<PAGE>
 
                                FORM 10-KSB/A-1

                       SECURITIES AND EXCHANGE COMMISSION

                            WASHINGTON, D.C.  20549
 
(Mark One)
 
[X]  Annual report pursuant to section 13 or 15(d) of the Securities Exchange
     Act of 1934

     For the fiscal year ended  March 31, 1997 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    1-13513
                            -------------

                        UNITED STATES EXPLORATION, INC.
                        -------------------------------
            (Exact name of registrant as specified in its charter)

Colorado                                                84-1120323 
--------                                                ----------
(State or other jurisdiction of                         (I.R.S. Employer
incorporation or organization)                          identification No.)

1560 Broadway, Suite 1900, Denver, Colorado             80202
-------------------------------------------             -----
  (Address of principal executive offices)              (Zip Code)

Registrant's telephone number, including area code: (303) 863-3550
                                                    --------------

Securities registered pursuant to Section 12(b) of the Act:

      Title of each class            Name of each exchange on which registered

Common Shares, $.0001 par value             The American Stock Exchange
-------------------------------             ---------------------------

Check whether the issuer (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 
               -------       -------

Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B in this form, and no disclosure will 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-KSB or any amendment to
this Form 10-KSB. [_]

The Issuer's revenues for the most recent fiscal year were $4,513,387.

The aggregate market value of the 3,826,215 Common Shares held by nonaffiliates
of the Company as of March 31, 1997, is approximately $12,435,199 based upon the
last reported sale of the Company's Common Shares as of July 1, 1997.

The total number of Common Shares outstanding as of March 31, 1997 was
8,312,358.


                     DOCUMENTS INCORPORATED BY REFERENCE:

                                     None
<PAGE>
 
                               TABLE OF CONTENTS

        FORM 10-KSB ANNUAL REPORT - FOR FISCAL YEAR ENDED MARCH 31, 1997

                        UNITED STATES EXPLORATION, INC.

 
PART I                                                                   PAGE
                                                                         ----
     Items 1 and 2. Business and Properties...........................   1
                                                                      
     Item 3.        Legal Proceedings.................................   20
                                                                      
     Item 4.        Submission of Matters to a Vote of                
                    Security Holders..................................   20
                                                                      
     Item 5.        Market for Company Securities and Related         
                    Shareholders Matters..............................   20
                                                                   
     Item 6.        Management's Discussion and Analysis of        
                    Financial Conditions and Results of Operations....   22
                                                                   
     Item 7.        Financial Statements and Supplementary Data.......   27
                                                                   
     Item 8.        Changes in and Disagreements with Accountants  
                    on Accounting and Financial Disclosure............   27
 
PART II
 
     Item 9.        Directors and Executive Officers..................   28
                                                                   
     Item 10.       Executive Compensation............................   29
                                                                   
     Item 11.       Security Ownership of Certain Beneficial       
                    Owners and Management.............................   32
                                                                   
     Item 12.       Certain Relationships and Related Transactions       33
 
PART IV
 
     Item 13.       Exhibits, Financial Statement Schedules and
                    Reports on Form 8-K...............................   35
 
     Signature Page...................................................   38
 
     Index to Financial Statements....................................   39

                                       i
<PAGE>
 
                               GLOSSARY OF TERMS

BBLS:               Barrels.

BOPD:               Barrels of oil per day.

BLANKET LEASE:      The mineral lease between the Company and the Osage Indian
                    Tribe covering approximately 64,000 acres in Osage County,
                    Oklahoma, and including provision for additional drilling
                    obligations to hold portions of the lease.

COMPLETION:         The procedure used in finishing  an oil or gas well for
                    production.

DEVELOPMENT WELL:   A well drilled within the proved area of an oil or gas
                    reservoir to the depth of a stratigraphic horizon known to
                    be productive for the purpose of extracting proved oil or
                    gas reserves.

DRY HOLE:           An exploratory or a development well found to be incapable
                    of producing either oil or gas in sufficient quantities to
                    justify completion as an oil or gas well.

EXPLORATORY WELL:   A well drilled to find and produce oil or gas in an
                    undeveloped area, to find a new reservoir in a field
                    previously found to be productive of oil or gas in another
                    reservoir or to extend a known reservoir. Generally, any
                    exploratory well is an well that is not a development well.

FERC:               Federal Energy Regulatory Commission.

GROSS ACRE:         An acre in which a working interest is owned. The number of
                    gross acres is the total number of acres in which working
                    interests are owned.

GROSS WELL:         An oil or gas wells in which a working interest is owned.

LEASES:             Full or partial leasehold interests in oil and gas
                    prospects, authorizing the owner thereof to drill for,
                    reduce to possession and produce and sell oil and gas, upon
                    payment of rentals, bonuses and/or royalties.

MMBTU:              Million British Thermal Units. A British Thermal Unit is the
                    quantity of heat required to raise the temperature of one
                    pound of water 1 F. at or near its point of maximum density.

MCF:                Thousand cubic feet.

                                       ii
<PAGE>
 
MMCF:               Million cubic feet.

NGL:                Natural gas liquids.

NET ACRES:          One net acre is deemed to exist when the sum of the
                    fractional ownership of working interests in gross acres
                    equals one. The number of net acres is the sum of the
                    fractional working interests owned in gross acres, expressed
                    as whole numbers and fractions thereof.

NET WELL:           One net well is deemed to exist when the sum of fractional
                    ownership interests in gross wells equals one.

NET REVENUE
INTERESTS ("NRI"):  An interest owner's pro rata share of total gross revenues,
                    after deduction of royalties and other burdens but before
                    payment of operating expenses, derived from the sale of oil
                    and gas from a specific property.

PROSPECT:           An area believed to contain related geologic features and
                    thought to be productive of oil and gas.

PROVED DEVELOPED    Reserves that can be expected to be recovered through
BEHIND PIPE         existing wells with existing equipment and operating methods
RESERVES (PDBP):    but behind the casing of existing wells or at minor depths
                    below the present bottom of such wells and where the cost of
                    making such oil and gas is relatively small compared to the
                    cost of a new well.

PROVED DEVELOPED    Quantities of oil and gas which geological and engineering
PRODUCING(PDP):     data demonstrate with reasonable certainty to be recoverable
                    in future years from known reservoirs under existing
                    economic and operating conditions at prices and costs as of
                    the date the estimate is made.
                   
PROVED RESERVES:    Those quantities of oil and gas which can be expected with 
                    little doubt to be recoverable commercially at current
                    prices and costs, under existing regulatory parties and with
                    existing conventional equipment and operating methods.
                    
PROVED UNDEVELOPED  Reserves that are expected to be recovered from new wells or
RESERVES (PUD):     undrilled acreage on from existing wells where a relatively
                    major expenditure is required for recompletion.

WORKING INTEREST    The operating interests under an oil and gas lease entitling
("WI"):             the holder at its expense to conduct drilling and production
                    operations on the leased property and to receive the net
                    revenues attributable to such interest after payment of
                    royalty and overriding royalty interests and other lease
                    burdens.

                                      iii
<PAGE>
 
                                INDEX OF TABLES
 
Table     Description                                                   Page
-----     -----------                                                   ----

I         Average Production Costs and Sales Prices................       3
                                                                   
II        Average Daily Flow-Through...............................       8
                                                                   
III       Developed Properties.....................................      10
                                                                   
IV        Remaining Reserves, March 31, 1997.......................      12
                                                                   
V         Remaining Reserves, March 31, 1996.......................      13
                                                                   
VI        Remaining Reserves, March 31, 1995.......................      13
                                                                   
VII       Future Net Revenues (non-escalated basis)................      14
                                                           
VIII      Present Value of Estimated Future Net Revenues...........      15
          (non-escalated basis)


                             ADDITIONAL INFORMATION

     Descriptions in this Report are qualified by reference to the contents of
any contract, agreement or other documents and are not necessarily complete.
Reference is made to each such contract, agreement or document filed as an
exhibit to this Report, or previously filed by the Company pursuant to
regulations of the Securities and Exchange Commission.  (See "Item 13. Exhibits,
Financial Statements, Schedules and Reports on Form 8-K.")

               SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS

     Certain statements contained or incorporated by reference herein constitute
"forward looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995.  Such forward looking statements include, without
limitation, statements regarding the Company's need for working capital, future
revenues and results of operations.  Factors that could cause actual results to
differ materially include, among others, the following: Market prices in the oil
and gas industry, results of drilling, recompletions and work-overs undertaken
by the Company, the Company's ability to identify, document and finance future
acquisitions of producing or undeveloped oil and gas properties, competition
with other regional suppliers of oil and gas products, relationships with third
parties regarding utilization of Company owned gas gathering systems and the
overall economic climate as well as the other factors discussed under "Risk
Factors."  Most of these factors are outside the control of the Company.
Investors are cautioned not to put undue reliance on forward looking statements.
Except as otherwise required by rule or regulation of the Commission, the
Company disclaims any intent or obligation to update publicly these forward
looking statements, whether as a result of new information, future events or
otherwise.

                                       iv
<PAGE>
 
ITEMS 1. AND 2. BUSINESS AND PROPERTIES

GENERAL DEVELOPMENT OF BUSINESS

     United States Exploration, Inc. (the "Company") was incorporated under the
laws of the State of Colorado on January 9, 1989.  The Company completed its
initial public offering in July of that year.   Through the year ended March 31,
1997, the Company's Common Shares traded in the over-the-counter market.
Effective October 23, 1997, the Common Shares were admitted for trading on the
American Stock Exchange.

     The Company commenced operation in the oil and gas industry in May, 1990 in
connection with the acquisition of oil and gas assets from a public Canadian
company, Cirque Energy, Ltd., formerly known as Petrolantic Ltd.  At that time,
the Company acquired oil and gas assets consisting of producing and undeveloped
properties and interests in gas gathering systems, in exchange for the issuance
of its Common Stock.  Subsequently, the Company reacquired and retired a
majority of that Common Stock in exchange of the issuance of convertible
debentures.  All of those debentures were subsequently retired or converted.
Since completion of the acquisition from Cirque, the Company has operated as an
independent producer of oil and gas.

     All of the Company's operations are currently located in southeast Kansas
and central and northeast Oklahoma.  The Company owns high percentage working
interests and net revenue interests in both oil and gas properties, and
interests in numerous gas gathering systems.  During fiscal 1997, a decision was
made to discontinue operation of a wholly-owned subsidiary which operated as a
drilling contractor.  Accordingly, the Company's drilling activities are
currently conducted through independent drilling contractors.  The Company owns
and manages most of its oil and gas interests through wholly-owned subsidiaries,
including Argas, Inc., Producers Service, Incorporated, Performance Petroleum
Corporation, ZCA Gas Gathering Co., Inc. and Pacific-Osage, Inc.  All references
in this Report to the Company include United States Exploration, Inc. and its
wholly-owned subsidiaries.

     Since inception, the Company has pursued a strategy of growth through
acquisition.  During the fiscal year end March 31, 1997, the Company continued
that process by completing a number of acquisitions.  Effective January 15,
1997, the Company consummated the acquisition of all of the assets of Five Star
Petroleum, Inc., consisting of oil and gas leases located in Oklahoma and oil
and gas production and storage equipment located in proximity to the leases.
Contemporaneously, the Company acquired all of the outstanding stock of ZCA Gas
Gathering Co., Inc.  ("ZCA"), a privately-held Delaware corporation.  The assets
of ZCA consisted of a fifty percent interest in a gas gathering system, stored
natural gas, producing natural gas wells and the Blanket Lease.  Both of these
acquisitions, as well as smaller acquisitions consummated during the fiscal
year, were completed with affiliates of the Company.  (See "-Developments During
Fiscal 1997").

