filing as Exhibit 99.1, refer to
pages 32 and 33.

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

     Information for this item relating to Alliance can be found in the Proxy
Statement submitted to the Securities and Exchange Commission on July 13, 1998.
The Proxy Statement has been included with this filing as Exhibit 99.1, refer to
pages 34 through 41.

     Management had planned to consummate the acquisition of a 20 per cent
interest in certain undeveloped oil and gas properties in the East Irish Sea and
Liverpool Bay areas ("the East Irish Sea Interests"), which would have involved
a satisfactory refinancing of the Group's borrowings.  On July 30, 1998 the
Board announced that financing for that transaction had not been raised and that
the resolutions to approve the acquisition were not put to shareholders.

     Management's plans in the event that the acquisition and refinancing did
not proceed, were to seek other transactions of a similar nature, restructure
the existing credit facility or seek alternative forms of financing and to take
such other steps as were necessary to allow the Group to meet its obligations as
they fell due. It was envisioned that such steps might have included the
continued reduction of the Group's overheads, deferral of elements of the
recompletion program and the realization of oil and gas properties.

                                       1

<PAGE>
     Since July 30, 1998, management has reduced the Group's overheads through
selective redundancies, has held discussions with Bank of America regarding the
existing credit facility but has primarily been evolving alternative financing
plans to allow the acquisition of part of the East Irish Sea Interests. Such 
alternative financing has been formulated and it is anticipated that proposals
will be put to shareholders on or before October 31, 1998. This will also
include a restructuring of the existing credit facility. Management believes
that the satisfactory completion of this transaction will provide the Group with
financing which will allow it to meet its obligations as they fall due.

     Management is mindful of the Group's financial condition should this
transaction not be  consummated. The existing credit facility with Bank of
America requires monthly repayments of $325,000 to commence on October 31, 1998
and with the balance remaining outstanding on March 31, 2000 being repayable in
full on that date. The Group's operating cash flow will not be sufficient to
meet its obligations under the existing credit facility and, given the passage
of time and the concentration of management's efforts on achieving the
acquisition outlined above, it may not be possible to take the necessary steps,
which might include property dispositions, to allow the Group to meet its
obligations in a timely manner.

     However, the pursuit by management of an alternative structure to acquire
the East Irish Sea Interests has been undertaken with the full support of Bank
of America, including the deferral of property disposals pending final
resolution of the acquisition of part of the East Irish Sea Interests.  Bank of
America has indicated to management that, in the event that the proposed
transaction is not consummated, it will work with the Group to achieve a
mutually satisfactory refinancing. There is, however, no guarantee that a
successful refinancing will be achieved in a timely manner if at all.

     The Directors believe that there is reasonable assurance that the Group
will remain a going concern even if the proposed transaction is not consummated.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     Information for this item relating to Alliance can be found on pages F-1
through F-24.

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

     Not Applicable

                                       2

<PAGE>
 
                                   PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

     John A "Jak" Keenan, aged 44, is the Chairman and Managing Director of
Alliance.  He has worked in the oil industry since 1976 and was successively
first vice president of corporate development, chief operating officer and
director and president of the oil and gas division of Great Western Resources,
Inc.  He resigned his position at Great Western Resources, Inc. in August 1995
and accepted a position at the law firm of Jenkens & Gilchrist in Houston,
Texas, where he specialized in oil and gas transactions.  He joined the Board of
Alliance in April 1996.

     H Brian K Williams, aged 43, is the Finance Director of Alliance.  He
qualified as a Chartered Accountant with Thomson McLintock (now part of KPMG)
and then held positions at British National Oil Corporation and Hamilton
Brothers Oil & Gas before joining Pict Petroleum plc, where he became finance
director in 1991.  He joined the Board of Alliance in June 1996.

     Paul R Fenemore, aged 43, is the Operations and Business Development
Director of Alliance.  He has a B.Sc. degree in combined science obtained in
1975 and a M.Sc. degree in marine geotechnics.  He has extensive experience in
detailed technical and economic evaluations of exploration and oil field
appraisal and development projects and project management and has held several
technical and senior management positions with Gulf Oil Corporation, Amoco
Europe and West Africa Limited, Amerada-Hess UK Limited, Hamilton Brothers (UK)
Limited, CSX Oil and Gas Corporation, Cairn Energy PLC and Hunting Surveys
Limited.  From 1991 until 1995 he was managing director of Petroleum Ventures
International and Spectron Petroleum Limited and became a fellow of the
Geological Society in 1992.  He joined the Board of Alliance in May 1996.

     M Phillip Douglas, aged 59, is a non-executive Director of Alliance.  He
was a director and head of international investment at Morgan Grenfell for 16
years and was a director of G T Management.  He also has a number of other non-
executive directorships in public and private companies.  He joined the Board of
Alliance in November 1993.

     William J A Kennedy, aged 59, is a non-executive Director of Alliance.
After 25 years experience in the investment industry he became vice president of
a major conglomerate, Crownx, Inc.  For the past nine years he has operated a
management consulting service and sits on the board of two public Canadian
companies.  He joined the Board of Alliance in January 1994.

     Michael E Humphries, aged 41, is a non-executive Director of Alliance.
Having begun his career at Britoil Plc, he has spent 16 years working in the
international oil and gas arena and is currently Senior Vice President of
Rothschild Natural Reosurces, LLC, based in Washington DC, where he has
responsibility for Rothschild's oil and gas activities in North America. He
joined the Board of Alliance in December 1997.

     Christopher R L Samuelson, aged 52, is a non-executive Director of
Alliance.  He is a joint chief executive of Valiant Group Limited, a large
independent trust company, with whom he has been associated for the last twelve
years.  He also holds a wide number of directorships around the world.  He
joined the Board of Alliance in April 1996.

     John R Martinson, aged 63, is a non-executive Director of Alliance.  He has
a B.Sc. degree in engineering and a masters degree in business administration.
He became a director of LaTex in May 1995, having served as a consultant to that
company since 1994.  He is managing director of Wood Roberts, LLC, where he has
been engaged in financial consulting since January 1989.  From 1973 to 1988 Mr.
Martinson was an independent oil and gas entrepreneur.  Previously, he was with
Kidder Peabody & Co., Oppenheimer & Co. and Mobil Corporation.  He joined the
Board of Alliance in May 1997.

                                       3
<PAGE>
 
ITEM 11. EXECUTIVE COMPENSATION

     The compensation of the directors for the year ended April 30, 1998 were as
follows:

<TABLE>
<CAPTION>
 
                          Fees     Salary    Bonus   Pension  Benefits   Total
<S>                      <C>      <C>       <C>      <C>      <C>       <C>
 
Jak Keenan                     -  $174,500  $30,000        -  $107,103  $311,603
Brian Williams                 -  $142,136  $10,000  $21,322         -  $173,458
Paul Fenemore                  -  $164,990  $20,000  $ 8,361         -  $193,351
Philip Douglas           $16,722         -        -        -         -  $ 16,722
Bill Kennedy             $16,722         -        -        -         -  $ 16,722
Michael Humphries              -         -        -        -         -         -
Christopher Samuelson    $12,542         -        -        -         -  $ 12,542
John Martinson           $12,542         -        -        -         -  $ 12,542
Patrick Maley            $ 6,271         -        -        -         -  $  6,271
Jeff Wilson              $60,000         -        -        -         -  $ 60,000
Stanley Robinson         $ 6,271         -        -        -         -  $  6,271
</TABLE>

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
 
     Information for this item relating to Alliance can be found in the Proxy
Statement submitted to the Securities and Exchange Commission on July 13, 1998.
The Proxy Statement has been included with this filing as Exhibit 99.1, refer to
page 60.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     Information for this item relating to Alliance can be found in the Proxy
Statement submitted to the Securities and Exchange Commission on July 13, 1998.
The Proxy Statement has been included with this filing as Exhibit 99.1, refer to
page F-20.

                                       4
<PAGE>
 
                                    PART IV

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

(a)  Financial Statements (included at Item 8. Financial Statements and
     Supplemental Data):

     Audited Financial Statements of Alliance Resources PLC

        Independent Auditor's Report
        Consolidated Balance Sheets as April 30, 1997 and 1998;
        Consolidated Statements of Operations for the year ended
                July 31, 1996, nine months ended April 30, 1997
                and year ended April 30, 1998
        Consolidated Statements of Stockholders' Equity for the
                year ended July 31, 1996, nine months ended
                April 30, 1997 and year ended April 30, 1998
        Consolidated Statements of Cash Flows for the year ended
                Year July 31, 1996, nine months ended April 30,
                1997 and year ended April 30, 1998
        Notes to Consolidated Financial Statements

(b)  Reports on Form 8-K

     No reports on Form 8-K were filed by the Company with the Securities and
     Exchange Commission during the fourth quarter of the Company's fiscal year
     ended April 30, 1998.

(c)  Exhibits

EXHIBIT
NUMBER
------

27    Financial Data Schedule.  Not applicable.

99.1  Proxy Statement filed with the Securities and Exchange Commision on July
      13, 1998.

                                       5
<PAGE>
 
                         INDEX TO FINANCIAL STATEMENTS
 
<TABLE>
<CAPTION>
                                                                            PAGE
                                                                            ----
<S>                                                                         <C>
Independent Auditors' Report............................................... F-2
Consolidated Balance Sheets................................................ F-3
Consolidated Statements of Operations...................................... F-4
Consolidated Statements of Stockholders' Equity............................ F-5
Consolidated Statements of Cash Flows...................................... F-6
Notes to Consolidated Financial Statements................................. F-7
</TABLE>
 
                                      F-1
<PAGE>
 
                         INDEPENDENT AUDITORS' REPORT
  
Board of Directors
Alliance Resources PLC and Subsidiaries
 
  We have audited the accompanying consolidated balance sheets of Alliance
Resources PLC and subsidiaries as of April 30, 1997 and 1998 and the related
consolidated statements of operations, stockholders' equity, and cash flows
for the year ended July 31, 1996, the nine months ended April 30, 1997 and the
year ended April 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 audits.
 
  We conducted our audits in accordance with generally accepted auditing
standards in the United States. 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 audits provide a
reasonable basis for our opinion.
 
  In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Alliance Resources PLC and subsidiaries as of April 30, 1997 and April 30,
1998 and the results of their operations and their cash flows for the year
ended July 31, 1996, the nine months ended April 30, 1997 and the year ended
April 30, 1998 in conformity with generally accepted accounting principles in
the United States.
 