     As of July 1, 1997, the Company was negotiating with Bruce D. Benson, a
then-unrelated third party, along with Benson Mineral Group, Inc., Kansas Gas
Company and Pawnee Management Corp., private entities owned and/or managed by
Mr. Benson,  to acquire additional oil and gas 

                                       1
<PAGE>
 
assets. Such assets consist of an additional gas gathering system, oil gathering
system, salt water disposal system, producing oil and gas leases in southeast
Kansas and northeast Oklahoma, a processing plant and related equipment and
supplies. These negotiations terminated without culmination of any acquisition.
However, Mr. Benson was named President, Chief Executive Officer and Chairman of
the Board of Directors in August, 1997.

OIL AND GAS OPERATIONS

     All of the Company's current operations are located in the United States,
in the States of Kansas and Oklahoma.  The Company primarily holds high
percentage working and net revenue interests in oil and gas leases in
Montgomery, Cowley and Chautauqua Counties,  Kansas and Osage, Kay, Noble and
Logan Counties in Oklahoma, as well as interests in certain gas gathering
systems located within the same geographic regions.  The Company also operates a
very limited number of wells for third parties.  Prior to the acquisition of
Performance Petroleum Corporation ("Performance"), the Company's operations
primarily focused on natural gas.  With the acquisition of Performance and the
subsequent acquisition of the assets of Five Star Petroleum ("Five Star"), the
Company acquired a number of primarily oil producing properties.  These
acquisitions, in addition to substantially increasing the Company's production,
allowed it to diversify such production into both natural gas and oil.

     During the fiscal year ended March 31, 1997, the Company recompleted eight
wells in connection with management's efforts to increase production of gas on
certain of the Performance leases and commence production on the Blanket Lease
in Osage County, Oklahoma.  The recompletion of one of these wells located in
proximity to the ZCA Gas Gathering System was accomplished in conjunction with a
joint venture agreement between the Company and Thermal Energy Corporation of
Tulsa, Oklahoma, in which the Company holds a 50% interest.  (See "-Developments
During Fiscal 1997").   Of the first six wells recompleted, four of the wells
were determined to be non-commercial, one is a producing gas well and one is
still in the process of being tested.  In December of 1996, the Company
recompleted one additional well in Kay County, Oklahoma.  The recompletion was
effected to take advantage of seasonally high gas  prices which existed during
the 1996-97 winter and is currently producing.  In addition, the Company
recompleted a formerly shut in oil well in an attempt to establish commercial
gas production.  After testing, it was determined that insufficient commercial
gas existed and the well was returned to temporarily abandoned status.  During
fiscal 1997, the Company expended an aggregate of $111,386 on these and other
development efforts.

     The Company has not conducted extensive exploration or development on its
own, due to previous limitations on working capital.  Rather, management has
focused efforts on obtaining currently producing oil and gas assets and on
recompleting existing wells located on Company owned properties.  This allows
the Company to increase its revenues without expending large amounts of capital
for exploration or development.  The acquisitions of the Five Star assets, ZCA,
Argas and the additional leases during fiscal 1997 and the corresponding
recompletion work on these properties were part of this strategy.  During the
fiscal year ended March 31, 1997, the Company expended approximately $2,220,000
on these acquisitions.  (See "-Developments for Fiscal 1997").

                                       2
<PAGE>
 
     The assets of the Company consist generally of interests in various gas
gathering systems and oil and gas leaseholds covering approximately 79,000 gross
acres, located in proximity to such systems and to gas gathering systems owned
by third parties.  All of the assets are located in Chautauqua, Cowley and
Montgomery Counties, in Southeast Kansas, Osage and Kay, Noble and Logan
Counties in north central and northeast Oklahoma.  All of the leases in which
the Company owns an interest are currently held by production. The Company
intends to continue operation of the gas gathering systems and oil and gas
leaseholds, alone and in conjunction with industry participants. The Company is
also exploring opportunities to acquire additional producing reserves, although
no definitive agreements have been executed to date.  Management estimates that
the Company's assets were producing at the rate of approximately 1,206 mcf of
natural gas per day and 255 BOPD at March 31, 1997 from 220 producing oil and
gas wells.

     Net oil and gas production (after royalties), average production costs and
average sales prices for the Company's products for the years ended March 31,
1997, 1996 and 1995 are shown in the table below:

                                    TABLE I
                                    -------
                          NET OIL AND GAS PRODUCTION,
                   AVERAGE PRODUCTION COSTS AND SALES PRICES
 
                   Net                              Production
Year Ended      Production          Cost Per                Average Sales Price
March 31,   Oil (bbl)   Gas(mmcf)   Equivalent Unit /(1)/  Oil (bbl)   Gas (mcf)
----------  ---------  -----------  ---------------------  ----------  ---------
 
1997          88,114          318             $ 9.42/(2)/     $20.25      $2.57
1996          59,177          186               7.23           16.48       1.74
1995            1120           78               6.23/(3)/      14.47       1.84
-------------------------
(1)  Production Costs per Equivalent Unit is calculated at the rate of 6 mcf of
     natural gas per bbl of oil.

(2)  The increase in the Cost per Equivalent Unit of production during the
     fiscal year ended March 31, 1997 is attributable to an increase in oil
     production, relative to the production of natural gas, and the higher costs
     generally associated with producing oil.

(3)  Does not include the Company's net revenue interests in certain coal bed
     gas wells operated for third parties. If such interests were included, the
     Cost per Unit would be $4.63 for 1995.

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

     The substantial increase in production of oil and gas during fiscal 1996
and 1997 shown in the above table was the result of acquiring Performance
Petroleum, and the assets included in that acquisition.  (See "--Properties").

INDUSTRY SEGMENT

     The Company operates exclusively in one industry, the oil and gas industry.

                                       3
<PAGE>
 
EXPLORATION, DEVELOPMENT AND ACQUISITION OF OIL AND GAS PROPERTIES

     Management and consultants of the Company are continually involved in
reviewing Company owned properties and other prospects to determine the
desirability of exploration, development and acquisition of reserves.  Due to
limited working capital, the Company has drilled no new wells in the last three
fiscal years.  As of July 1, 1997, the Company had recompleted one gas well and
one oil well, both of which are producing.  During the three years ended March
31, 1997, the Company expended the following net amounts for exploration,
development and acquisition of oil and gas properties.
 
            YEAR ENDED
            MARCH 31,                           INVESTMENT
            ----------                          ----------
               1997                             $2,093,216
               1996                             $5,598,686
               1995                             $   56,684


DEVELOPMENTS FOR FISCAL 1997

     The major developments during fiscal year 1997 were a change in the
Company's management and the acquisitions of additional oil and gas assets.
Effective September 17, 1996, the Company experienced a change in control.  Mr.
Demetrie D. Carone was elected to serve as the President, Chief Executive
Officer and member of the Board of Directors, replacing Terry L. Carroll. Prior
to his election as an officer and director, Mr. Carone was an investor in the
Company who beneficially owned more than 5% of the Company's outstanding Common
Stock.  Mr. Carone did not acquire any additional shares of the Company's Common
Stock as a result of his election as an officer and director.  

     In connection with the change in control of the Company and also effective
September 17, 1996, the Company accepted the resignation of Terry L. Carroll,
the Company's former President, from all positions held by him with the Company,
its subsidiaries and affiliates.  In connection with the acceptance by the
Company of Mr. Carroll's resignation, Mr. Carroll released and relinquished any
and all claims for wages, salary, employee benefits or other compensation which
may have been due him from the Company for past services rendered.  The Company
agreed to enter into a lease agreement with Mr. Carroll covering the business
premises of the Company and a residential lease covering a residential property
used by the Company's operations manager.  The Company and Mr. Carroll each
agreed to indemnify and hold the other harmless from any and all claims, suits
or causes of action whether known or unknown arising from the past relationship.

     Effective October 1, 1996, the Company completed the acquisition of all of
the outstanding stock of Argas, Inc. ("Argas"), a Kansas corporation for the
purchase price of $160,000.  The primary asset held by Argas was its interest in
the USX-Argas 1996 Joint Venture (the "Joint Venture").  The Company
participated in the Joint Venture as a 49% owner with Argas owning the 

                                       4
<PAGE>
 
remaining 51%. The Joint Venture owned and operated four gas gathering systems,
known as Chautauqua, Havana, Cowley and Elgin and operated a fifth for another
joint venture in which the Company previously owned a 50% interest. Subsequent
to the acquisition of Argas, the Company holds a 100% interest in the Joint
Venture. Argas was controlled by a former affiliate of the Company, Terry L.
Carroll, and his wife, Violet M. Carroll. The acquisition price was negotiated
by the Company directly with Mr. Carroll and no appraisal was received from an
independent party.

     Effective November 1, 1996, the Company completed the acquisition of all of
the assets of Five Star, a Colorado corporation, for the purchase price of
$1,300,000 (including imputed interest), paid in cash.  The assets purchased by
the Company included all of Five Star's interest in certain oil and gas leases
located in Logan and Noble counties, Oklahoma, covering approximately 560 acres
and upon which are located 10 oil wells and 1 salt water disposal well, along
with related equipment. The purchase price for this acquisition was provided
from the Company's available working capital. The Company's then-President,
Demetrie D. Carone, was also the President of Five Star.  The Company did not
obtain any independent appraisal of the acquired assets.

     Effective October 1, 1996, the Company completed the acquisition of ZCA, a
Delaware corporation, for a net cash purchase price of $560,000 (including
imputed interest).  The purchase price for this acquisition was also provided
from the Company's available working capital.  Upon completion of the
transaction,  ZCA became a wholly owned subsidiary of the Company.  ZCA owns a
50% interest and operates a gas gathering system located in Osage County,
Oklahoma which is approximately ninety (90) miles in length.  In addition,  ZCA
is the Lessee under the Blanket Lease covering approximately 64,100 acres of
land located in Osage County, Oklahoma  upon which are located approximately 30
producing oil and gas wells.

     By resolution of the Osage Tribal Council, the Lease was amended to make
provisions for the release of the undeveloped portions of the Lease. Under the
terms and conditions of the Amendment to the Lease, ZCA must nominate 10,080
acres or 63 non-producing or undeveloped quarter sections for release back to
the Osage Indian tribe each year. Once nominated, ZCA, as the lease owner, will
then have one year from the date of nomination within which to either drill a
new ZCA gas well on the quarter section or recomplete an existing well on the
quarter as a gas well. In the event that ZCA drills a dry hole, it will get a
second chance on that quarter section whereby ZCA has the option to attempt
another well located in another portion of the quarter section. In the event the
second well is also a dry hole or it fails to meet any of the other
aforementioned conditions, then the quarter section will revert back to the
lessor.

     The Company currently operates the Blanket Lease under a joint venture
agreement with Thermal Energy Corporation which essentially provides that each
party owns an equal interest in any new wells and each pays an equal portion of
the costs to drill or recomplete those wells.

     The Company's former President, Demetrie D. Carone and the beneficial owner
of more than 5% of its outstanding stock, Dale R. Jensen, were the only
shareholders of ZCA. The Company did not obtain an independent appraisal of the
value of ZCA and its related assets prior to this acquisition.

                                       5
<PAGE>
 
     Finally, effective December 1, 1996, the Company acquired certain oil and
gas leases (the "Hull Leases") located in Osage County, Oklahoma for a purchase
price of $200,000 (including imputed interest), paid from the Company's working
capital. The Hull leases cover approximately 320 acres and contain five oil
wells, four of which are currently producing and one of which is shut in. The
Hull leases were acquired from a group of individuals including Mr. Carone, who
owned or controlled the largest single interest in and to the Hull leases. The
Company did not obtain an independent appraisal of the value of the Hull leases.
However, a disinterested majority of the Board of Directors of the Company as
then constituted determined that all the foregoing acquisitions were in the best
interests of the shareholders. The Company has continued operation of all of
these assets in the oil and gas industry.

     The Company also completed a private placement of Preferred Stock during
the fiscal year, resulting in gross proceeds to the Company of $24,000,000.  For
a further discussion of the private placement, see Item 6.  Management's
Discussion and Analysis of Financial Condition.

MARKETING

     Production from the Company's properties is sold to various purchasers in
the geographic area of the properties.  Gas is gathered through gas gathering
systems owned or operated by the Company and certain independent third parties
and sold to larger gas purchasers or end users.  Oil is collected from tanks
located near the wells and hauled by trucks to third party purchasers.  The
Company also acquires natural gas from third party producers, transports the gas
through its gas gathering systems and resells to purchasers in conjunction with
production from its own properties.  The principal markets for oil and gas
consumption are industrial and consumer use for heat, manufacturing, power,
transportation and residential use.

     During fiscal 1997, there were two customers which accounted for more than
10% of the Company's revenues from oil and gas sales.  These customers were:
Conoco, Inc. which purchased all of the Company's oil production in Osage and
Kay Counties, Oklahoma and a substantial portion of the Company's oil and gas
production in Logan County, Oklahoma; and Woodward Marketing, LLC which
purchased all gas production associated with the Company's PSI Pipeline.  Loss
of either of these customers would temporarily affect revenues to the Company,
although management believes the Company will continue to have a market for its
products for the foreseeable future.

     The availability of a ready market for the Company's oil and gas will
depend upon numerous factors beyond its control, including the extent of
domestic production and importation of oil and gas, relative status of the
domestic and international economy, the proximity of the Company's properties to
gas gathering systems, the capacity of such systems, the marketing of other
competitive fuels, fluctuation in seasonal demands and governmental regulation
of production, refining, transportation and pricing of oil, natural gas and
other fuels.

     Natural gas produced by the Company and third party producers is
transported through gas gathering systems owned or operated by the Company or by
third parties to larger gas pipelines owned by third parties.  Natural gas
gathered by the Company is sold at a spot price determined on 

                                       6
<PAGE>
 
a monthly basis by reference to the national market for gas. At March 31, 1997
the Company received an average of $2.57 per mcf for its natural gas. Oil is
also sold at prevailing spot prices, which averaged $20.25 at fiscal year end
1997.

PROPERTIES

     Ingelside Refinery
     ------------------

     Effective July 18, 1994, the Company completed the acquisition of a crude
oil refinery from Tipperary Corporation, a publicly-traded Texas corporation.
The refinery has an estimated processing capacity of approximately 10,400 BOPD
and miscellaneous storage tanks with capacities of approximately 125,000
barrels.  Included within the acquisition were approximately 100 acres of real
estate, 80 of which are presently undeveloped and the balance of which contain
the refinery.  The refinery has been out of operation since the early 1980's due
to the prevailing economic conditions of the industry as a whole.  The Company
is presently attempting to market these assets to a third party.

     Gas Gathering Systems.
     --------------------- 

     The gas gathering systems in which the Company owns interests provide
facilities for gathering natural gas from remote leases and smaller gathering
systems and delivering the gas to larger pipelines for ultimate delivery to end
users and other wholesalers.  A gathering system is a system of pipelines that
extend through or over a series of easements and rights-of-way with various
permits or licenses to operate the gathering system, a compressor and a
dehydrator.  Included in the gathering system are site leases for compressors
and dehydrators which are necessary to operate the pipeline.  The gathering
systems are utilized to transport the Company's natural gas to market, as well
as providing the Company with revenue from gathering charges from reselling
natural gas produced by third parties.

     The terms of the rights-of-way and site leases sometimes vary so that the
term of one right-of-way may not be co-extensive with another connecting right-
of-way.  Most rights-of-way and leases will terminate if the pipelines are
abandoned.  Rentals vary but are generally not significant.  Some of the
property on which the Company's rights-of-way are located may be subject to land
mortgages. Further, as a general rule, there is no nondisturbance agreement
between the Company and any mortgage holders.  Accordingly, should the land
owner default with regard to any requisite mortgage payment, the holder of the
mortgage could foreclose and extinguish the Company's interest in that
particular right-of-way.  In such event, the Company may be forced to
renegotiate its rights or consider alternative rights of way.

     The following are the gas gathering systems in which the Company currently
owns interests.

     1.   PSI.  The PSI Gathering System consists of approximately 72 miles of
          ---                                                                 
four-inch steel gathering line located in southeast Kansas and traversing the
counties of Chautauqua, Cowley and Montgomery.  The PSI line generally extends
from east to west and collects gas from the three 

                                       7
<PAGE>
 
county area for resale to a gas marketer under contract with the Company. Prior
to acquisition by the Company in February, 1994, PSI purchased a majority of
natural gas produced by the Company and gathered through other Company systems.

      The Company leases a 100% interest in this system from an independent
third party pursuant to a 10-year agreement which expires in 2008 . (See Note
"J" to the Financial Statements). PSI sells to larger systems in proximity to
the system.

     2.   Peru-Hale Gathering System, Chautauqua County, Kansas.  The Peru-Hale
          -----------------------------------------------------                
Gathering System is approximately 12 miles in length and extends generally north
and south from the PSI Line in Chautauqua County, Kansas. This gas gathering
system consists of approximately 19 separate rights-of-way, including site
leases for a compressor necessary to operate the system. The duration of the
different rights of way vary between 10 and 25 years and are generally renewable
at the option of the Company. Rentals to land owners are generally not
significant, totaling in the aggregate less than $1,000 per year. The Company
owns a 100% interest in this system, which was constructed in 1987. This System
presently delivers all gas gathered by it to the PSI Line.

     3.   Independence Gas System.  The Company owns a 100% interest in the
          -----------------------                                          
Independence Gas Gathering System.  The Gathering System is located
approximately 17 miles east of the Peru-Hale Pipeline, in Montgomery County .
The gathering system consists of polyethylene pipe and is approximately 16 miles
in length.

     4.   Pacific Gas Gathering System.  The Company owns a 100% interest in the
          ----------------------------                                          
Pacific gas gathering system located in Osage county, Oklahoma, which was
acquired in connection with the Pacific acquisition.  The 32 mile gathering
system collects gas primarily from leases owned by the Company and which were
acquired in connection with the Performance acquisition.  The system is
constructed primarily of 3" and 4" polyethylene piping.  However, approximately
4 miles of the pipeline is constructed of 2-7/8" OD steel pipe.

     5.   Cowley I Pipeline.  In connection with the Company's acquisition of
          -----------------                                                  
Argas, Inc., the Company acquired all of Argas' interest in the Cowley I
Pipeline located in eastern Cowley county, Kansas, and now owns 100% of the
system.  The pipeline consists of approximately 2.5 miles of 4 inch polyethylene
plastic piping and  1/2 mile of 3" steel line.  The pipeline is located near the
western end of the PSI Pipeline and gathers gas from three leases operated by
independent third parties for ultimate delivery to the PSI pipeline.

     6.   Cowley II Pipeline.   The Company also owns a 100% interest in this
          -------------------                                                
system, acquired from Argas and located in extreme eastern Cowley county,
Kansas. This pipeline has been shut in without a commercial gas supply for
approximately 4 years. The pipeline consists of approximately 4 miles of above
ground 6" steel pipe and 1/2 mile of buried 2.5 inch steel pipe. The Company
anticipates salvaging approximately 3 miles of the above ground pipe for future
use.

                                       8
<PAGE>
 
     7.   Havana-Chautauqua Gathering System.  The Company owns a 100% interest
          ----------------------------------                                   
in the Havana-Chautauqua Gas Gathering System located in Montgomery and
Chautauqua Counties, Kansas.  This system serves an area of approximately 70
square miles and consists of approximately 22 miles of 4" and 6" polyethylene
plastic pipeline and extends 4 miles south and 13 miles north of the PSI
pipeline.  The system gathers gas from nine Company owned leases and from
several leases controlled by independent third parties.  The system currently
gathers approximately 413,000 cubic feet of gas per day for ultimate delivery to
the PSI pipeline.

     8.   Elgin Pipeline.  The Company owns a 100% interest in this system,
          --------------
located in Chautauqua County, Kansas. It has been shut in without a commercial
supply of gas since approximately 1995. The pipeline consists of approximately
14 miles of 4 and 6 inch steel pipe and 3 miles of 2 and 3 inch buried
polyethylene pipe. The Company anticipates using portions of the pipeline along
with the SEK pipeline, to which it is adjacent, to transport low-BTU gas into
Oklahoma where the low BTU gas can then be blended with higher quality gas.

     9.   ZCA Gas Gathering. The  ZCA Gas Gathering system  ("ZCA") in which
          -----------------                                                 
the Company owns a 50% interest, consists of approximately 90 miles of pipeline
ranging in size from 2 to 12 inches in diameter. ZCA serves a six township (216
square miles) area of eastern Osage County, Oklahoma. The primary source of gas
for ZCA is the Company owned ZCA Blanket Lease covering approximately 64,160
acres on which are located approximately 30 producing oil and gas wells. The
pipeline also purchases gas from several independently operated properties
located both on and off the Blanket Lease. The primary source of gas sales from
ZCA is the smelting facility owned by the Zinc Corporation of America located in
Bartlesville, Oklahoma. Sales are also made to local rural residential gas
customers. Excess produced gas is transported to the Company owned Pacific Gas
Gathering System which in turn sells gas to Williams Natural Gas Company.

     10.  SEK Gathering System, Chautauqua County, Kansas.  The Company owns a
          -----------------------------------------------                     
100% interest in the Southeast Kansas ("SEK") Gathering System, also located in
Chautauqua County. This gathering system extends approximately 10 miles south
from the PSI Line and is constructed of 4-inch steel and 6-inch polyethylene
material. This system is currently shut down due to lack of production in the
surrounding area.

                                       9
<PAGE>
 
                                    TABLE II
                           AVERAGE DAILY FLOW-THROUGH
 
PIPELINE              YEAR ENDED         CURRENT      MAXIMUM
--------              MARCH 31, 1997     CAPACITY     CAPACITY/2/
                      --------------     --------     --------
 
PSI                       1,250mcfd/3/   3,000 mcfd   10,000 MCFD
PERU-HALE                   732          1,200         6,000
INDEPENDENCE/1/             144          1,200         2,500
PACIFIC                     263          1,250         5,000
COWLEY I/1/                  28            200         1,000
COWLEY II/4/                  0              0         1,000
ELGIN/5/                      0              0         2,000
HAVANA-
CHAUTAUQUA/1/               413          1,200         2,500
ZCA/1,6/                    256          2,500         4,000
SEK GAS GATHERING             0              0         1,500

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

    /1/  The figures contained herein represent partial year results as the
         pipeline was only operated by the Company for a period of six months.

    /2/  Subject to available supply and demand, maximum capacity can be
         achieved by increasing the size of the compressor on the gas gathering
         system.

    /3/  Includes all gas gathered through Peru-Hale, Independence, Cowley I and
         Havana-Chautaugqua, which is delivered to the PSI Pipeline.
 
    /4/  The Cowley II pipeline has been shut down since November 30, 1992 due
         to the lack of producing wells within the vicinity which this pipeline
         serves.