  The accompanying financial statements have been prepared assuming the Company 
will continue as a going concern.  As discussed in Note 1 to the financial 
statements, the Company has suffered recurring losses from operations, has 
current liabilities in excess of current assets and is obliged to commence 
repayments on its borrowings from October 31, 1998 which raise substantial doubt
about the Company's ability to continue as a going concern.  Management plans in
regard to these matters are also described in Note 1.  The financial statements 
do not include any adjustments that might result from the outcome of this 
uncertainty.

KPMG Audit Plc
London, England
 
June 17, 1998 except for Note 1 - Financial Condition
              which is as of September 22, 1998
 
                                      F-2
<PAGE>
 
                    ALLIANCE RESOURCES PLC AND SUBSIDIARIES
 
                          CONSOLIDATED BALANCE SHEETS
                            APRIL 30, 1997 AND 1998
 
<TABLE>
<CAPTION>
                                                        1997          1998
                      ASSETS                        ------------  ------------
<S>                                                 <C>           <C>
Current assets:
  Cash............................................. $     72,948  $    408,439
  Accounts receivable--trade.......................    2,119,406     2,132,654
  Other current assets.............................       54,176        73,977
                                                    ------------  ------------
    Total current assets...........................    2,246,530     2,615,070
                                                    ------------  ------------
Property, plant and equipment, at cost
  Oil and gas properties, at cost, full cost
   method..........................................   36,107,310    43,200,388
  Other depreciable assets.........................      855,512     1,029,118
                                                    ------------  ------------
                                                      36,962,822    44,229,506
  Less accumulated depreciation and depletion......  (10,254,970)  (14,421,400)
                                                    ------------  ------------
    Net property, plant and equipment..............   26,707,852    29,808,106
                                                    ------------  ------------
Other assets:
  Deposits and other assets........................      282,920       144,989
  Deferred acquisition costs.......................          --        970,305
  Deferred loan costs, less accumulated
   amortization....................................    1,620,185     1,221,650
                                                    ------------  ------------
                                                    $ 30,857,487  $ 34,760,120
                                                    ============  ============
<CAPTION>
  LIABILITIES AND STOCKHOLDERS' EQUITY
<S>                                                 <C>           <C>
Current liabilities:
  Accounts payable--trade.......................... $ 11,428,872  $  8,972,704
  Accrued expenses payable.........................      437,736       847,190
  Current portion of long-term debt................          --      2,275,000
                                                    ------------  ------------
    Total current liabilities......................   11,866,608    12,094,894
Other liabilities..................................      810,783       139,626
Long-term debt, excluding current installments.....   18,095,497    18,791,762
Convertible subordinated unsecured loan notes......          --      1,550,700
                                                    ------------  ------------
    Total liabilities..............................   30,772,888    32,576,982
                                                    ------------  ------------
Stockholders' equity:
  Common stock--par value 40 pence; 46,000,000
   shares authorized representing:
    LaTex Series A convertible preferred stock
     1,180,110 issued and outstanding at April 30,
     1997; aggregate liquidation preference
     $4,570,510....................................      766,599           --
    LaTex Series B convertible preferred stock
     3,239,708 issued and outstanding at April 30,
     1997; aggregate liquidation preference
     $5,245,370....................................    2,104,515           --
    Common stock issued and outstanding; 17,982,068
     and 31,209,408 at April 30, 1997 and 1998,
     respectively..................................   11,681,150    20,114,634
  Additional paid-in capital.......................    5,149,146     5,911,050
  Accumulated deficit..............................  (19,127,446)  (23,842,546)
  Treasury stock 953,099 and nil at April 30, 1997
   and April 30, 1998, respectively................     (489,365)          --
                                                    ------------  ------------
    Total stockholders' equity.....................       84,599     2,183,138
                                                    ------------  ------------
Commitments and contingencies
                                                    $ 30,857,487  $ 34,760,120
                                                    ============  ============
</TABLE>
 
          See accompanying notes to consolidated financial statements.
 
                                      F-3
<PAGE>
 
                    ALLIANCE RESOURCES PLC AND SUBSIDIARIES
 
                     CONSOLIDATED STATEMENTS OF OPERATIONS
           YEAR ENDED JULY 31, 1996, NINE MONTHS ENDED APRIL 30, 1997
                         AND YEAR ENDED APRIL 30, 1998
 
<TABLE>
<CAPTION>
                                                    NINE MONTHS
                                     YEAR ENDED        ENDED        YEAR ENDED
                                    JULY 31, 1996  APRIL 30, 1997 APRIL 30, 1998
                                    -------------  -------------- --------------
                                    (AS RESTATED,
                                     SEE NOTE 3)
<S>                                 <C>            <C>            <C>
Revenues
  Oil and gas revenue.............. $ 11,979,982    $ 5,698,490    $10,209,881
  Crude oil and gas marketing......      540,156        146,381            --
                                    ------------    -----------    -----------
    Total revenues.................   12,520,138      5,844,871     10,209,881
                                    ------------    -----------    -----------
Operating expenses
  Lease operating expenses.........    5,472,130      3,117,341      5,505,826
  Cost of crude oil and gas market-
   ing.............................      133,455         15,798            --
  Cessation of overseas explora-
   tion............................    3,446,795            --             --
  General and administrative ex-
   penses..........................    2,893,146      3,481,003      3,363,885
  Depreciation, depletion, and am-
   ortization......................    3,510,814      1,541,415      2,598,066
  Loss on commodity derivatives....          --             --       1,128,000
                                    ------------    -----------    -----------
    Total operating expenses.......   15,456,340      8,155,557     12,595,777
                                    ------------    -----------    -----------
Loss from operations...............   (2,936,202)    (2,310,686)    (2,385,896)
                                    ------------    -----------    -----------
Other income (expense):
  Equity in net losses and write-
   offs of investments in
   affiliates......................   (4,034,414)       (19,823)           --
  Interest expense.................   (2,829,700)    (2,102,933)    (2,573,646)
  Interest income..................      280,322         52,038         62,226
  Miscellaneous income (expense)...   (1,810,382)        (7,929)       132,951
  Gain on sale of assets...........          --             --          35,442
                                    ------------    -----------    -----------
    Total other income (expense)...   (8,394,174)    (2,078,647)    (2,343,027)
                                    ------------    -----------    -----------
Net loss...........................  (11,330,376)    (4,389,333)    (4,728,923)
Preferred stock dividends..........     (570,621)      (517,613)           --
                                    ------------    -----------    -----------
Net loss for common shareholders... $(11,900,997)   $(4,906,946)   $(4,728,923)
                                    ============    ===========    ===========
Basic loss per share for common
 shareholders...................... $       (.77)   $      (.30)   $      (.15)
                                    ============    ===========    ===========
Weighted average number of shares
 outstanding.......................   15,507,551     16,585,113     31,125,689
                                    ============    ===========    ===========
</TABLE>
 
          See accompanying notes to consolidated financial statements.
 
                                      F-4
<PAGE>
 
                    ALLIANCE RESOURCES PLC AND SUBSIDIARIES
 
                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
           YEAR ENDED JULY 31, 1996, NINE MONTHS ENDED APRIL 30, 1997
                         AND YEAR ENDED APRIL 30, 1998
 
<TABLE>
<CAPTION>
                                            COMMON STOCK        ADDITIONAL                                TOTAL
                           PREFERRED   -----------------------    PAID-IN    ACCUMULATED   TREASURY   STOCKHOLDERS'
                             STOCK       SHARES     PAR VALUE     CAPITAL      DEFICIT       STOCK       EQUITY
                          -----------  ----------  -----------  -----------  ------------  ---------  -------------
<S>                       <C>          <C>         <C>          <C>          <C>           <C>        <C>
Balances at July 31,
 1995, as previously
 reported...............  $ 2,268,733  16,233,381  $10,545,203  $ 4,532,470  $   (946,456) $(399,106) $ 16,000,844
Adjustment for the
 cumulative effect of
 retroactively applying
 full cost method of
 accounting for oil and
 gas exploration and
 development
 activities.............          --          --           --           --     (1,373,047)       --     (1,373,047)
                          -----------  ----------  -----------  -----------  ------------  ---------  ------------
Balances at July 31,
 1995, as restated
 (see note 3)...........    2,268,733  16,233,381   10,545,203    4,532,470    (2,319,503)  (399,106)   14,627,797
Issued for services.....          --       85,981       55,853       22,272           --         --         78,125
Issued for debt of
 affiliate..............          --      123,641       80,317      (19,797)          --         --         60,520
Issued for litigation
 settlement.............      200,607         --           --       299,393           --         --        500,000
Issued for dividends....      211,071         --           --       359,550      (570,621)       --            --
Purchase of treasury
 stock..................          --          --           --           --            --     (90,259)      (90,259)
Net loss, as restated...          --          --           --           --    (11,330,376)       --    (11,330,376)
                          -----------  ----------  -----------  -----------  ------------  ---------  ------------
Balances at July 31,
 1996, as restated
 (see note 3)...........    2,680,411  16,443,003   10,681,373    5,193,888   (14,220,500)  (489,365)    3,845,807
Issued for services.....          --       85,986       55,857       44,143           --         --        100,000
Issued for employee
 bonus..................          --    1,453,079      943,920     (415,795)          --         --        528,125
Issued for dividends....      190,703         --           --       326,910      (517,613)       --            --
Net loss................          --          --           --           --     (4,389,333)       --     (4,389,333)
                          -----------  ----------  -----------  -----------  ------------  ---------  ------------
Balances at April 30,
 1997...................    2,871,114  17,982,068   11,681,150    5,149,146   (19,127,446)  (489,365)       84,599
Exchange of Preference
 Stock..................   (2,871,114)  4,419,818    2,871,114          --            --         --            --
Cancellation of treasury
 stock..................          --     (953,099)    (619,132)     129,767           --     489,365           --
Issued for LaTex
 acquisition............          --    8,103,816    5,105,550   (1,066,211)          --         --      4,039,339
Acquisition of
 overriding royalty.....          --    1,343,750      872,900    1,498,400           --         --      2,371,300
Exercise of warrants....          --       56,805       37,148       12,852           --         --         50,000
Issued for services.....          --      256,250      165,904      187,096           --         --        353,000
Foreign exchange........          --          --           --           --         13,823        --         13,823
Net loss................          --          --           --           --     (4,728,923)       --     (4,728,923)
                          -----------  ----------  -----------  -----------  ------------  ---------  ------------
Balance at April 30,
 1998...................  $       --   31,209,408  $20,114,634  $ 5,911,050  $(23,842,546) $     --   $  2,183,138
                          ===========  ==========  ===========  ===========  ============  =========  ============
</TABLE>
 
 
          See accompanying notes to consolidated financial statements.
 
                                      F-5
<PAGE>
 
                    ALLIANCE RESOURCES PLC AND SUBSIDIARIES
 
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
           YEAR ENDED JULY 31, 1996, NINE MONTHS ENDED APRIL 30, 1997
                         AND JANUARY 31, 1997 AND 1998
 
<TABLE>
<CAPTION>
                                                         NINE MONTHS
                                           YEAR ENDED       ENDED     YEAR ENDED
                                            JULY 31,      APRIL 30,    APRIL 30,
                                              1996          1997         1998
                                          -------------  -----------  -----------
                                          (AS RESTATED,
                                           SEE NOTE 3)
<S>                                       <C>            <C>          <C>
Cash flows from operating activities:
 Net loss...............................  $(11,330,376)  $(4,389,333) $(4,728,923)
 Adjustments to reconcile net loss to
  net cash provided by (used in)
  operating activities:
 Depreciation, depletion and
  amortization..........................     3,510,814     1,541,415    2,598,066
 Amortization of deferred loan costs....       193,000       394,000      813,096
 Employee bonus.........................           --        528,125          --
 Litigation settlement..................       500,000           --           --
 Write-offs of investments in
  affiliates............................     4,034,414           --           --
 Cessation of overseas exploration......     3,446,795           --           --
 Gain on sale of assets.................           --            --       (35,442)
Changes in assets and liabilities, net
 of effects from acquisition:
 Accounts receivable....................       203,155     1,204,903      487,427
 Due from related parties...............       198,288       392,297          --
 Accrued expenses payable...............       467,942      (169,319)     409,454
 Accounts payable.......................     1,686,017     2,239,165   (4,032,763)
 Other assets...........................       (40,290)      161,530       97,500
 Other liabilities......................       615,000       195,783     (792,554)
                                          ------------   -----------  -----------
  Net cash provided by (used in)
   operating activities.................     3,484,759     2,098,566   (5,184,139)
                                          ------------   -----------  -----------
Cash flows from investing activities:
 Proceeds from sale of property and
  equipment.............................     3,984,491     1,573,625    5,729,300
 Purchases of property and equipment....    (3,899,198)     (350,322)  (2,407,162)
 Increase in accounts and notes
  receivable-other......................    (2,300,000)          --           --
 Decrease in accounts and notes
  receivable-other......................     1,032,500     1,273,320          --
 Effect of LaTex acquisition............           --            --       (15,181)
 Deferred acquisition cost..............           --            --      (221,987)
 Advances to unconsolidated affiliates..      (326,334)          --           --
                                          ------------   -----------  -----------
  Net cash provided by (used in)
   investing activities.................    (1,508,541)    2,496,623    3,084,970
                                          ------------   -----------  -----------
Cash flows from financing activities:
 Deferred loan and reorganization
  costs.................................  $   (137,186)  $  (401,208) $  (385,680)
 Proceeds from notes payable............     6,233,192           --     2,770,340
 Payments on notes payable..............    (8,276,857)   (4,140,370)         --
 Exercise of warrants...................           --            --        50,000
 Purchase of treasury stock.............       (90,259)          --           --
                                          ------------   -----------  -----------
 Net cash provided by (used in)
  financing activities..................    (2,271,110)   (4,541,578)   2,434,660
                                          ------------   -----------  -----------
 Net increase (decrease) in cash and
  cash equivalents......................      (294,892)       53,611      335,491
Cash and cash equivalents beginning of
 period.................................       314,229        19,337       72,948
                                          ------------   -----------  -----------
Cash and cash equivalents end of
 period.................................  $     19,337   $    72,948  $   408,439
                                          ============   ===========  ===========
Supplemental disclosures of cash flow
 information:
 Cash paid during the period for
  interest..............................  $  2,403,156   $ 1,623,985  $ 1,634,360
                                          ============   ===========  ===========
 Cash paid for income taxes.............  $      5,275   $       --   $       --
                                          ============   ===========  ===========
Supplemental disclosure of noncash
 investing and financing activities:
 Common stock issued for services and
  bonus.................................  $     78,125   $   562,500  $   353,000
 Preferred stock issued for litigation
  settlement............................       500,000           --           --
 Common stock issued to pay debt of
  unconsolidated affiliate..............        60,520           --           --
 Issuance of convertible loan notes.....           --            --       150,000
 Common stock issued on acquisition of
  LaTex.................................           --            --     4,039,339
 Common stock issued for overriding
  royalty...............................           --            --     2,371,300
 Convertible loan notes issued for
  overriding royalty....................           --            --     1,400,700
</TABLE>
 
          See accompanying notes to consolidated financial statements.
 
                                      F-6
<PAGE>
 
                    ALLIANCE RESOURCES PLC AND SUBSIDIARIES
 
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
 Organization and basis of presentation
 
  Alliance Resources PLC ("Alliance" or "the Company") and its subsidiaries
are engaged in the exploration, development and production of oil and gas and
oil and gas marketing. Oil and gas production operations are currently
conducted principally in Oklahoma, Texas, Louisiana, Mississippi and Alabama.
Until the year ended July 31, 1996, exploration and development of oil and gas
properties was carried on in Tunisia and Kazakhstan, C.I.S.
 
  Alliance is a London-based public limited company organized under the laws
of England and Wales and its shares are listed on the London Stock Exchange.
The Company prepares its statutory financial statements in accordance with
U.K. law and U.K. generally accepted accounting principles. These financial
statements are prepared in accordance with generally accepted accounting
principles in the United States.
 
  On May 1, 1997, Alliance completed its acquisition of LaTex Resources, Inc.
("LaTex"), a US independent oil and gas exploration and production company.
The acquisition resulted in the issue of 21,448,787 ordinary shares to the
shareholders of LaTex compared to the 8,103,816 then outstanding. As a result,
the LaTex shareholders had a controlling interest in the combined group and so
for accounting and financial reporting purposes, LaTex is treated as having
acquired Alliance ("Reverse Acquisition"). Accordingly, in the consolidated
financial statements for the period beginning May 1, 1997, the assets and
liabilities of Alliance are recorded at fair values while the assets and
liabilities of LaTex and its subsidiaries are recorded at their historical
costs as shown in LaTex's existing financial statements. The consolidated
financial statements of Alliance for all financial periods to April 30, 1997,
reflect the results of operations and assets and liabilities of LaTex and its
subsidiaries. Adjustments have been made to reflect, in those periods, the
changes in the capital structure resulting from the acquisition and earnings
per share has been restated on the basis of the number of Alliance shares
which, based on the exchange ratio used in the acquisition, represents the
weighted average number of LaTex common shares outstanding in the relevant
period.
 
  In these financial statements the "Group" refers to Alliance and its
subsidiaries for periods ending on or after May 1, 1997 and to LaTex
Resources, Inc. and its subsidiaries for periods ending on or before April 30,
1997.
 
 Change of Fiscal Year End
 
  LaTex's fiscal year end was July 31 whereas that of Alliance was April 30.
As a result, the fiscal year end changed from July 31 to April 30 effective
April 30, 1997.
 
 Financial Condition
 
  The Directors consider that satisfactory progress has been made in
integrating and rationalizing the operations of LaTex since the acquisition on
May 1, 1997 and that the financial condition of the Group is significantly
improved.
 
  The Group's working capital deficit has been reduced from $9,620,078 at
April 30, 1997 to $9,479,824 at April 30, 1998. Operating losses are much
reduced.
 
  In the year from April 30, 1998, loan repayments of $2,275,000 are scheduled
to be made.
 
  Management had planned to consummate the acquisition of a 20 percent interest
in certain undeveloped oil and gas properties in the East Irish Sea and
Liverpool Bay areas ("the East Irish Sea Interests") which would have involved a
satisfactory refinancing of the Group's borrowings. On July 30, 1998 the Board
announced that financing for that transaction had not been raised and that the
resolutions to approve the acquisition were not put to shareholders.

  Management's plans in the event that the acquisition and refinancing did not
proceed, were to seek other transactions of a similar nature, restructure the
existing credit facility or seek alternative forms of financing and to take such
other steps as were necessary to allow the Group to meet its obligations as they
fell due. It was envisaged that such steps would have included the continued
reduction of the Group's overheads, deferral of elements of the recompletion
programme and the disposition of oil and gas properties.

  Since July 30, 1998, management has reduced the Group's overheads through
selective redundancies, has held discussions with Bank of America regarding the
existing credit facility but has primarily been evolving alternative financing
to allow the acquisition of part of the East Irish Sea Interests. Such
alternative financing has been formulated and it is anticipated that proposals
will be put to shareholders on or before October 31, 1998. This will also
include a restructuring of the existing credit facility. Management believe that
the satisfactory completion of this transaction will provide the Group with
financing which will allow it to meet its obligations as they fall due.

  Management is mindful of the Group's financial condition should this
transaction not be consummated. The existing credit facility with Bank of
America requires monthly repayments of $325,000 to commence on October 31, 1998
with the balance remaining outstanding on March 31, 2000 being repayable in full
on that date. The Group's operating cash flow will not be sufficient to meet its
obligations under the existing credit facility and, given the passage of time
and the concentration of management's efforts on achieving the acquisition
outlined above, it may not be possible to take the necessary steps, which might
include property dispositions, to allow the Group to meet its obligations in a
timely manner.

  In the event that the proposed acquisition of part of the East
Irish Sea Interests and related refinancing is not consummated management will
seek to restructure the existing credit facility. There is, however, no
guarantee that a successful refinancing will be achieved in a timely manner if
at all.

 
                                      F-7
<PAGE>
 
                    ALLIANCE RESOURCES PLC AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 Reporting Currency
 
  The current operations are in the oil and gas industry in the United States
and are conducted through subsidiaries, LaTex Resources, Inc., Alliance
Resources (USA), Inc. and Source Petroleum, Inc. Transactions are conducted
primarily in US dollars. As a result, the directors consider that the US
dollar is the functional currency of the Group and the Group's consolidated
financial statements have been prepared in US dollars.
 