    /5/  The Elgin pipeline has been shut down since August 31, 1995 due to
         lack of exploration in the vicinity which this pipeline serves.

    /6/  The Company owns a 50% interest in this Pipeline.

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

     Oil and Gas Properties.
     ---------------------- 

     1.  Peru-Hale Pipeline Region, Chautauqua County, Kansas.  The Company
         ----------------------------------------------------              
owns a 100% working interest (87.5% net revenue interest) in approximately 1,998
acres of oil and gas leases in the area surrounding the Peru-Hale Gathering
System, in southeast Kansas.  The area contains 29 wells, of which 11 are
producing, one salt water disposal well, and 17 are shut-in at March 31, 1997.
Developmental drilling to date has established proved reserves of 27,310 bbls of
oil and 1,888 mmcf of natural gas in this area.  Production levels approximate
168 mcf of natural gas per day and approximately 2.7 BOPD at March 31, 1997.

                                       10
<PAGE>
 
     2.   Havana-Chautauqua Pipeline Region, Montgomery and Chautauqua Counties,
          ----------------------------------------------------------------------
Kansas. The Company has a 100% working interest (87.5% net revenue interest) in
------                                                                         
2,783 acres of oil and gas leases located in proximity to the Chautauqua-Havana
Gas Gathering System in Chautauqua and Montgomery Counties, Kansas, owned by the
Company.  The properties are in close proximity to the interest held by the
Company in the Peru-Hale Pipeline Region.  Each of these properties, in turn, is
in close proximity to the PSI Line and the Williams Natural Gas Pipeline (owned
by an unaffiliated third party), crossing southern Kansas.

     The Chautauqua-Havana Pipeline property currently contains 13 producing
wells and 35 shut-in wells, including four salt water disposal wells.
Developmental drilling to date has established proved reserves of 21,490 bbls of
oil and 2,611 mmcf of natural gas in this area.  Daily production from these
leases was approximately 71 mcf of natural gas per day at March 31, 1997.

     3.   Central Oklahoma Properties.  As a result of the Performance
          ---------------------------                                 
acquisition, the Company has a 100% working interest in six leases in Kay
County, Oklahoma.  As a result of the Five Star acquisition, the Company has a
100% working interest in five leases in Logan and Noble Counties, Oklahoma.  In
the aggregate, these 11 leases contain 23 producing wells and five non-producing
wells, including a certain number of salt water disposal wells.  The Company's
net revenue interest in these properties ranges from 81.25% to 87.5%.  Drilling
to date has established proved developed producing reserves estimated at 1,227
mmcf of gas and 249,490 bbls of oil.  Daily production from these leases was
approximately 494 mcf of natural gas per day and approximately 72 BOPD at March
31, 1997.

     4.   Osage County, Oklahoma Properties.  Also as a result of the
          ---------------------------------                          
Performance acquisition, the Company has a 100% working interest in 31 leases in
Osage County, Oklahoma covering approximately 8,680 acres.  The 31 leases
contain 143 producing wells and 159 non-producing wells, including a certain
number of salt water disposal wells.  Drilling to date has established proved
developed producing reserves estimated at 1,061 mmcf of gas and 479,380 bbls of
oil.  Daily production from these leases was approximately 257 mcf of natural
gas per day and approximately 173 BOPD at March 31, 1997.

     5.   ZCA Pipeline Region, Osage County, Oklahoma.  As a result of the ZCA
          --------------------------------------------                      
acquisition, the Company presently has a 100% working interest (83.333% net
revenue interest) in a Blanket Lease covering approximately 64,160 acres in
Osage County, Oklahoma. The Lease contains 30 producing wells and 7 non-
producing wells, including a certain number of salt water disposal wells.
Drilling to date has established 2,921 mmcf of gas and 14,750 bbls of oil. Under
the terms and conditions of the Company's Lease Agreement with the Osage Indian
Tribe, the Company must nominate 10,080 acres or 63 non-producing or undeveloped
quarter sections at the end of each lease year for release. Once nominated, the
Company then has one year within which to drill a new well or recomplete an
existing well on the quarter nominated sections. At the end of the nominating
year, the quarter sections which remain undeveloped will be released back to the
Osage Indian Tribe and will be deleted from the Blanket Lease. The nomination
and release program will continue until only quarter sections which contain a
developed producing well will remain subject to the Lease. Daily production from
these leases was approximately 238 mcf of natural gas per day and approximately
8 BOPD at March 31, 1997.

                                       11
<PAGE>
 
     To the best of management's knowledge and belief, remaining interests in
the wells in which the Company owns an interest are owned by independent third
parties. The following table summarizes gross and net interest producing wells,
gross and net developed acres and proved reserves of the Company at March 31,
1997. Unless otherwise stated, all wells are gas wells.

                                   TABLE III
                              DEVELOPED PROPERTIES

<TABLE> 
<CAPTION> 

                                                                                                      PROVED RESERVES
                                                                                                      ---------------
                                            Producing                               
                                            Wells                    Acres                  Oil (Bbls)               Gas (mmcf)
                                            -----                    -----                  ----------               ----------
Property                 Location      Gross       Net          Gross       Net          Gross       Net          Gross       Net
--------                 --------      -----       ---          -----       ---          -----       ---          -----       ---
 <S>                    <C>            <C>         <C>          <C>        <C>           <C>        <C>           <C>        <C> 
Havana-
Chautauqua
Pipeline                Chautauqua       13        13           2,783      2,783         24,560     21,490        3,134      2,613
Region                  County, KS

------------------------------------------------------------------------------------------------- --------------------------------
Peru-Hale
Pipeline                Chautauqua       11        11/1/        1,998      1,998         31,220     27,310        2,289      1,888
Region                  County, KS

------------------------------------------------------------------------------------------------- --------------------------------
Osage                   Osage
Region                  County, OK      143       143/2/        8,680      8,680        585,460    479,390        1,300      1,060

------------------------------------------------------------------------------------------------- --------------------------------
ZCA Pipeline            Osage
Region                  County, OK       30        30/3/       64,160     64,160/5/      18,110     14,750        3,524      2,921
 
------------------------------------------------------------------------------------------------- --------------------------------
Central                 Kay, Noble &
Oklahoma                Logan            23        23/4/        1,440      1,440        296,180    249,490        1,468      1,226
Region                  Counties, OK
------------------------------------------------------------------------------------------------- --------------------------------
TOTALS                                  220       220          79,061     79,061        955,530    792,430       11,715      9,708
 
</TABLE>

------------------------------------
     1    Includes two oil wells.

     2    Includes 140 oil wells.

     3    Includes six oil wells.

     4    Includes 22 oil wells.

     5    Portions of this acreage are subject to drilling obligations to hold
          the acreage. In addition, a third party has the right to earn to 50%
          interest in wells drilled on this acreage.

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

                                       12
<PAGE>
 
RESERVES

     Included below is selected information from reports of an independent
petroleum engineering firm retained by the Company for the assets presently
owned by the Company.  Information is taken from reports of Petroleum
Consultants, Inc. ("PC") and were prepared for the Company.  These examinations
included the following:

     1.   A study and evaluation of the oil and gas reserves and production for
the Company properties, during the fiscal years ending March 31, 1997, 1996 and
1995;

     2.   Tests to estimate the Company's proved oil and gas reserves to project
timing of future production from proved reserves and project timing of future
production and expenditures required to develop proved undeveloped reserves
based upon current costs, assuming continuation of existing economic conditions;
and

     3.   Other such procedures and examinations which PC considered necessary
under the circumstances.

     The following factors are applicable to the tables set forth below with
respect to the Company's estimated proved reserves and estimated future oil and
gas revenues:

     1.   Non-escalated Basis Reporting.  All estimates are made on the basis of
          -----------------------------                                         
non-escalated reporting.  This estimate of reserves, estimated future net
revenues and present value of estimated future net revenues, is based upon the
assumption that oil and gas prices will remain at current levels and that
production costs will not escalate in the future.

     2.   Oil and Gas Prices and Operating Costs.  Information contained in the
          --------------------------------------                               
reserve reports is based on certain assumptions regarding prices of oil and gas,
operating costs and future investment necessary to produce hydrocarbons. The
1997 report assumes current field prices of $18.25 per barrel of oil and $1.08
or $1.14 per mcf of gas for the Company's Kansas properties, depending upon
which pipeline the lease is connected; $20.98 per barrel for oil and $1.12 per
mcf of gas located on the Osage County properties; $1.36 per mcf for the
Company's central Oklahoma properties except for the Williams lease, which was
$1.53 per mcf and the Company operated wells in Logan County, Oklahoma, where
the per mcf price was $1.67; and the ZCA properties where the price per barrel
for oil was $20.98 and the price per mcf for gas was $1.06. The 1996 report
assumes oil prices of $19.50 and $20.70 per barrel for the properties located in
Kansas and Oklahoma respectively, and gas prices of between $1.00 and $2.00,
depending on which pipeline the lease is connected. The 1995 report assumes oil
prices of $17.25 per barrel for oil and prices of either $.87 or $1.24 per mcf
for natural gas, depending upon which pipeline the lease is attached. Average
monthly operating expenses were obtained from the Company, as were investments
necessary for additional development.

                                       13
<PAGE>
 
     3.   Proved Developed and Undeveloped Reserves.  The following tables take
          -----------------------------------------                            
into account total proved reserves, defined as those quantities of crude oil,
natural gas and natural gas liquids which, upon analysis of geologic and
engineering data, appear with reasonable certainty to be recoverable in the
future from known oil and gas reservoirs under existing economic and operating
conditions.  Proved reserves have been limited to those quantities of oil and
gas which can be expected with little doubt to be recoverable commercially at
current prices and costs, under existing regulatory practices and with existing
conventional equipment and operating methods.  Proved developed reserves are
limited to those reserves expected to be produced from completion intervals now
on production in existing wells or reserves existing behind the casing of
existing wells or at minor depths below the present bottom of such wells which
are expected to be produced in the predictable future, where the cost of making
such oil and gas available for production is relatively small compared to the
cost of a new well.  Proved undeveloped reserves are proved reserves which are
expected to be recovered from new wells on undrilled acreage or from existing
wells where a relatively major expenditure is required for recompletion.

     The following tables set forth the estimated proved developed and proved
undeveloped oil and gas reserves of the Company as of March 31, 1997, 1996 and
1995.

                                  TABLE IV/1/
                      REMAINING RESERVES AT MARCH 31,1997
                      -----------------------------------

                                                         Natural Gas
                        Crude Oil & NGL's                ------------
                        Gross        Net                 Gross      Net
                        -----        ---                 -----      ---
                        bbls         bbls                Mmcf       Mmcf

Proved Developed
Producing              699,570      579,830              3,956      3,064
Nonproducing            81,450       68,040              3,905      3,313
                       -------      -------             ------      -----
Subtotal               781,020      647,870              7,861      6,377
                                          
Proved Undeveloped     174,510      144,560              3,854      3,331
                       -------      -------             ------      -----
                                          
TOTAL PROVED           955,530      792,430             11,715      9,708
                       =======      =======             ======      =====

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

     1  For a description of the decrease in Company reserves from March 31,
     1996 to March 31, 1997, see "Decrease in Reserves for Fiscal 1997" below.

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

                                       14
<PAGE>
 
                                    TABLE V
                                    -------
                      REMAINING RESERVES AT MARCH 31,1996
                      -----------------------------------

                                                         Natural Gas
                        Crude Oil & NGL's                ------------
                        Gross        Net                 Gross      Net
                        -----        ---                 -----      ---
                        bbls         bbls                Mmcf       Mmcf
 
Proved Developed
Producing              710,992      580,850              1,951      1,451
Nonproducing           102,038       87,682              3,350      2,873
                       -------      -------              -----      -----
   Subtotal            813,030      668,532              5,301      4,324
 
Proved Undeveloped   1,418,453    1,128,787              5,923      5,176
                     ---------    ---------              -----      -----
 
TOTAL PROVED         2,231,483    1,797,319             11,224      9,500
                     =========    =========             ======      =====
 
                                    TABLE VI
                                    --------
                       Remaining Reserves March 31, 1995
                       ---------------------------------
                                                         Natural Gas
                        Crude Oil & NGL's                ------------
                        Gross        Net                 Gross      Net
                        -----        ---                 -----      ---
                        bbls         bbls                Mmcf       Mmcf 

Proved Developed
Producing                2,777       2,432                 260        160
Nonproducing            76,480      66,915               2,090      1,828
                        ------      ------               -----      -----
   Subtotal             79,257      69,347               2,350      1,988
 
Proved Undeveloped      14,491      12,685               5,097      4,460
                        ------      ------               -----      -----
 
TOTAL PROVED            93,748      82,032               7,447      6,448
                        ======      ======               =====      =====

     Decrease in Reserves for Fiscal 1997.  The substantial decrease in reserves
     ------------------------------------                                       
from March 31, 1996 to March 31, 1997 is attributable to an adjustment in
estimates of reserves. The greatest component of the downward adjustment is
attributable to a proposed secondary recovery project in Oklahoma. A particular
field was estimated to have reserves recoverable from a water flood project
proposed to be undertaken in the future.

     During fiscal 1997, the geological staff and engineering consultants of the
Company performed further analysis of these lease wells to determine the
feasibility of installing the proposed field-wide water flood.  The Company's
further analysis indicated that the reservoir targeted for 

                                       15
<PAGE>
 
secondary recovery did not have characteristics suitable for a large scale water
flood project and the expenditures for such a project would bear considerable
risks. At the conclusion of this analysis, the Company and its independent
engineering consultants decided to eliminate these reserves for fiscal 1997. The
Company hopes to modify the proposed water flood program on this lease starting
with a smaller pilot project. Reserves for this modified program have not yet
been determined by the Company or its engineers.

     Increase in Reserves for Fiscal 1996.  The substantial increase in
     ------------------------------------                              
estimated reserves at March 31, 1996 compared to those estimates at March 31,
1995 is attributable to the acquisition of Performance Petroleum. That
acquisition added an estimated 1,772,427 bbls of oil and 2,336 mmcf of natural
gas.

     The Company emphasizes that reserve estimates are inherently imprecise and
that estimates of new discoveries are more imprecise than those of producing oil
and gas properties.  Accordingly, the estimates may change as future information
becomes available.

     The Company did not file any reports pertaining to its reserves with any
governmental authority or agency, other than the information contained in this
Report, during the period ended March 31, 1997, or thereafter.  The Company does
not have any reserves subject to long-term supply or similar agreements with
foreign governments or authorities.

     Following is information provided by the Company's independent engineers
concerning the estimated future oil and gas revenues of the Company's estimated
proved oil and gas reserves net of future operating and development costs and
the present value of estimated future net revenues from proved oil and natural
gas reserves calculated on a 10% non-escalated basis.  No provision has been
made for Federal income tax and accordingly, the disclosures in these tables
differ slightly from the disclosure in the Financial Statements.  For further
information concerning the Company's oil and gas reserves, see "ITEM 7.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA."

                                   TABLE VII
                                   ---------

                       Estimated Future Net Revenues from
                    Proved Net Oil and Natural Gas Reserves
                             (non-escalated basis)
 
                         March 31, 1997   March 31, 1996   March 31, 1995  
                         --------------   --------------   --------------
                            ($000's)         ($000's)         ($000's)
Proved Developed:
    Producing                $ 7,704         $ 7,186           $   71
    Nonproducing               3,306           3,777            2,048
                             -------         -------           ------
Subtotal                      10,740          10,963            2,119
                                                     
Proved Undeveloped           $ 4,013          23,407            1,786
                             -------         -------           ------
                                                     
TOTAL PROVED                 $14,753         $34,370           $3,905
                             =======         =======           ======

                                       16
<PAGE>
 
     The substantial decrease in estimated future net revenues as of March 31,
1997 is primarily attributable to the Company's determination that reserve
estimates for certain Company owned properties should be decreased pending
further study of an anticipated water flood recovery program. (See - "Decrease
in Reserves for Fiscal 1997").

     The substantial increase in estimated future net revenues during the year
ended March 31, 1996 is attributable to the acquisition of Performance
Petroleum.  Properties associated with that acquisition contribute $27,186,734
of the estimated future net revenues at March 31, 1996.

                                   TABLE VIII
                                   ----------

                           Present Value of Estimated
                            Future Net Revenues from
                      Proved Oil and Natural Gas Reserves
                        (based upon a 10% discount rate)
                             (non-escalated basis)
 
                      March 31, 1997   March 31, 1996   March 31, 1995
                      ---------------  ---------------  ---------------
                         ($000's)         ($000's)         ($000's)
 
Proved Developed
Producing                 $5,013           $ 5,178          $   63
Nonproducing               2,074             2,679           1,463
                          ------           -------          ------      
Subtotal                   7,087             7,857           1,526      
Proved Undeveloped         2,549            11,846           1,086      
                          ------           -------          ------      

TOTAL PROVED              $9,636           $19,703          $2,612       
                          ======           =======          ======
                                                                       
TITLES

     The Company acquired substantially all its properties from third parties
through acquisition. The properties acquired from Cirque were based upon the
warranties and representations as to good title made by the officers and
directors of that entity.  The assets acquired from the remaining entities were
acquired in an "as is, where is" basis.  While the Company has not or did not
obtain warranties of title in every case, management undertook procedures
designed to be reasonable under the circumstances prior to the acquisition to
confirm the status of those titles.

     Although the Company does not intend to regularly investigate titles to oil
and gas leases when acquiring unproven acreage, it proposes to do so before any
drilling or development is undertaken.  Status of title on unproved acreage is
determined by the representations and warranties of the seller delivered at
closing.  However, the Company acquires a title opinion from an attorney prior
to making any substantial expenditures on a property.  Management believes that
its practices are consistent with industry standards.

                                       17
<PAGE>
 
     The methods of title examination adopted by the Company are reasonably
calculated, in the opinion of management of the Company, to insure that
production from its properties, if obtained, will be readily saleable for the
account of the Company.  Certain of the Company's producing properties have been
subject to independent title investigations and such titles have been accepted
by the Company.  Insofar as is known to the Company, there is no material
litigation pending or threatened pertaining to its proved acreage.  With respect
to the rights-of-way, easements and site leases required for the components of
the Company's gathering systems, title to the underlying land may be subject to
certain defects and encumbrances, none of which are, in the opinion of
management of the Company, material in relation to the Company's property and
operations.

FACILITIES

     During the fiscal year ended March 31, 1997, the Company's executive and
administrative offices  were located at 1901 New Street, Independence, Kansas
67301.  The Company  occupied this space on a month to month basis pursuant to a
lease arrangement with Mr. Terry Carroll and his wife, Violet M. Carroll.

     Effective August 7, 1997, the Company relocated its executive and
administrative offices to 1560 Broadway, Suite 1900, Denver, Colorado, pursuant
to a Cost and Expense Sharing Agreement with Benson Mineral Group, Inc., an
affiliate of Bruce D. Benson.  Pursuant to that Agreement, the Company shares
approximately 8,450 square feet of office space and certain personnel of BMG
with that entity.  The Company pays its prorata share of office rent, personnel
costs, administrative costs and expenses to BMG.  

     The Company  owns a non-operating crude oil refinery located near Corpus
Christie, Texas. This refinery has an estimated processing capacity of
approximately 10,400 BOPD and miscellaneous storage tanks with capacity of
approximately 125,000 bbls.  Included within the company's interest in the
refinery facility is approximately 100 acres of real estate, 80 of which are
presently undeveloped and the balance of which contain the refinery.

EMPLOYEES

     At March 31, 1997, the Company had approximately 26 employees, including
its President/Treasurer and its Vice President/Secretary.  In addition to its
executive officers, the Company  employed a field supervisor, a geologist,
accounting and administrative staff and various field personnel.  The Company
also engages independent contract laborers to supplement the services of its
employees on an as-needed basis.  At March 31, 1997, the Company engaged
approximately three contract laborers in its field operations.

     Effective August 7, 1997, Bruce D. Benson became President, Chief Executive
Officer and Chairman of the Board of Directors of the Company.  He serves in
those capacities pursuant to an Executive Employment Agreement at the will of
the Board of Directors.  Mr. Benson is paid a minimum annual salary of $150,000
pursuant to this Agreement.

                                       18
<PAGE>
 
     The Company may engage additional employees as its business requires in the
future.

COMPETITION

     The Company competes with numerous other firms and individuals in its
activities.  The Company's competitors include major oil companies and other
independent operators, most of which have financial resources, staffs and
facilities substantially greater than those of the Company. Competition in the
oil and gas industry is intense.

     The Company also faces intense competition in obtaining risk capital for
drilling its prospects and acquiring other assets and may be at a competitive
disadvantage compared with more established companies with proven records of
successful operations.  The competition to obtain drilling funds far exceeds the
funds available, and the Company can make no assurance that it will be able to
obtain such funding.  Management believes that competition for drilling funds is
principally dependent upon an analysis of the potential source of revenues, the
cost of drilling and related activities, the likelihood of discovering oil or
other hydrocarbons in commercial quantities, and the potential size of oil
reserves which may be eventually established.

     In its efforts to obtain additional leases, the Company will encounter
competition from lease speculators, independent oil firms and major oil
companies, many of which have larger financial and other resources than the
Company.  The ability to acquire leases is generally determined by the amount of
cash paid to acquire the lease, the royalty or other interest retained by the
transferor, and the nature of any commitment to drill on the leased acreage.  In
the case of a drilling commitment, the ability to acquire leases is also
determined by the perception of the leaseholder of the Company's ability to
perform such commitment.

GOVERNMENT REGULATION

     The production and sale of oil and gas is subject to Federal and state
governmental regulations, including the imposition of excise taxes, the
prevention of waste, conservation, pollution controls and price regulations.
Most states may regulate the rate of well production and establish maximum daily
production allowances, as well as having requirements for obtaining drilling
permits, the spacing and operation of wells and other matters.  In addition, the
Federal government can increase imported oil and gas quantities or impose
various regulations in the future.

     The Company's sales of natural gas are subject to regulation by FERC under
the Natural Gas Policy Act of 1978 (the "Act").  Most natural gas pricing is
presently deregulated and the remaining regulation has no material impact on
prices received by the Company.  It is not possible to predict the long-term
impact of future natural gas price regulation or deregulation.  The Company's
activities are subject to existing Federal and state regulations governing
environmental quality and pollution control.  Such regulations have not had a
significant effect upon the capital expenditures, earnings or competitive
position of the Company.

                                       19
<PAGE>
 
MISCELLANEOUS

     There are no patents, trademarks, licenses, franchises or concessions held
by the Company.

     The oil and gas business is generally not seasonal in nature, although
unusual weather extremes for extended periods may increase or decrease demand
for oil and gas products.

ITEM 3.   LEGAL PROCEEDINGS

     No material legal proceedings to which the Company (or any of its officers
or directors in their capacities as such) is a party or to which the property of
the Company is subject is pending and no such legal proceeding is known by
management of the Company to be contemplated.

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

     No matters were submitted to a vote of security holders of the Company
during the fourth quarter of the fiscal year covered by this Report.