 Consolidation
 
  The consolidated financial statements comprise the financial statements of
the Company and all other companies in which the Group's holding exceeds 50
percent. Transactions and balances between group companies are eliminated on
consolidation.
 
 Earnings Per Share
 
  Basic loss per share has been computed by dividing the net loss attributable
to common shareholders by the weighted average number of common shares
outstanding during the period.
 
  The effect of potential common shares (warrants, options and convertible
subordinated unsecured loan notes) is anti-dilutive. Accordingly, diluted loss
per share is not presented.
 
 Foreign Currency Translation
 
  The financial statements of companies of the Group whose functional currency
is not US dollars are translated for consolidation purposes at the rate of
exchange ruling at the balance sheet date. Exchange differences arising on the
retranslation of net assets are taken directly to stockholders' equity.
 
  In the underlying financial statements, transactions with third parties are
translated into the functional currency at the exchange rate prevailing at the
date of each transaction. Monetary assets and liabilities denominated in
currencies other than the functional currency are translated into US dollars
at the exchange rate prevailing at the balance sheet date. Any exchange gain
or loss is dealt with through the consolidated statement of operations.
 
  The Group's share capital is denominated in sterling and for the purposes of
the consolidated financial statements, is translated into US dollars at the
rate of exchange at the time of its issue.
 
 Revenues
 
  Revenues represents income from production and delivery of oil and gas,
recorded net of royalties in kind. The Group follows the sales method of
accounting for gas imbalances. A liability is recorded only if the Group's
excess takes of gas volumes exceed its estimated recoverable reserves from the
relevant well and no receivable is recorded where the Group has taken less
than its entitlement to gas production.
 
 Oil and Gas Interests
 
  The Group follows the full cost method of accounting for oil and gas
operations whereby all costs of exploring for and developing oil and gas
reserves are capitalized as tangible fixed assets. Such costs include lease
 
                                      F-8
<PAGE>
 
                    ALLIANCE RESOURCES PLC AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
acquisition costs, geological costs, the costs of drilling both productive and
non-productive wells, production equipment and related overhead costs.
Capitalized costs, plus estimated future development costs are accumulated in
pools on a country-by-country basis and depleted using the unit-of-production
method based upon estimated net proved reserve volumes. Reserve volumes are
combined into equivalent units using approximate relative energy content.
 
  Costs of acquiring and evaluating unproved properties and major development
projects are excluded from the depletion calculation until it is determined
whether or not proved reserves are attributable to the properties, the major
development projects are completed, or impairment occurs, at which point such
costs are transferred into the pool.
 
  Proceeds from the sale or disposal of properties are deducted from the
relevant cost pool except for sales involving significant reserves where a
gain or loss is recognized.
 
  The Group performs a "ceiling test" calculation in line with industry
practice. Costs permitted to be accumulated in respect of each cost pool are
limited to the future estimated net recoverable amount from estimated
production of proved reserves. Future estimated net recoverable amounts are
determined after discounting and using prices and cost levels at the balance
sheet date.
 
  Provision is made for abandonment costs net of estimated salvage values, on
a unit-of-production basis, where appropriate.
 
 Depreciation of Other Fixed Assets
 
  Other tangible fixed assets are stated at cost less accumulated
depreciation. Depreciation is provided on a straight line basis to write off
the cost of assets, net of estimated residual values, over their estimated
useful lives as follows:
 
<TABLE>
              <S>                            <C> 
              Fixtures and equipment         -- 3 to 7 years
              Buildings                      -- 30 years
</TABLE>
 
 Deferred Taxation
 
  Deferred tax assets and liabilities are recognized for the estimated future
tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax
rates in effect for the year in which those temporary differences are expected
to be recovered or settled. The effect on deferred tax assets and liabilities
of a change in tax rates is recognized in the consolidated statement of
operations in the period that includes the enactment date.
 
 Joint Ventures
 
  The Group's exploration, development and production activities are generally
conducted in joint ventures with other companies. The consolidated financial
statements reflect the relevant proportions of turnover, production, capital
expenditure and operating costs applicable to the Group's interests.
 
  The effects of redeterminations of equity interests in joint ventures are
accounted for when the outcome of the redetermination is known.
 
 Leases
 
  Rentals under operating leases are charged to the consolidated statement of
operations on a straight line basis over the lease term.
 
                                      F-9
<PAGE>
 
                    ALLIANCE RESOURCES PLC AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
 Debt Issuance Costs
 
  Debt issuance costs are initially capitalized as intangible assets and are
amortized over the term of the debt to which they relate.
 
 Derivatives
 
  Changes in value of financial instruments, utilized to hedge commodity price
and interest rate risk are recognized in the consolidated statement of
operations when the underlying transactions are recognized. Changes in value
of financial instruments which do not meet the criteria to be treated as a
hedge of an underlying risk are recognized in the consolidated statement of
operations as they occur.
 
  The Group's criteria for a derivative instrument to qualify for hedge
accounting treatment are as follows:
 
  --the timing or duration, quantum and characteristics of the underlying
    exposure must have been identified with reasonable certainty;
 
  --changes in the value of the derivative must correlate to a high degree
    with changes in the present value of the exposure under a wide range of
    possible circumstances;
 
  --the derivative has been designated as a hedge or is a synthetic
    alteration of a specific asset, liability or anticipated transaction; and
 
  --the derivative instrument either: (a) reduces exposure of net income or cash
    flow to fluctuations caused by movements in commodity prices, currency
    exchange rates or interest rates, including fixing the cost of anticipated
    debt issuance; or (b) alters the profile of the group's interest rate or
    currency exposures, or changes the maturity profile of the investment
    portfolio, to achieve a resulting overall exposure in line with policy
    guidelines.
 
  For any termination of derivatives receiving hedge accounting treatment,
gains and losses are deferred when the relating underlying exposures remain
outstanding and are included in the measurement of the related transaction or
balance. In addition, upon any termination of the underlying exposures, the
derivative is marked-to-market and the resulting gain or loss is included with
the gain or loss on the terminated transaction. The Group may re-designate the
remaining derivative instruments to other underlying exposures provided the
normal criteria are all met.
 
 Cash Flow Statement
 
  For the purposes of the consolidated statement of cash flows, the Group
treats all investments with an original maturity of three months or less to be
cash equivalents.
 
 Stock Awards
 
  The Group follows the intrinsic value method of accounting for common stock
options and awards to employees.
 
 Accounting Estimates
 
  In the course of preparing financial statements, management makes various
assumptions and estimates to determine the reported amounts of assets,
liabilities, revenue and expenses and in relation to the disclosure of
commitments and contingencies. Changes in these assumptions and estimates will
occur as a result of the passage of time and the occurrence of future events
and, accordingly, the actual results could differ from the amounts estimated.
 
                                     F-10
<PAGE>
 
                    ALLIANCE RESOURCES PLC AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
 Business Segments
 
  The Group adopted Financial Accounting Standard (FAS) 131 "Segment
Disclosures and Related Information" during the year ended April 30, 1998.
Prior to April 30, 1997 the Group sold a portion of its oil and gas production
volumes through its oil and gas marketing subsidiary although the operations
and net assets of that subsidiary were not separately managed. The Group
considers itself to be involved in one business activity and does not meet the
criteria established by FAS 131. Accordingly, information regarding marketing
activities has not been included for any periods presented.
 
 Comparative Figures
 
  Certain comparative figures have been restated to conform to the current
basis of presentation.
 
(2) ACQUISITION OF LATEX
 
  On May 1, 1997, Alliance, completed its acquisition of LaTex, whereby a
newly formed wholly-owned subsidiary of Alliance merged with and into LaTex
with LaTex being the surviving corporation for accounting purposes. In
consideration the shareholders and warrant holders of LaTex received an
aggregate of 21,448,787 shares of Alliance, par value (pounds) 0.40 per share
(the "New Alliance Shares") and warrants to purchase an additional 1,927,908
New Alliance Shares.
 
  As a result, after giving effect to a 40-to-1 reverse stock split of the
Alliance ordinary shares, each shareholder of LaTex on May 1, 1997, received
0.85981 of a New Alliance Share for each share of the LaTex's common stock,
2.58201 new Alliance shares for each share of the LaTex's Series A preferred
stock then held, 6.17632 New Alliance Shares for each share of LaTex's Series
B preferred stock then held, and a warrant to purchase 0.85981 of a New
Alliance Share for each share of LaTex's Common Stock subject to warrants.
 
  The purchase price has been arrived at as follows:
 
<TABLE>
      <S>                                                            <C>
      Value of 8,103,816 Alliance shares outstanding................ $4,039,339
      Acquisition costs.............................................    871,000
                                                                     ----------
                                                                     $4,910,339
                                                                     ==========
</TABLE>
 
  The value of the Alliance shares outstanding has been arrived at by using
the share price of LaTex at the time of announcement of the acquisition
adjusted by the exchange ratio.
 
  Transaction costs incurred by Alliance reduced the fair value of Alliance's
monetary assets and liabilities at the date of the acquisition.
 
  The fair value of the assets and liabilities of the acquired business at the
effective date of acquisition is as follows:
 
<TABLE>
   <S>                                                              <C>
   Cash............................................................ $ 1,460,555
   Other current assets............................................     480,045
   Other assets....................................................     202,253
   Oil and gas assets..............................................   5,268,929
   Other fixed assets..............................................     253,386
   Debt............................................................     (85,420)
   Other liabilities and provisions................................  (2,669,409)
                                                                    -----------
                                                                    $ 4,910,339
                                                                    ===========
</TABLE>
 
                                     F-11
<PAGE>
 
                    ALLIANCE RESOURCES PLC AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
  In connection with the acquisition, Alliance issued to Bank of America
156,250 Alliance Shares and convertible subordinated unsecured loan notes of
(Pounds)93,519 convertible into 115,456 Alliance Shares to settle fees of
$200,000 and $150,000 payable upon restructuring of LaTex's bank debt. In
addition the Company has conditionally agreed to issue 116,895 Shares to
Rothschild Natural Resources, LLC in settlement of outstanding fees of
$150,000.
 
  Under the terms of the Alliance Merger Agreement effective May 1, 1997,
LaTex disposed of its interest in its unconsolidated affiliates, Wexford and
Imperial, and its interests in its wholly-owned subsidiaries LaTex Resources
International, Inc. and Phoenix Metals, Inc. (See notes 5 and 14).
 
  Alliance has also issued 1,343,750 Alliance Shares, convertible subordinated
unsecured loan notes of (Pounds)873,281 convertible into 1,078,125 Alliance
Shares and 1,210,938 warrants to Bank of America in exchange for an overriding
royalty interest in most of LaTex's properties held by Bank of America.
 
  The purchase price was allocated to oil and gas properties and has been
arrived at as follows:
 
<TABLE>
   <S>                                                              <C>
   Value of 1,343,750 ordinary shares and warrants issued.......... $2,371,300
   Value of convertible subordinated unsecured loan note issued....  1,400,700
                                                                    ----------
                                                                    $3,772,000
                                                                    ==========
</TABLE>
 
(3) ACCOUNTING CHANGE
 
  Effective August 1, 1996, the Group changed its method of accounting for oil
and gas exploration and development activities from the "successful efforts"
method to the "full cost" method. The Group believes the full cost method more
properly reflects the economic facts associated with the discovery and
development of oil and gas reserves in the circumstances of the enlarged Group
and allows for better comparability with similar companies which tend to use
this method. Consolidated financial statements for all prior periods have been
restated to apply the new accounting method retroactively. The effects of the
accounting change on the year ended July 31, 1996 and the nine months ended
April 30, 1997 are as follows:
 
<TABLE>
<CAPTION>
                                                                 NINE MONTHS
                                                   YEAR ENDED       ENDED
                                                  JULY 31, 1996 APRIL 30, 1997
                                                  ------------- --------------
   <S>                                            <C>           <C>
   Increase (decrease) in:
     Oil and gas properties (cost) (at period
      end).......................................  $  114,967    $   648,723
                                                   ==========    ===========
     Net loss....................................  $1,099,593    $(2,373,358)
                                                   ==========    ===========
     Basic loss per common share.................  $      .07    $     (0.14)
                                                   ==========    ===========
</TABLE>
 
  The balance of the consolidated accumulated deficit (net of income taxes)
for each period presented has been adjusted for the effect of retroactively
applying the full cost method.
 
(4) FINANCIAL INSTRUMENTS
 
  The carrying value of cash and cash equivalents, accounts receivables and
accounts payable approximate the estimated fair value of those financial
instruments due to their short maturities. The estimated fair value of the
interest rate swap agreement, based on current market rates, approximated a
net payable of $468,834 at April 30, 1997 and $445,767 at April 30, 1998. The
estimated fair value of the commodity derivative instruments approximates net
payable of $1,017,816 at April 30, 1997 and a net receivable of $409,395 at
April 30, 1998. The carrying value of long-term debt approximates to the fair
value, as advised by the Group's bankers. See note 15.
 
                                     F-12
<PAGE>
 
                    ALLIANCE RESOURCES PLC AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
  Fair value is defined as the amount at which the instrument could be
exchanged in a current transaction between willing parties.
 
(5) INVESTMENTS
 
  The Group acquired 32.3% of Wexford Technology, Incorporated ("Wexford")
through a series of transactions culminating in May 1994. During fiscal 1996,
the Group recorded a charge to operations of $2,270,102 to write off its
investment. The Group owned 12% of common stock of Imperial Petroleum, Inc.
("Imperial") and certain officers, directors and employees of the Group owned
28.8%. During fiscal 1996, the Group recorded a charge to operations of
$1,764,312 to write off this investment. Such write-offs also included
advances made to the two companies.
 
  Wexford and Imperial are both development stage enterprises that are seeking
capital infusion to complete their facilities and achieve commercial
operations. Neither Wexford nor Imperial have been able to raise additional
debt or equity capital and the Group did not guarantee any of their
liabilities. Further, there can be no assurance, assuming Wexford and Imperial
successfully raise additional funds or enter into a business alliance, that
they will achieve commercial operation or positive cash flow. As a result, as
noted, above the Group wrote off its investments in these affiliates.
 
  In connection with the acquisition of LaTex, the Group entered into an
agreement to dispose of its interests in Wexford and Imperial. (See notes 2
and 14)
 
(6) INCOME TAXES
 
  Income taxes different from the amounts computed by applying the U.S.
federal tax rate of 34% as a result of the following (in thousands):
 
<TABLE>
<CAPTION>
                                                        NINE MONTHS
                                           YEAR ENDED      ENDED    YEAR ENDED
                                            JULY 31,     APRIL 30,  APRIL 30,
                                              1996         1997        1998
                                          ------------- ----------- ----------
                                          (AS RESTATED)
   <S>                                    <C>           <C>         <C>
   Computed expected tax benefit.........    $(3,852)     $(1,492)   $(1,608)
   Increase in valuation allowance for
    deferred tax, assets.................      4,218        1,301      6,792
   Net Operating losses acquired.........        --           --      (5,513)
   Other.................................       (366)         191        329
                                             -------      -------    -------
   Actual income tax expense (benefit)...    $   --       $   --     $   --
                                             =======      =======    =======
</TABLE>
 
  The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities are presented below in
thousands:
 
<TABLE>
<CAPTION>
                                                               1997      1998
                                                              -------  --------
   <S>                                                        <C>      <C>
   Total deferred tax liabilities--
     Property, plant and equipment........................... $   498  $  1,754
                                                              -------  --------
   Deferred tax assets:
     Net operating and other loss carryovers.................   7,266    15,473
     Investment write-downs..................................     917       917
     Percentage depletion carryforward.......................     390       390
     Accrued expenses not deductible until paid..............     378       219
                                                              -------  --------
   Total deferred tax assets.................................   8,951    16,999
     Valuation allowance.....................................  (8,453)  (15,245)
                                                              -------  --------
   Net deferred tax assets...................................     498     1,754
                                                              -------  --------
   Net deferred tax asset (liability)........................ $   --   $    --
                                                              =======  ========
</TABLE>
 
                                     F-13
<PAGE>
 
                    ALLIANCE RESOURCES PLC AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
  In the year ended April 30, 1998, the valuation allowance increased by
$5,513,000 resulting from net operating loses attributable to Alliance at the
date of acquisition by LaTex.
 
  A valuation allowance is required when it is more likely than not that all
or a portion of the deferred tax assets will not be realized. The ultimate
realization of the deferred tax assets is dependent upon future profitability.
Accordingly, a valuation allowance has been established to reduce the deferred
tax assets to a level which, more likely than not, will be realized.
 
  The Group has net operating loss carryovers to offset future taxable
earnings of approximately $45,510,000. If not previously utilized, the net
operating losses will expire in varying amounts from 2004 to 2013.
 
(7) LONG-TERM DEBT
 
  Long-term debt at April 30, 1997 and April 30, 1998 was as follows:
 
<TABLE>
<CAPTION>
                                                           1997        1998
                                                        ----------- -----------
   <S>                                                  <C>         <C>
   Borrowing under Credit Agreement.................... $18,095,497 $21,066,762
     Less current maturities...........................         --   (2,275,000)
                                                        ----------- -----------
                                                        $18,095,497 $18,791,762
                                                        =========== ===========
</TABLE>
 
  Prior to May 1, 1997, the Group's debt agreement contained certain
covenants, including but not limited to maintaining a positive current ratio
of 1.0, excluding the current portion of long-term debt, maintaining a minimum
tangible net worth of $10,000,000, maintaining a minimum cash or cash
equivalents balance of $500,000 and maintaining working capital of at least
$500,000. The Group was not in compliance with certain covenants at July 31,
1996 and the bank had not waived the requirements and so debt was classified
as a currently liability at that date. The Group was not in compliance with
the current ratio, cash equivalent, minimum tangible net worth, and working
capital covenants at April 30, 1997 and was operating under a "forbearance"
agreement which together with the Alliance Credit Agreement mentioned below
allowed the debt to be classified as long term. The "forbearance" agreement
expired on April 30, 1997.
 
  A subsidiary of Alliance entered into a Credit Agreement (the "Alliance
Credit Agreement") with the Bank of America effective May 1, 1997, amending
and restating the Group's previous credit agreement. Under the Alliance Credit
Agreement principal payments are suspended until October 31, 1998. However,
cash flows generated by the Group in excess of amounts shown in the business
plan that formed the basis of negotiation with Bank of America will be used to
reduce outstanding principal indebtedness. The maturity date of the line of
credit remains March 31, 2000. Substantially all of the existing security for
the outstanding indebtedness remains in place. As additional security, the
Bank of America received mortgages on substantially all of Alliance's
producing oil and gas properties and pledges of the stock of Alliance's
subsidiaries.
 
  The Alliance Credit Agreement contains certain covenants, which include, but
are not limited to, maintenance of a current ratio of .35 to 1 during the
period commencing on May 1, 1997 and ending on April 30, 1998. The Group has
not timely filed with the Bank of America copies of the required financial
filings covering the nine month period ended April 30, 1997 and each of the
three subsequent quarters. The Bank of America has agreed to waive compliance
with the covenant for these outstanding filings.
 
  A portion of the borrowings under the Alliance Credit Agreement bears
interest, payable monthly, at a rate equal to the higher of the Bank of
America Reference Rate plus 1% and the Federal Funds Rate plus 1 1/4%. Another
portion of the borrowings bears interest, payable monthly, at a rate equal to
the London Interbank Offered Rate plus 2%. The rate at April 30, 1998 was
7.875%. The note matures on March 31, 2000. Amounts outstanding are secured by
mortgages which cover the majority of the Group's oil and gas properties.
 
                                     F-14
<PAGE>
 
                    ALLIANCE RESOURCES PLC AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
  The contractual maturities of long term debt as at April 30, 1998 are as
follows:
 
<TABLE>
   <S>                                                               <C>
   Year ending April 30, 1999......................................  $ 2,275,000
            2000...................................................   18,791,762
</TABLE>
 
(8) SAVINGS AND PROFIT SHARING PLAN
 
  The Group maintains an employee savings and profit sharing plan (the Plan)
which covers substantially all of its employees. The Plan is comprised of a
401(k) saving portion and a noncontributory defined contribution portion.
Employees are qualified to participate after approximately one year of
service. Participating in the 401(k) plan is voluntary, and the Group matches
contributions up to four percent of the employees' salary at a rate of 33 1/3
percent of the employee's contribution. Employees are allowed to contribute
the maximum amount allowed by Internal Revenue Code each year, subject to
nondiscrimination rules.
 