ITEM 5.   MARKET FOR REGISTRANT'S SECURITIES AND RELATED SHAREHOLDER MATTERS

     The Company's Common Shares are traded in the over-the-counter market.
Commencing April 1, 1993, the Common Shares were approved for listing in the
National Association of Securities Dealer's Automated Quotation System
("NASDAQ") under the symbol "USXP".  The following table sets forth the range of
high and low bid quotations as reported for the Common Shares of the Company for
the periods indicated as reported in NASDAQ.  Quotations represent prices
between dealers, and do not include retail markups, markdowns or commissions,
and do not necessarily represent prices at which actual transactions were
effected.
 
                                   COMMON SHARES
                                   HIGH     LOW
                                   ----     ---
FISCAL YEAR 1997                         
----------------                         
First Quarter                            
(April 1 to June 30)               $1.19    $ .63
                                         
Second Quarter                           
(July 1 to Sept. 30)               $5.63    $ .69
                                         
Third Quarter                            
(October 1 to Dec. 31)             $5.38    $3.63
                                         
Fourth Quarter                           
(January 1 to March 31)            $4.38    $2.81

                                       20
<PAGE>
 
FISCAL YEAR 1996
----------------
First Quarter
(April 1 to June 30)               $1.03    $ .56
                                            
Second Quarter                           
(July 1 to Sept. 30)               $1.47    $ .91
                                         
Third Quarter                               
(October 1 to Dec. 31)             $1.50    $ .75
                                         
Fourth Quarter                              
(January 1 to March 31)            $1.44    $ .69
                                          
     The number of record holders of the Common Shares as of March 31, 1997 was
402, including nominees of beneficial owners. The Company estimates that there
were approximately 1,500 beneficial owners of its Common Shares as of that
date.

     Holders of the Common Shares are entitled to receive such dividends as may
be declared by the Company's Board of Directors.  No dividends on the Common
Shares have been paid by the Company to date nor does the Company anticipate
that dividends will be paid in the foreseeable future.  The Series "C" Preferred
Stock of the Company currently outstanding prevents the Company from paying any
dividends until the Series "C" Preferred Stock is redeemed.

                                       21
<PAGE>
 
ITEM 6.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
          RESULTS OF OPERATIONS

INTRODUCTION

     Portions of the section include "forward looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995.  (See Note
regarding forward looking statements, Page iv of this Report)

     Effective September 1, 1995, the Company acquired all the outstanding stock
of Performance Petroleum Corporation and Pacific Osage, Inc.  Effective October
1, 1996, the Company acquired all of the outstanding stock of Argas, Inc. and
ZCA .  The Consolidated Financial Statements of the Company include  the assets
of these combined entities and results of operations for these subsidiaries from
the effective date of acquisition, together with the assets and operations of
the Company's other wholly owned subsidiaries, USX Operating Co., Inc. and
Producers Service, Inc.

LIQUIDITY AND CAPITAL RESOURCES

March 31, 1997
--------------

     The financial position of the Company improved dramatically during the
fiscal year ended March 31, 1997, primarily as a result of a private placement
of equity securities conducted during the year.  Working capital increased from
a deficit of $957,641 at March 31, 1996, to a positive $17,062,422 at March 31,
1997, an increase of $18,020,063.  Current assets increased from $838,595 at
March 31, 1996 to $17,593,425 at March 31, 1997, reflecting receipt of proceeds
by the Company from sale of a new class of Preferred Stock in this private
placement.  In addition to a substantial increase in cash, cash equivalents and
a certificate of deposit, the increase in current assets was affected by an
increase in accounts receivable in the approximate amount of $200,000.  Such
increase results from increased operations of the Company and reflects the
increased sale of oil and gas to third parties.  Accounts payable and accrued
liabilities also increased as a result of this increase in operations, although
in a smaller amount than the increase in accounts receivable.

     Management is of the opinion that the Company has sufficient liquidity and
working capital for the foreseeable future.  The Company has no existing
commitments for capital expenditures at year end.  The Company's focus during
fiscal 1998 will be to invest its capital in the exploration, development and
acquisition of oil and gas properties in an effort to increase cash flow and
profitability.

     The Company completed a private placement of equity securities during the
second and third fiscal quarters of 1997.  The Company sold 4,000,000 shares of
a newly created Series "C" Preferred Stock to qualified investors pursuant to an
exemption from the registration requirements of Federal and state securities
laws.  Proceeds from the offering of $24,000,000 were budgeted for development
of currently owned property, acquisition and development of additional property
and repayment of debt.  The Preferred Stock carries a cumulative dividend of 8%
per annum.  During the year ended March 31, 1997, the Company paid or accrued
dividends of  $360,000.  The Series "C" Preferred 

                                       22
<PAGE>
 
Stock is redeemable at the Company's option at any time at the issue price of
$6.00 per share, plus accrued but unpaid dividends. Subject to certain anti-
dilution provisions which are not yet applicable, the Preferred Stock is
convertible at the holder's option into two shares of Common Stock for each
share of Preferred until the stock is redeemed by the Company, if ever. The
Series "C" Preferred Stock has a liquidation preference of $6.00 per share.

     A portion of the proceeds of the private placement were utilized during
fiscal 1997 to reduce debt and acquire additional assets.  The Company repaid
term debt in the amount of $6,615,210, originally acquired in connection with
the acquisition of Performance and Pacific-Osage.  As a result of that
repayment, the Company was debt free at March 31, 1997.  The Company also paid
$1,481,000 to acquire additional oil and gas leases and $674,731, net of cash
received, to acquire ZCA and Argas.  It is anticipated that these acquisitions
will assist in expanding the Company's operations during fiscal 1998.

     Cash flow from operations also contributed to an increase in working
capital during fiscal 1997.  Cash flow from operating activities for the year
was $1,316,118, compared to $59,382 for the year ended March 31, 1996.
Material, non-cash adjustments affecting cash flow, include depreciation,
depletion and amortization in the amount of $1,100,749, a provision for
impairment of assets in the amount of $321,397 and equity in the net income in a
joint venture in the amount of $87,753.  Material changes in current assets and
liabilities affecting cash flow include a decrease in accounts receivable of
$103,800, an increase in accounts payable in the amount of $86,134 and a
decrease in amounts due related parties of $160,711.  The Company also realized
a decrease in amounts due from related parties in the amount of $18,795.

     Finally, the Company received proceeds from the exercise of outstanding
stock options during fiscal 1997, contributing to its overall cash flow.
Options to acquire 1,015,700 shares of Common Stock were exercised by  former
officers, directors and consultants, resulting in net proceeds to the Company of
$669,585.  Those proceeds were added to Company's working capital and utilized
for operations.

March 31, 1996
--------------

     During fiscal 1996, the Company realized its short-term objective of
expanding operations through the acquisition of producing oil and gas assets.
The Company completed the acquisition of Performance and Pacific Osage effective
September 1, 1995.  While management believes those acquisitions have improved
the Company's financial condition, its liquidity and working capital were
adversely effected during the year ended March 31, 1996.

     The working capital deficit at March 31, 1996 was $957,641 compared to a
deficit of $850,880 at March 31, 1995, an increase of $106,761.  Current assets
and current liabilities both increased during fiscal 1996, although current
liabilities increased in a greater amount.  The greatest factor affecting the
decrease in working capital was debt associated with the acquisition of
Performance and Pacific Osage.  Those acquisitions were financed with a term
loan in the amount of $6.8 million, of which approximately $1.2 million was
classified as a current liability at March 31, 

                                       23
<PAGE>
 
1996. This note was payable at the rate of $141,000 per month until July, 1997,
when the remaining balance was due and payable in full. The note represented the
Company's greatest need for liquidity and working capital during 1996.

     The Company relied primarily on cash flow from operations to service this
debt during fiscal 1996.  However, during the latter portion of the fiscal year,
when the monthly payments rose to $141,000, cash flow from operations was
insufficient to make the required payments.  As a result, the Company relied on
restricted cash to satisfy the balance.  Restricted cash (available only for
repayment of then-existing term debt) at March 31, 1996 represented  proceeds of
asset or equity sales made by the Company subsequent to execution of the
promissory note in September, 1995.  At March 31, 1996, the Company had
remaining restricted cash of approximately $75,000  with which to service the
debt.  As a result of its limited cash and insufficient cash flow, management
anticipated that the Company required additional cash from outside sources to
make the monthly payments during fiscal 1997 and pay the remaining balance when
the note matured  in July, 1997.  The private placement in fiscal 1997
accomplished that objective.

     During fiscal 1996, the Company relied principally on proceeds of the term
loan and proceeds from the exercise of stock options to provide capital for
development of oil and gas properties and finance the acquisitions of
Performance and Pacific.  The Company also repaid debt to a different lender in
the amount of $397,000.  Proceeds from the exercise of stock options totaled
$286,500, substantially all of which was received from a consultant to the
Company.

     Debentures outstanding during fiscal 1995 were converted to equity  during
fiscal 1996.  In connection with the acquisition of Performance and Pacific, the
Company agreed to conversion of the Debentures into shares of its common stock
in accordance with the provisions of the Debenture instrument.  As a result of
that transaction, debt and accrued interest in the amount of $500,000 was
converted from current liabilities to stockholders' equity and an additional
2,000,000 shares of common stock were issued by the Company.  A substantial
portion of those 2,000,000 shares of common stock are now owned by the former
owners of Performance.

     Management's efforts to generate additional cash through the acquisition of
producing properties was successful, as the Company's operations generated
approximately $60,000 of cash during fiscal  1996.  This compares to fiscal
1995, when the Company's operations used approximately $235,000 in cash.
Despite this improvement, however, the Company continued to require cash from
outside sources to service its debt during 1996 and expand its operations.
The Company also owns a crude oil refinery, equipment and real estate located in
the State of Texas, which are held for resale.  However, the Company's efforts
to market these assets have continued since calendar 1994, with no definitive
agreement to-date.

     Substantially all of the increase in current assets during 1996 is
attributable to the acquisition of Performance and Pacific.  The increase in
cash and accounts receivable at March 31, 1996 were directly attributable to the
increased production from the Performance properties and sales and operations
from Pacific Osage.  The increase in inventories from fiscal 1995 to fiscal 1996
is associated with the parts and supplies store operated by Pacific Osage.  The
increase in liabilities is also primarily attributable to the acquisition of
Performance and Pacific.  In addition to current 

                                       24
<PAGE>
 
maturities of the long term debt, both accounts payable and amounts due related
parties increased during fiscal 1996. Such increases are also attributable to
the operations of Performance and Pacific.

RESULTS OF OPERATIONS

Year Ended March 31, 1997
-------------------------

     During the fiscal year ended March 31, 1997, the Company realized a net
loss of $87,530 on revenues of $4,513,387.  This compares to a net loss of
$786,165 for the year ended March 31, 1996. Taking into account the  Preferred
Stock dividends applicable to the period of $884,250, the net loss for fiscal
1997 equates to $0.13 per share, compared to a net loss of $0.19 per share
during fiscal 1996.  Excluding provision for the impairment of assets, the
Company would have realized a profit of $233,867 for the year ended March 31,
1997 before provision for the Preferred Stock dividends.