  The noncontributory defined contribution portion of the Plan allows the
Group to share annual profits with employees. Annual payments to the Plan are
elective. Management elected to make no contributions to the Plan for the year
ended July 31, 1996, the nine months ended April 30, 1997 and the year ended
April 30, 1998. The Group is under no obligation to make contributions to the
Plan in the future.
 
(9) CAPITAL STOCK
 
  On May 1, 1997, the Company's share capital was consolidated such that every
40 ordinary shares of 1 pence each were consolidated into 1 ordinary share of
40 pence. All prior capital stock amounts have been restated to reflect this
reverse stock split. At the same date, the Company issued 21,448,747 ordinary
shares of 40 pence each to the holders of the issued ordinary shares and
preference shares of LaTex outstanding at that date.
 
  For the periods ended on or before April 30, 1997, in these consolidated
financial statements, the share capital reflects the Alliance shares issued on
May 1, 1997 as though issued at the date of issue of the LaTex shares for
which Alliance shares were exchanged. The Alliance shares issued in exchange
for preference shares in LaTex are treated as preference shares up to the date
of exchange from which time they have been treated as equity shares.
 
  The Series A Convertible Preferred Stock (i) paid annual dividends at the
rate of $0.07 per share payable quarterly in cash (or, if payment of cash
dividends was prohibited by the senior lender, payable in additional shares of
Series A Convertible Preferred Stock), (ii) had no voting rights except as
otherwise required under Delaware law, (iii) had a liquidation preference over
shares of Common Stock of $3.87 per share plus accrued and unpaid dividends,
(iv) was convertible by the holder into shares of Common Stock at a conversion
price of $1.29 per share, and (v) had piggyback registration rights in the
event of a registered public offering of Common Stock. The aggregate
liquidation preference of Series A Convertible Preferred Stock at April 30,
1997 was $4,570,510.
 
  The Series B Convertible Preferred Stock (i) paid annual dividends at the
rate of $0.19 per share payable quarterly in cash (or, if payment of cash
dividends was prohibited by the senior lender, payable in additional shares of
Series B Convertible Preferred Stock), (ii) had no voting rights except as
otherwise required under Delaware law, (iii) had a liquidation preference over
shares of Series A Convertible Preferred Stock and Common Stock of $1.62 per
share plus accrued and unpaid dividends, and (iv) was convertible by the
holder into shares of Common Stock at an initial conversion price of $0.24 per
share, subject to adjustment from time to time to prevent dilution. By
separate agreement, the Group granted certain demand registration rights and
piggyback registration rights in the event of a registered public offering of
its Common Stock. The aggregate liquidation preference of the Series B
Convertible Stock at April 30, 1997 was $5,245,370.
 
                                     F-15
<PAGE>
 
                    ALLIANCE RESOURCES PLC AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
  During the period under review, LaTex held stock in treasury. The total
common stock in treasury at the date of acquisition by Alliance was 953,099
shares. No Alliance shares were issued in exchange for those treasury shares
and, as LaTex became a wholly-owned subsidiary of Alliance, these treasury
shares have been treated as having been canceled.
 
  During the nine months ended April 30, 1997, 85,981 shares were taken into
treasury in return for the transfer of the Group's interests in two affiliates
and two subsidiaries. As the carrying amounts of the companies was nil, no
consideration has been recorded for these shares.
 
  Preferred Stock activity during the periods indicated follows:
 
<TABLE>
<CAPTION>
                                                           ALLIANCE COMMON STOCK
                                                               REPRESENTING:
                                                           ---------------------
                                                            SERIES A   SERIES B
                                                           ---------- ----------
   <S>                                                     <C>        <C>
   Balance at July 31, 1996...............................  1,161,460  2,964,787
   Issued for dividends...................................     18,650    274,921
                                                           ---------- ----------
   Balance at April 30, 1997..............................  1,180,110  3,239,708
                                                           ========== ==========
</TABLE>
 
(10) STOCK OPTIONS
 
  Effective October 21, 1996, each holder of options granted under the Group's
1993 Incentive Stock Plan agreed to terminate all options held and receive
grants of 1,690,000 Restricted shares of LaTex Common Stock which, on May 1,
1997, was exchanged for Alliance shares. The Group recognized an employee
bonus of $528,125 related to this transaction based on the market value of
LaTex's stock on the date of grant. No tax gross up rights were granted in
connection with the issue of the Restricted Stock.
 
  Since May 1, 1997, the Group operates two employee share option schemes.
Both schemes have similar terms, the principal terms being:
 
  --any director or employee may be granted options over Shares;
 
  --the subscription price will be no less than market price at the date of
    grant;
 
  --options granted to an individual are limited such that the aggregate
    market value of shares subject to option taken together with the aggregate
    market value of shares which have been acquired under rights granted under
    the schemes in the previous ten years does not exceed four times cash
    salary;
 
  --the exercise of options may be subject to performance tests. Ordinary
    options (exercisable after three years) may be subject to attainment of a
    specified profit level or performance. Long term options (exercisable
    after 5 years) may be subject to growth in earnings per share over the
    immediately preceding five years matching or exceeding growth in earnings
    per share of the companies ranked in the top 25 of the FTSE-100 share
    index.
 
  A summary of the status of the share option schemes is as follows:
 
<TABLE>
<CAPTION>
                                                                WEIGHTED AVERAGE
                                                        SHARES   SERVICE PRICE
                                                        ------- ----------------
   <S>                                                  <C>     <C>
   As at May 1, 1997...................................     --            --
   Granted............................................. 675,000    24.5 pence
   On acquisition of LaTex............................. 237,500      80 pence
                                                        -------
   As at April 30, 1998................................ 912,500    38.9 pence
                                                        =======
</TABLE>
 
                                     F-16
<PAGE>
 
                    ALLIANCE RESOURCES PLC AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
  No performance tests have been set for any of the above options.
 
  The Group's accounting policy for compensation cost is in line with
Accounting Principles Board Opinion 25. Accordingly, compensation cost has not
been recognized for share option plans except to deal with any discounts on
option exercise prices, compared with market prices at the measurement date.
For the year ended April 30, 1998, had compensation costs been charged against
income based on the fair value at the grant-dates for awards under the share
option plans, consistent with Statement of Financial Accounting Standards No.
123, the net loss and net loss per share would not have been materially
different. This was determined using the Black Scholes option pricing model
utilizing the following assumptions:
 
<TABLE>
   <S>                                                                  <C>
   Risk free interest rate............................................. 6%
   Expected life....................................................... 10 years
   Volatility.......................................................... 14%
</TABLE>
 
  No equivalent information is provided in respect of earlier periods in view
of the cancellation of all outstanding awards in the year ended July 31, 1996.
 
  At April 30, 1998, the Company also had outstanding 50,000 options to
purchase shares at 300 pence per share which have been issued other than
pursuant to the employee share options schemes.
 
(11) WARRANTS
 
  On May 1, 1997 the Company issued warrants to subscribe for 1,927,908 common
shares of 40 pence each in exchange for the then outstanding warrants to
subscribe for common shares in LaTex. For periods ended on or before April 30,
1997, the warrants outstanding reflect the Alliance warrants issued on May 1,
1997, as though issued at the date of issue of the LaTex warrants for which
the Alliance warrants were exchanged.
 
  In addition warrants to subscribe for 1,210,938 Common Shares were issued to
Bank of America as part consideration for the acquisition of the overriding
royalty interest (see note 2).
 
  Warrants to purchase 1,927,908 and 3,082,041 common shares were outstanding
at April 30, 1997 and 1998, respectively. The warrants expire at various dates
ranging from November 1998 to May 2007, at prices ranging from $.87 to $4.94.
 
(12) CONVERTIBLE SUBORDINATED UNSECURED LOAN NOTES
 
  At April 30, 1998 the Group had outstanding loan notes convertible into
1,193,581 common shares of which loan notes convertible into 1,078,125 common
shares were issued in part consideration for the acquisition of the overriding
royalty interest amounting to $1,400,700 (see note 2) and loan notes
convertible into 115,456 common shares were issued to settle restructuring and
arrangement fees of $150,000 in connection with the LaTex acquisition. The
loan notes, which are non-interest bearing, are convertible by the holders (on
the payment of a nominal cash consideration) any time up to ten years
following their date of issue. They are convertible in the following six
months on like terms at the option of the Company. Any loan notes not
converted prior to the date ten years and six months from issue will be repaid
on that date at an amount equal to twice the amount paid up on the notes.
 
                                     F-17
<PAGE>
 
                    ALLIANCE RESOURCES PLC AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
(13) CONTINGENCIES AND COMMITMENTS
 
  On October 7, 1994, Northern Natural Gas Company ("Northern") filed a
lawsuit against the Group alleging that the Group had breached two
transportation service agreements dated December 1, 1990, between Northern and
Panda Resources, Inc. (Panda), a former wholly-owned subsidiary of the Group.
On June 6, 1996, Northern and the Group entered into a settlement agreement
pursuant to which (a) the Group issued to Northern 50,000 shares of LaTex's
Series B Senior Convertible Preferred Stock at fair market value of $500,000,
and (b) the Group agreed to pay Northern $465,000 in installments of $50,000
by June 21, 1996, $150,000 by May 1, 1997, $125,000 by May 1, 1998, and
$140,000 by May 1, 1999. An agreed judgment was entered in the case, but
Northern has agreed not to seek to enforce the judgment unless the Group
defaults in its payment obligations. Once the required payments have been
made, Northern has agreed to execute a release of the judgment. These amounts
have been reflected in the Group's consolidated financial statements in the
year ended July 31, 1996.
 
  On November 17, 1994, Associated Storage Corporation ("Associated") filed a
lawsuit against the Group alleging that the Group had breached a July 21, 1993
agreement between Associated and the Group. On May 15, 1997, Associated and
the Group entered into a settlement agreement pursuant to which the Group
agreed to pay $100,000 in twelve monthly installments. These amounts have been
reflected in the Group's consolidated financial statements in the nine months
ended April 30, 1997.
 
  In connection with the sale of Panda, the Group became a party to disputes
between Torch Energy Marketing, Inc. ("Torch"), Nuevo Liquids, Inc. ("Nuevo")
and Panda. On December 7, 1995, the Group entered into a settlement agreement
(the "Settlement") to settle all matters related to the sale and the related
litigation. Pursuant to the Settlement, the Group agreed to pay to Torch and
Nuevo (a) $20,000 on December 7, 1995, and an additional $30,000 over the
course of 90 days following execution of the Settlement, and (b) to pay
$50,000 within one year of the Settlement, an additional $50,000 within two
years of the Settlement, and an additional $150,000 within three years of the
Settlement, together with interest in the amount of $36,000. These amounts
have been reflected in the Group's consolidated financial statements. To
secure its obligation under the Settlement, the Group stipulated in an agreed
judgment that it would be liable in the amount of $1,000,000 (less any amounts
paid pursuant to the Settlement) upon the Group's default of its obligation
under the Settlement. In addition, the Group agreed to assume and indemnify
Panda and Torch against all obligations and amounts owed under a May 2, 1989
agreement between Panda and Northern relating to the transportation of natural
gas through a facility located in Dewey County, Oklahoma. Pursuant to this
indemnification, the Group has been asked to indemnify Torch with respect to
claims brought against it by Northern in a lawsuit filed March 7, 1996, as
more fully discussed below.
 
  On March 7, 1996, Northern filed a lawsuit against Torch Energy Advisors,
Inc. ("Torch") for alleged breach of a May 2, 1989 agreement (the "Dewey
County Contract") between Torch, Panda and Northern relating to the
transportation of natural gas through a facility located in Dewey County,
Oklahoma. The Group has assumed the defense of this matter pursuant to the
indemnification agreement entered into as part of the December 7, 1995,
settlement among Torch, Panda and the Group discussed above. Northern
contended that Panda failed to transport the required volumes. Northern sued
Torch under a written guaranty agreement and has claimed that Torch denuded
the assets of Panda and is therefore liable for the debts of Panda. On March
23, 1998, the Group agreed to execute a promissory note for $150,000 plus
accrued interest to Northern Natural Gas Company in consideration for
Northern's agreement not to sue the Group. Provision for this settlement had
been made in the consolidated financial statements for the nine months ended
April 30, 1997.
 
                                     F-18
<PAGE>
 
                    ALLIANCE RESOURCES PLC AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
  As at the date of these financial statements, the Group has made all
required payments under the above settlements on a timely basis.
 
  Germany Oil Company (a wholly owned subsidiary) was named as a defendant in
three wrongful death actions which were settled during the year ended April
30, 1998. The Group's liability insurance was adequate to cover the loss.
 
  On September 12, 1996 Alliance received a writ from Best Royalties Plc
claiming $186,368 and a declaration that Best Royalties Plc is entitled to a
sum equal to 40 percent of Alliance Resources (USA), Inc.'s net cash proceeds
received from the Arrowhead No. 1 well (and payment of such sum). Alliance
denies the claim and is vigorously defending this matter.
 
  On March 9, 1998 Alliance filed a lawsuit in Louisiana, USA alleging
malpractice against a law firm of Baldwin & Haspel, LLC, for acts and omission
in certain property and securities transactions during the period June 1994 to
October 1996. The total amount of Alliance's claim has not yet been
ascertained.
 
  On April 8, 1998, Union Pacific Resources Company ("UPRC") filed a lawsuit
in the District Court of Denver, Colorado against Germany Oil Company alleging
breach of contract arising out of oil and gas property in Cheyenne County,
Colorado. Germany Oil Company filed an answer and counterclaim on May 18,
1998, vigorously denying the allegation and alleging breach of contract,
breach of fiduciary duty, conversion and other related claims. The total
amount of the claims will be determined at trial.
 
  On April 17, 1998, UPRC filed a lawsuit in the District Court of Tarrant
County, Texas against Germany Oil Company alleging breach of contract arising
out of oil and gas property in Crockett County, Texas and claiming damages of
approximately $351,000. Germany Oil Company intends to vigorously defend the
claim and counterclaim for breach of contract, breach of fiduciary duty, and
other related claims.
 
  In addition to the aforementioned litigation, the Group is a named defendant
in lawsuits, and is subject to claims of third parties from time to time
arising in the ordinary course of business. While the outcome of lawsuits or
other proceedings and claims against the Group cannot be predicted with
certainty, management does not expect these additional matters to have
material adverse effect on the financial position or results of operations or
liquidity of the Group.
 
  The Group leases office space and certain property and equipment under
various lease agreements. As of April 30, 1998, future minimum lease
commitments were approximately as follows:
 
<TABLE>
<CAPTION>
      YEAR ENDING APRIL 30
      --------------------
      <S>                                                                <C>
        1999...........................................................  $20,155
        2000...........................................................    5,000
        2001...........................................................    5,000
</TABLE>
 
  Rent expense under all operating leases was $175,470, $160,780, and $235,732
during the year ended April 30, 1998, the nine months ended April 30, 1997,
and the year ended July 31, 1996, respectively.
 
  The Company announced on April 29, 1998 that it is in discussions which may,
or may not, lead to the acquisition of a minority interest in certain United
Kingdom gas interests. Such acquisition would be classified as a reverse
takeover under The Rules of the London Stock Exchange and accordingly subject
to Alliance Resources PLC shareholders approval. Accordingly on April 29, 1998
the London Stock Exchange, at the Company's request, temporarily suspended the
listing of the Company's ordinary shares pending shareholders approval of the
acquisition. The Company is currently in discussions with various parties
regarding financing arrangements to allow for the completion of the
acquisition. These discussions include potential revisions to the existing
Credit Agreement with Bank of America to provide the Company with additional
funding and liquidity until completion of the acquisition.
 
                                     F-19
<PAGE>
 
                    ALLIANCE RESOURCES PLC AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
(14) RELATED PARTY TRANSACTIONS
 
  The Group from time to time has made loans to certain officers, directors
and stockholders. During the nine months ended April 30, 1997, the board of
directors forgave $391,218, of notes and accrued interest, due from directors
and former officers of the Group. This amount is included in general and
administrative expenses.
 
  Under the terms of the acquisition of LaTex by Alliance, the Group disposed
of its interests in Wexford and Imperial, and its interests in its wholly-
owned subsidiaries LaTex Resources International, Inc. (LaTex Resources
International) and Phoenix Metals, Inc. (Phoenix Metals) to Imperial for
85,981 shares of Common Stock. Imperial is controlled by the former president
of LaTex. A fairness opinion was obtained from the investment banking firm of
Wood Roberts, Inc. (WRI) a company controlled by John R. Martinson, a
Director, concluding that the transaction was fair to the Group's
stockholders. The Common Stock is included in Treasury Stock at April 30,
1997.
 
  The Group was previously a party to an agreement with WRI, pursuant to which
WRI acted as a financial advisor to the Group. Under the agreement, the Group
agreed to pay WRI a success fee in connection with any merger or acquisition
involving a party introduced to the Group by WRI, and any financing facility
arranged by WRI. In addition, the Group has issued to WRI six year common
stock purchase warrants to purchase 460,858 shares at $.87 per share, of which
374,877 and 318,072 are outstanding as of April 30, 1997 and January 31, 1998,
respectively. As of March 4, 1996, the financial advisor agreement between the
Group and WRI was terminated by agreement of the parties. By separate
agreement, the Group agreed to pay WRI a fee of $240,000 upon acquisition of
LaTex by Alliance and a fee equal to 0.5% of the amount of any credit facility
obtained by the Group from a bank or other financial institution introduced by
WRI in order to refinance its indebtedness to its principal lender (or 85,986
shares of Common Stock). This fee ($100,000) was settled by issue of the
Common Stock which is included in the stock outstanding at April 30, 1997.
 
  During the year ended April 30, 1998, the Company received $123,000 of
proceeds from the sale of 10,351,966 shares in the Company which had
previously been owned by Mr. John O' Brien, the former Chief Executive of the
Company. The right to receive the proceeds from the sale of the shares arose
from a settlement agreed between the Company and Mr. O'Brien following the
discovery that the Company had suffered a financial loss as a result of a
number of transactions involving Mr. O'Brien or parties connected with him.
 
(15) DERIVATIVES
 
 Oil and Gas
 
  The Group was required, by agreement with its primary lender in 1995, to
participate in a price protection program, for a majority of its oil and gas
sales. Under the commodity collar transaction, oil prices were fixed at a
floor of $16.50/Bbl and a ceiling of $19.82/Bbl based on projected monthly
production. Under the commodity swap transaction, the price of gas was fixed
at $1.806 MMBTU based on projected monthly production. The production rates
were calculated by the primary lender from reserve report data and were fixed
by the lender (24,352 Bbls and 173,868 MMBTU's per month). The monthly hedge
amount was calculated by the lender from published market rates. The pricing
agreement did not allow for full benefits from prices above the ceiling
amount. The settlement gains and losses are included in oil and gas revenue.
 
  As allowed under the Alliance Credit Agreement, the oil and gas pricing
derivatives were terminated on May 15, 1997, at a cost of $1,128,000 settled
by an increase in the Bank of America loan. The loss relating to the buy-out
has been recognized in its entirety during the year ended April 30, 1998,
consequent upon the Group entering into a new price protection agreement.
 
  On October 23, 1997, the Group entered into new commodity price hedge
agreements to protect against price declines which may be associated with the
volatility in oil and gas spot prices. Unlike the previous hedging
 
                                     F-20
<PAGE>
 
                    ALLIANCE RESOURCES PLC AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
agreements, the new commodity price hedge agreements, while protecting the
downside, also provide the Group with exposure to price increases beyond
certain agreed price levels. The commodity price hedges have been achieved
through the purchase of put options (floors) by the Group, and the associated
premium cost was funded by additional drawdowns under the current credit
agreement. The commodity price hedges cover 32,000 Bbls and 100,000 MMbtus per
month for the year to October 31, 1998, and cover in excess of 90% of the
Group's current monthly sales volumes. The floors currently equate to
approximately $18.50/Bbl Nymex WTI contract and $2.20/MMBTU Nymex Natural Gas
contract.
 
 Interest
 
  The Group is required, by agreement with its primary lender (see Note 8) to
participate in an interest rate protection program, for interest on the debt
payable to the primary lender until February 29, 2000. Interest is hedged to
achieve a fixed rate of 7.49% calculated on a monthly basis based on a fixed
amortization schedule determined on loan origination. The notional principal
is reduced each month by $365,000. The notional principal outstanding at April
30, 1998 was $17,799,000 and this will have reduced at termination to
$9,769,000. The hedging gains/losses are included in interest expense.
 
 Concentrations of Credit Risk
 
  During the year ended April 30, 1998, the Group sold approximately 39% of
its oil and gas revenues to one purchaser (year ended July 31, 1996, 16%). The
Group had no other purchases in excess of 10% of its oil and gas revenues in
any of the periods presented.
 