     The improved operations for fiscal 1997 are primarily attributable to
acquisitions completed during fiscal 1996 and 1997, together with increased oil
and gas prices during 1997 compared to those prevailing during 1996.  Revenues
from the sale of purchased gas increased $554,876, or approximately 77%.  This
increase is primarily attributable to the acquisition of Argas, Inc. and ZCA
during 1997.  Concurrent with this increase in revenues, costs of purchased gas
and gas transportation costs associated with these acquisitions increased in
approximately the same amount. Revenues from the sale of Company-produced oil
and gas increased $1,373,089, or approximately 98%.  Of that amount,
approximately $377,000 is attributable to the acquisition of assets during
fiscal 1997.  Operating costs associated with those acquired properties were
approximately $177,000 exclusive of depreciation, depletion and amortization
The remaining increase in revenue is primarily attributable to the acquisition
of Performance Petroleum, acquired during fiscal 1996.  Finally, revenues from
contracting and oil field supplies decreased $43,430 from 1996 to 1997, as the
Company determined to discontinue operation of its drilling subsidiary.

     Increased oil and gas prices also contributed to the increase in revenues
during fiscal 1997. The Company received an average of $2.57 per mcf of gas and
$20.25 per bbl of oil during 1997, compared to $1.74 and $16.48 during 1996,
respectively.

     Primarily as a result of  recent acquisitions, the Company's revenues  were
sufficient to offset operating expenses, together with general and
administrative costs.  However, the Company experienced a loss during 1997 as a
result of impairments discussed below.  Operating expenses increased from fiscal
1996 to 1997,  but at a lower rate than revenues.  General and administrative
expenses actually decreased, from $544,915 for the year ended March 31, 1996 to
$505,417 for the year ended March 31, 1997.  Part of that decrease is
attributable to the Company's president serving without compensation during
fiscal 1997.

     Other income of $75,237 includes chart income of $20,625, resulting from
meter reading services provided by the Company.  Settlement of a dispute with a
gas purchaser resulted in additional income of $25,000.

                                       25
<PAGE>
 
     Other factors affecting the Company's loss are interest income and expense.
Interest income increased from $2,064 from fiscal 1996 to $346,294 in fiscal
1997, as a result of temporary investment of the proceeds of the private
placement.  Interest expense decreased slightly from fiscal 1996 to 1997, from
$367,299 to $307,455.  Such expense was attributable to the term debt incurred
by the Company in connection with the acquisition of Performance and Pacific-
Osage.  It is not anticipated that such interest expense will be repeated during
fiscal 1998, as the Company is presently debt free.

     The loss for fiscal 1997 included provision for impairment of assets in the
amount of $321,397.  Such amount included a write-down of the Company's
investment in oil and gas assets in the amount of $41,432 based upon its oil and
gas reserve estimate at March 31, 1997 compared to the amount recorded for such
investment.  During the fourth quarter, the Company also decided to discontinue
its drilling and service business formerly conducted by a wholly-owned
subsidiary, USX Operating Co.  As a result of that decision, the Company made
adjustments totaling $246,000 to write-down equipment, goodwill and supplies
inventory to their liquidation or fair values.  Finally, the Company recorded an
additional impairment reserve of $65,000 to adjust the gas stripping plant and
other assets to their net realizable values.

     The continuing operations of the drilling and servicing contractor,
exclusive of the impairment provision, had a minimal effect on costs in 1997.
During 1998, management expects a significant reduction in operating overhead
formerly associated with the drilling subsidiary. Accordingly, the effect on
operations for 1998 should be positive although the drilling and servicing
contractor did operate for a portion of the period.

     The Company's lack of profitability has historically been attributable to
having insufficient revenues to cover general and administrative expenses,
depreciation, depletion and amortization, in addition to operating costs.
During fiscal 1997, the increase of revenues was sufficient to cover such items.
However, the Company experienced extraordinary expenses in the form of
impairments described above.  In order to achieve profitability in the future,
the Company must increase revenues sufficient to cover all expenses, including
the dividend payable to Preferred shareholders.  Prior management's efforts have
been, and current management's continue to be, focused on those objectives.

Year Ended March 31, 1996
-------------------------

     During the year ended March 31, 1996, the Company lost $786,165 on total
revenues of $2,536,788.  Total revenue increased $1,165,767 from the year ended
March 31, 1995, or 85%.  This substantial increase in revenues resulted from the
acquisition of Performance and Pacific, which operations were included with
those of the Company effective September 1, 1995.  The net loss for the year
also decreased, from ($829,149) for the fiscal year ended March 31, 1995 to
($786,165) for the fiscal year ended March 31, 1996.  During fiscal 1997, the
operations of Performance and Pacific will be integrated for the entire year.

                                       26
<PAGE>
 
     The greatest component of the increase in revenues during the year ended
March 31, 1996 was sale of Company-produced oil and gas.  Revenues from the sale
of the Company-produced oil and gas increased from $98,726 for the year ended
March 31, 1995 to $1,399,195 for the year ended March 31, 1996.  This increase
is primarily attributable to the acquisition of Performance and the accompanying
properties owned by that entity, and to a lesser extent, improving natural gas
prices. Oil and gas production at March 31, 1996 was approximately 335 barrels
of oil and 1065 mcf of natural gas per day.  Sale of gas purchased from third
parties decreased from fiscal  1995 to 1996, as a result of a decreased volume
of gas transported by the Company during  1996.  That decline, in turn, is
attributable to declining reserves owned by third parties in proximity to the
gas gathering systems and shutting down the SEK gas gathering system.
Contracting, drilling and oil field supply sales remained generally constant.

     The Company's gross margin, defined as total revenues less direct operating
expenses (excluding depreciation, depletion, amortization and general and
administrative expenses) improved substantially during the year ended March 31,
1996 compared to fiscal 1995. The gross margin increased from $261,453 for the
year ended March 31, 1995 to $888,070 for the year ended March 31, 1996.
Notwithstanding this increase, the Company continued to experience a loss, as
income generated from field operations remain insufficient to offset
depreciation, depletion and amortization, which increased substantially during
the year ended March 31, 1996 due to the Company's acquisition of Performance
and Pacific.  Production costs also increased from fiscal 1995 to fiscal 1996,
as a greater proportion of the Company's production was attributable to oil and
its accompanying higher costs of production compared to natural gas.

     The greatest increase in other expenses included depreciation, depletion
and amortization, together with interest.  Depreciation, depletion and
amortization increased from $470,398 for fiscal 1995 to $718,021 for fiscal
1996.  This increase is associated with the acquisition of Performance and
accompanying oil and gas properties.  Interest expense also increased
substantially, from $64,212 for the year ended March 31, 1995 to $367,299 for
the year ended March 31, 1996.  This increase is associated with the term debt
incurred to acquire the Performance and Pacific properties.  General and
administrative expenses remain generally constant from fiscal 1995 to 1996.

ITEM 7.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     Reference is made to the Index to Financial Statements following Part IV of
this report for a listing of the Company's financial statements and notes
thereto.

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

     During the two most recent fiscal years, there have been no changes in, or
disagreements with, the Company's certified public accountants of the nature
requiring disclosure pursuant to this item.

                                       27
<PAGE>
 
                                    PART III

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

     The following table sets forth the names and ages of the members of the
Company's Board of Directors and its executive officers at March 31, 1997:
 
     NAME                       AGE          POSITION
     ----                       ---          --------
                                          
     Demetrie D. Carone          57          President, Chief Executive Officer,
                                             Chairman of the Board and Director
                                          
     Ronald R. McGinnis          61          Vice-President, Secretary
                                             and Director
                                          
     Jack MacIsaac               56          Director

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

     DEMETRIE D. CARONE. Mr. Carone  served as the President, Chief Executive
     ------------------                                                      
Officer, Chairman of the Board and a director of the Company  from September,
1996 to August, 1997.  Since 1977, Mr. Carone has also been president of WP&G
Distributing Co., Inc., a privately held Colorado corporation involved in the
wholesale distribution of dairy products.  From September, 1995 to January,
1997, Mr. Carone served as the president of Five Star Petroleum, Inc., a
privately-owned Oklahoma corporation involved in the exploration, development
and production of oil and gas and from which the Company acquired certain assets
during the fiscal year.  Prior to that, he was the president and a director of
Performance Petroleum Corporation and Pacific-Osage, acquired by the Company in
September, 1995.  Finally, from July, 1996 to August, 1997, he served as the
president and a director of ZCA .

     RONALD R. MCGINNIS.  Mr. McGinnis served as Vice President, Secretary and a
     ------------------                                                         
Director of the Company  from May 18, 1990 to August, 1997.  Mr. McGinnis serves
as the vice-president and a director of Wallstreet Racing Stables, Inc., a
publicly traded Colorado corporation engaged in the business of acquiring,
training and racing thoroughbred race horses.  He has occupied that position
since July, 1995.  From 1990 to January, 1997, Mr. McGinnis also served as the
vice-president and a director of Consolidated Capital of North America, Inc., a
publicly traded Colorado corporation engaged in the real estate industry.
Finally, from 1990 to 1995, Mr. McGinnis was the president, sole director and
shareholder of Argas Pipeline Company, a private Kansas corporation which owned
an interest in a gas gathering system.

       JACK MACISAAC.  Mr. MacIsaac  served as a director of the Company  from
       -------------                                                          
May 26, 1992 to August, 1997.  Since 1986, Mr. MacIsaac has been engaged as a
private investor.  Prior to that, he was employed in the real estate industry.

                                       28
<PAGE>
 
     Each director is serving a term of office which shall continue until the
next annual meeting of shareholders and until his successor has been duly
elected or appointed and qualified.  Officers of the Company serve at the
pleasure of the Board of Directors.  The Company held its last annual meeting of
shareholders on November  19, 1997.  None of the Company's officers or directors
are party to any material legal proceeding, nor are such legal proceedings
contemplated to the best information of such officers and directors.  No family
relationships exist between any of the officers and directors of the Company.

     COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES ACT OF 1934.

     The following information sets forth each officer, director or beneficial
owner of more than ten percent of any class of equity securities of the Company
registered pursuant to Section 12 of the 1934 Act who, based solely upon a
review of Forms 3, 4 and 5 received by the Company pursuant to Rule 16(a)-3 of
the 1934 Act, failed to file on a timely basis, Forms 3, 4 or 5 as required by
Section 16(a) during the most recent fiscal year or prior fiscal years:
 
Name of Reporting Person    Late Form 4  Late Form 5  No. of Transactions
--------------------------  -----------  -----------  -------------------
 
Thomas Stansfield                1            1                    1
Donald F. Dillon                 1            1                    2
Lancaster Ventures, LLC          1            1                    1

ITEM 10.  EXECUTIVE COMPENSATION

     All of the officers and directors of the Company  served without
compensation during fiscal 1997,  although each officer and director  was
entitled to participate in the Company's Incentive Stock Option and Non-
Qualifying Stock Option Plans and to be reimbursed for reasonable and necessary
expenses incurred on behalf of the Company.  The Company did not grant any stock
options to its officers or directors during fiscal 1997.  Finally, the Company
maintained no "key-man" life insurance policies on the lives of its officers or
directors during 1997, and maintains no such policies as of the filing of this
report.  However, the Company may enter into compensation arrangements with one
or more of its officers or directors in the future, as deemed reasonable and
prudent in the discretion of the Board of Directors.