(16) DISPOSITION OF OIL AND GAS PROPERTIES
 
  The Group made two oil and gas property sales during the nine months ended
April 30, 1997, for approximately $1,500,000. During the year ended April 30,
1998, the Group sold oil and gas properties for approximately $5,600,000.
Proceeds of such sales were credited to the full cost pool.
 
(17) SUPPLEMENTAL FINANCIAL INFORMATION FOR OIL AND GAS PRODUCING ACTIVITIES
     (UNAUDITED)
 
 Results of Operations from Oil and Gas Producing Activities
 
  The following sets forth certain information with respect to the Group's
results of operations from oil and gas producing activities for the year ended
July 31, 1996, the nine months ended April 30, 1997 and the year ended April
30, 1998. All of the Group's oil and gas producing activities are located
within the United States. The abandonment costs include $2,491,299 and
$955,496 related to the Tunisia and Kazakhstan projects, respectively.
 
<TABLE>
<CAPTION>
                                        1996           1997           1998
                                   -------------- -------------- --------------
                                   (AS RESTATED)
                                   (IN THOUSANDS) (IN THOUSANDS) (IN THOUSANDS)
   <S>                             <C>            <C>            <C>
   Revenues......................     $11,980        $ 5,698        $10,210
   Production costs..............      (4,601)        (2,550)        (4,849)
   Gross production taxes........        (871)          (567)          (657)
   Cessation of overseas explora-
    tion.........................      (3,447)           --             --
   Depreciation and depletion....      (3,208)        (1,457)        (2,571)
   Loss on commodity deriva-
    tives........................         --             --          (1,128)
                                      -------        -------        -------
   Income (loss) from operations
    before income taxes..........        (147)         1,124          1,005
   Income tax expense............         --             --             --
                                      -------        -------        -------
   Results of operations
    (excluding corporate overhead
    and interest costs)..........     $  (147)       $ 1,124        $ 1,005
                                      =======        =======        =======
</TABLE>
 
                                     F-21
<PAGE>
 
                    ALLIANCE RESOURCES PLC AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
 Capitalized Costs and Cost Incurred Relating to Oil and Gas Activities
 
<TABLE>
<CAPTION>
                                       1996           1997           1998
                                  -------------- -------------- --------------
                                  (AS RESTATED)
                                  (IN THOUSANDS) (IN THOUSANDS) (IN THOUSANDS)
<S>                               <C>            <C>            <C>
United States....................    $ 41,379       $36,107        $ 43,200
Foreign..........................         --            --              --
                                     --------       -------        --------
      Total capitalized costs....      41,379        36,107          43,200
Less accumulated depreciation,
 depletion and amortization......     (12,022)       (9,432)        (13,571)
                                     --------       -------        --------
      Net capitalized costs......    $ 29,357       $26,675        $ 29,629
                                     ========       =======        ========
Costs incurred during the year:
  Exploration costs:
    United States................    $    --        $   --         $    --
    Foreign......................          84           --              --
                                     --------       -------        --------
                                     $     84       $   --         $    --
                                     ========       =======        ========
  Development costs:
    United States................    $    978       $   348        $  1,821
    Foreign......................         --            --              276
                                     --------       -------        --------
                                     $    978       $   348        $  2,097
                                     ========       =======        ========
  Purchase of minerals in place:
    United States................    $  2,800       $   --         $  9,041
    Foreign......................         --            --              --
                                     --------       -------        --------
                                     $  2,800       $   --         $  9,041
                                     ========       =======        ========
</TABLE>
 
                                      F-22
<PAGE>
 
                    ALLIANCE RESOURCES PLC AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
ESTIMATED QUANTITIES OF PROVED OIL AND GAS RESERVES
 
  The estimates of proved oil and gas reserves were prepared by independent
petroleum engineers. The Group emphasizes that reserve estimates are
inherently imprecise. Accordingly, the estimates are expected to change as
more current information becomes available. In addition, a portion of the
Group's proved reserves are undeveloped, which increases the imprecision
inherent in estimating reserves which may ultimately be produced.
 
  Proved reserves are 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 developed reserves
are those which are expected to be recovered through existing wells with
existing equipment and operating methods.
 
  The following is an analysis of the Group's proved oil and gas reserves.
 
<TABLE>
<CAPTION>
                                                          OIL (MBBLS) GAS (MMCF)
                                                          ----------- ----------
   <S>                                                    <C>         <C>
   Proved resources at July 31, 1995.....................   5,431.8     28,113
   Revisions of previous estimates.......................   1,077.5      1,350
   Production............................................    (405.0)    (3,481)
   Purchases of reserves-in-place........................     248.7      2,190
                                                            -------     ------
   Proved reserves at July 31, 1996......................   6,353.0     28,172
   Revisions of previous estimates.......................     417.7       (577)
   Production............................................    (190.0)    (1,640)
                                                            -------     ------
   Proved reserves at April 30, 1997.....................   6,580.7     25,955
   Revisions of previous estimates.......................    (735.5)     2,149
   Production............................................    (396.2)    (1,689)
   Purchases of reserves-in-place........................   1,335.7      4,173
   Sales of reserves-in-place............................    (290.4)    (4,266)
                                                            -------     ------
   Proved reserves at April 30, 1998.....................   6,494.3     26,322
                                                            =======     ======
   Proved developed reserves at:
     July 31, 1996.......................................   4,952.9     27,757
                                                            =======     ======
     April 30, 1997......................................   5,166.9     25,461
                                                            =======     ======
     April 30, 1998......................................   3,773.7     22,632
                                                            =======     ======
</TABLE>
 
  During the nine months ended April 30, 1997, the Group sold oil and gas
properties for approximately $1,500,000. The Group chose not to include those
properties in its reserve appraisal at July 31, 1996.
 
                                     F-23
<PAGE>
 
                    ALLIANCE RESOURCES PLC AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
DISCOUNTED FUTURE NET CASH FLOWS
 
  In accordance with Statement of Financial Accounting Standards No. 69,
estimates of the standardized measure of discounted future cash flows were
determined by applying period-end prices, adjusted for fixed and determinable
escalations, to the estimated future production of year-end proved reserves.
Future cash inflows were reduced by the estimated future production and
development costs based on period-end costs to determine pre-tax cash inflows
over the Group's tax basis in the associated proved oil and gas properties.
Net operating losses, credits and permanent differences were also considered
in the future income tax calculation. Future net cash inflows after income
taxes were discounted using a 10% annual discount rate to arrive at the
Standardized Measure.
 
  The estimated standardized measure of discounted future cash flows follows:
 
<TABLE>
<CAPTION>
                                          1996          1997          1998
                                      ------------  ------------  ------------
   <S>                                <C>           <C>           <C>
   Future cash inflows..............  $181,566,000  $139,587,000  $131,858,000
   Future production and development
    costs...........................   (79,763,000)  (64,086,000)  (48,683,000)
                                      ------------  ------------  ------------
   Future net cash inflows before
    income tax expense..............   101,803,000    75,501,000    83,175,000
   Future income tax expense........   (21,193,000)  (11,477,000)  (10,444,000)
                                      ------------  ------------  ------------
   Future net cash flows............    80,610,000    64,024,000    72,731,000
   10% annual discount for estimated
    timing of cash flows............   (36,721,000)  (28,656,000)  (27,625,000)
                                      ------------  ------------  ------------
   Standardized measure of
    discounted future net cash
    flows...........................  $ 43,889,000  $ 35,368,000  $ 45,106,000
                                      ============  ============  ============
</TABLE>
 
  The changes in standardized measure of discounted future net cash flows
follows:
 
<TABLE>
<CAPTION>
                                                  NINE MONTHS
                                    YEAR ENDED       ENDED        YEAR ENDED
                                   JULY 31, 1996 APRIL 30, 1997 APRIL 30, 1998
                                   ------------- -------------- --------------
   <S>                             <C>           <C>            <C>
   Beginning of period............  $28,802,000   $ 43,889,000   $35,368,000
   Increases (decreases)
     Sales, net of production
      costs.......................   (6,973,000)    (4,074,000)   (4,338,000)
     Net change in sales prices,
      net of production costs.....   21,444,000    (12,690,000)    7,671,000
     Changes in estimated future
      development costs...........   (3,419,000)      (280,000)   (1,161,000)
     Revisions of previous quan-
      tity estimates..............    6,601,000      1,282,000    (1,778,000)
     Accretion of discount........    2,691,000      5,350,000     3,963,000
     Net change income taxes......   (8,725,000)     5,345,000       813,000
     Purchases of reserves-in-
      place.......................    2,093,000            --     12,720,000
     Sales of reserves-in-place...          --             --     (4,975,000)
     Changes of production rates
      (timing) and other..........    1,375,000     (3,454,000)   (3,177,000)
                                    -----------   ------------   -----------
   End of period..................  $43,889,000   $ 35,368,000   $45,106,000
                                    ===========   ============   ===========
</TABLE>
 
                                     F-24
<PAGE>
 
                                  SIGNATURES


     Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

                                                Alliance Resources PLC

Date:  September 22, 1998                               /s/ John A. Keenan
                                                        ---------------------
                                                John A. Keenan, Chairman
                                                and Managing Director

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

<TABLE> 
<CAPTION> 
 
        SIGNATURE                              TITLE                        DATE
        ---------                              -----                        ----           
<S>                              <C>                                  <C>

/s/ John A. Keenan               Chairman and Managing Director       September 22, 1998
-------------------------------
John A. Keenan
 
/s/ H Brian K Williams           Finance Director                     September 22, 1998
-------------------------------
H Brian K Williams
 
/s/ Paul R Fenemore              Operations and Business Development  September 22, 1998
-------------------------------
Paul R Fenemore                  Director
 
/s/ M Phillip Douglas            Director                             September 22, 1998
-------------------------------
M Phillip Douglas
 
/s/ William J A Kennedy          Director                             September 22, 1998
-------------------------------
William J A Kennedy
 
/s/Michael E Humphries           Director                             September 22, 1998
-------------------------------
Michael E Humphries
 
/s/ Christopher R L Samuelson    Director                             September 22, 1998
-------------------------------
Christopher R L Samuelson
 
/s/ John R Martinson             Director                             September 22, 1998
-------------------------------
John R Martinson
</TABLE>

                                       6