     The following table summarizes the total compensation of the Chief
Executive Officer (the only "Named Officer") of the Company for the last fiscal
year:

                                       29
<PAGE>
 
                              SUMMARY COMPENSATION
                              --------------------
<TABLE> 
<CAPTION> 

                                                ANNUAL COMPENSATION        LONG TERM COMPENSATION
                                                -------------------        ----------------------
 
                                                             OTHER ANNUAL  RESTRICTED     STOCK     LTIP     ALL OTHER
NAME                         YEAR       SALARY   BONUS       COMPENSATION  STOCK AWARDS   OPTION    PAYOUTS  COMPENSATION
----                         ----       ------   -----       ------------  ------------   ------    -------  ------------
<S>                          <C>        <C>      <C>         <C>           <C>            <C>       <C>      <C>
 
DEMETRIE D. CARONE/1/,       1997       -0-         -0-      -0-           -0-             -0-      -0-      -0-
  CHAIRMAN OF THE BOARD,                                                                                     
   PRESIDENT AND CHIEF                                                                                       
   EXECUTIVE OFFICER.                                                                                        
TERRY L. CARROLL,            1997       $24,000                                                              
  CHAIRMAN OF THE BOARD,     1996        96,000     -0-      -0-           -0-             -0-      -0-      -0-
  CHIEF EXECUTIVE OFFICER    1995        96,000     -0-      -0-           -0-             -0-      -0-      -0-
  AND PRESIDENT.
</TABLE>
----------
    /1/   See Item 12 Certain Relationships and Related Party Transactions for a
          description of certain options issued the executive officer in
          connection with a previous acquisition.

----------

OPTION GRANTS FOR FISCAL 1996

The Company granted no options to its officers or directors during fiscal 1997.

VALUE REALIZED UPON EXERCISE OF OPTIONS

     The following table sets forth the value realized by the Named Officers
upon exercise of stock options during the last completed fiscal year and the
value of any unexercised options at the end of fiscal 1997:

    AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END
                               OPTION/SAR VALUES
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------
Name                      Shares           Value                 Number of                 Value of unexercised
                          acquired         realized              unexercised               in-the-money options/SARS's
                          on               ($)                   options/SAR's at          at Fiscal Year end ($)         
                          exercise ($)                           Fiscal Year end (#)       
                          exercisable/                           exercisable/
                          unexercisable                          unexercisable             
----------------------------------------------------------------------------------------------------------------------
<S>                       <C>              <C>                   <C>                       <C>
Terry L. Carroll          131,400          $   75,555/1/              -0-                            -0-
Demetrie D. Carone        480,000          $1,369,000/2/              -0-                            -0-
----------------------------------------------------------------------------------------------------------------------
</TABLE>
1.   On August 5, 1996, the reporting person exercised options to purchase
     131,400 shares of the Company's Common Stock at a purchase price of $.55
     per share. The value realized represents the difference between the
     exercise price and the last reported price of the stock as reported by the
     NASDAQ Stock Market.

2.   On May 30, August 1 and November 4, 1996 the reporting person exercised
     options to purchase 120,000, 25,000 and 335,000 shares of the Company's
     Common Stock at exercise prices of $.55, $.75 and $.75. The value realized
     reflects the difference between the exercise price on the purchase date and
     the last reported price for the stock on that date as reported by the
     NASDAQ Stock Market.

                                       30
<PAGE>
 
COMPENSATION OF DIRECTORS

     The Company reimburses the outside directors for reasonable expenses
incurred by them in attending meetings of the Board of Directors or of
Committees of the Board.  During fiscal 1997, the Company did not incur nor
reimburse any director for any such expenses.  Directors do not receive
compensation for their directorships over their normal compensation if also
employees, although the Company may provide such compensation in the future.

     INCENTIVE STOCK OPTION PLAN.  Effective January 13, 1989, the Company
     ---------------------------                                          
adopted an Incentive Stock Option Plan (the "Plan") and reserved a total of
1,000,000 Common Shares for issuance pursuant to the Plan.  The Plan, designed
as an incentive for key employees, is administered by a compensation committee
which is formed by the Board of Directors, which selects optionees and
determines the number of Common Shares subject to each option.  The Plan
provides that no option may be granted at an exercise price less than the fair
market value of the Common Shares of the Company on the date of grant.  Unless
otherwise specified, the options expire five years from date of grant.
Thereafter, options may be exercised in whole or in part, depending on terms of
the particular option.

     No options were granted pursuant to the Plan during fiscal 1997.  As of
March 31, 1997, there were no options outstanding under the Plan and 841,900
remain available for issuance.

     NONQUALIFYING STOCK OPTION PLAN.  Effective May 25, 1990, the Board of
     -------------------------------                                       
Directors adopted a Nonqualifying Stock Option Plan ("NQSOP") for the benefit of
non-employee directors of the Company and others having rendered significant
services to the Company.  To date, an aggregate of 2,900,000 Common Shares have
been reserved to be issued pursuant to the NQSOP.  The NQSOP is administered in
the discretion of the Board of Directors, who have the authority to select
optionees, determine the number of Common Shares subject to each option and the
exercise price per share. In determining the value of services rendered to the
Company by potential optionees, the Board considers, among other things, such
factors as the value of comparable services rendered by others in the community,
the benefits received by the Company and the availability of comparable
services. All options granted pursuant to the NQSOP were exercisable at a price
not less than the fair market value of the Common Shares at the time of grant.
Unless otherwise specified, the options expire ten years from the date of grant.

     As of March 31, 1997, three individuals or entities held options to acquire
an aggregate of 203,700 Common Shares at an exercise prices ranging from $0.55
to $3.00  per share.  During the fiscal year ended March 31, 1997, no options
were issued under the NQSOP.  Finally, options to acquire 716,200 Common Shares
remain available for issuance under the NQSOP.

                                       31
<PAGE>
 
ITEM 11.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     As of March 31, 1997, a total of 8,312,358 Common Shares, the Company's
only class of voting stock, were issued and outstanding.  The Company also had
outstanding 4,000,000 shares of Preferred Stock which  were convertible into
8,000,000 shares of Common Stock in the discretion of the holders.

     The following table sets forth as of March 31, 1997, certain information
with respect to the Company's Common Stock beneficially owned by (i) each then
executive officer and director of the Company; (ii) each person who owns
beneficially more than five percent (5%) of the Company's outstanding Common
Stock; and (iii) all then-directors and officers as a group.  Unless otherwise
stated, the address of each person listed  was the Company's address, 1901 New
Street, Independence, Kansas 67301, and the type of ownership is record and
beneficial.
<TABLE>
<CAPTION>
 
NAME AND ADDRESS OF                NUMBER OF            PERCENT OF CLASS
BENEFICIAL OWNER                   SHARES               BENEFICIALLY OWNED
----------------                   ------               ------------------
<S>                                <C>                  <C>
                                                  
Officers & Directors                              
--------------------                              
Demetrie D. Carone                 2,042,866/(1)/       24.69%
Jack MacIsaac                          4,000/(2)/       *
Ronald R. McGinnis                   321,515             3.87%
                                                        
Principal Shareholders                                  
----------------------                                  
Dale Jensen                        3,368,770/(3)/       32.67%
2417 Ridge Road                                         
Lincoln, Nebraska 68512                                 
                                                        
Donald F. Dillon                   1,132,818/(4)/       12.27%
6600 South 56th Street                                  
Lincoln, NE 68516                                       
                                                        
Thomas Stansfield                  1,377,000/(5)/       14.79%
7052 East Fremont Place                                 
Englewood, CO 80112                                     
                                                        
Jerome and Betty Fenna               432,134             5.1%
13631 Balsam Lane                                       
Dayton, MN                                              
                                                        
All Directors and Executive        2,368,381            28.33%
Officers as a Group (3 Persons)
</TABLE>
-------------------------
*    Less than 1%

                                       32
<PAGE>
 
        (1)  Includes 47,330 Common Shares underlying 23, 665 shares of the
        Company's 1996 Series  "C" Convertible Preferred Stock held by Mr.
        Carone.

        (2)  Includes Options to purchase 3,700 Common Shares under the
        Company's Non-Qualified Stock Option Plan.

        (3)  Includes 2,000,000 Common Shares underlying 1,000,000 shares of the
        Company's 1996 Series "C" Convertible Preferred Stock held by the
        reporting person.

        (4)  Includes 916,668 Common Shares underlying 458,334 shares of the
        Company's 1996 Series "C" Convertible Preferred Stock and 216,150 Common
        Shares of the issuer's securities held by Lancaster Ventures, LLC of
        which the named individual is the sole Member.

        (5)  Includes 1,000,000 Common Shares underlying 500,000 shares of the
        Company's 1996 Series "C" Convertible Preferred Stock held by the
        reporting person.

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

CHANGES IN CONTROL

     On August 19, 1997, the Company reported a change in control effective
August 7, 1997. Bruce D. Benson was appointed President, Chief Executive Officer
and Chairman of the Board of Directors of the Company and in connection with
that appointment, received options to acquire 4,000,000 shares of the Company's
Common Stock.  Subsequent to the appointment of Mr. Benson, previous members of
the Board of Directors resigned and were replaced by Messrs. Benson, Robert J.
Malone, Richard L. Robinson and Thomas W. Gamel.

ITEM 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
--------  ----------------------------------------------

RECENT ACQUISITIONS

     Effective January 15, 1997, the Company completed three acquisitions from
individuals who are either officers, directors or principal shareholders of the
Company, or entities controlled by such individuals.  The Company acquired all
of the assets of Five Star Petroleum, consisting of interests in oil and gas
leases and related equipment, for a purchase price of $1,300,000.  The entire
purchase price was paid in cash.  Demetrie  Carone, former President of the
Company,  was also president, a director and principal shareholder of Five Star.
In addition, Messrs. Jensen and Stansfield, beneficial owners of greater than
five percent of the Company's Common Stock, were principal shareholders of Five
Star.  As a result of that acquisition, Messrs. Carone, Jensen and Stansfield
were paid $262,286, $275,340 and $241,150, respectively.

     Contemporaneously, the Company completed the acquisition of  ZCA, a
privately-held Delaware corporation.  The assets of  ZCA included  an interest
in a gas gathering system and oil and gas leases.  The purchase price of this
acquisition paid in cash by the Company was $560,000. Messrs. Carone and Jensen
were sole shareholders of  ZCA, owning an equal interest in that entity. The
former shareholders of ZCA also received $300,000 in connection with this
transaction from an unrelated third party for transfer of an interest in the
gathering system and leases.  ZCA was acquired by Messrs. Carone and Jensen in
July, 1996 for a purchase price of $800,000.

                                       33
<PAGE>
 
     Finally, the Company acquired certain oil and gas leases located in Osage
County, Oklahoma from certain individuals, including Messrs. Carone, Jenson and
Donald F. Dillon, a beneficial owner of more than 5% of the Company's Common
Stock.  The Company paid $200,000 cash for those leases, of which Mr. Carone
received $120,000, Mr. Jenson received $20,000 and Mr. Dillon received $20,000.

     Effective August 31, 1995, the Company completed the acquisitions of
Performance Petroleum  and Pacific-Osage.  The Company paid $800,000 cash to the
former stockholders of Performance and satisfied outstanding notes payable in
the approximate amount of $4,600,000.  The Company also issued 1,000 shares of
its Common Stock in connection with the acquisition.  The Company acquired
Pacific-Osage for approximately $840,000 in cash.  Messrs. Carone and Jensen
were also officers, directors and principal shareholders of Performance and Mr.
Carone was an officer, director and principal shareholder of Pacific-Osage.  By
virtue of those positions, Messrs. Carone and Jensen were paid $280,540 and
$148,260, respectively.  Mr. Carone also received 408,805 shares of the
Company's Common Stock and Mr. Jensen 408,770 shares in connection with those
acquisitions, as a result of the conversion of the outstanding Debentures
previously held by Five Star .  Mr. Carone also received options to acquire an
aggregate of 480,000 shares of Common Stock of the Company, and Mr. Jensen
360,000 options in conjunction with consulting agreements executed with the
Company.  All of those options were subsequently exercised.

     All of the foregoing transactions were approved by a disinterested majority
of the Board of Directors as then constituted, which determined that the
acquisitions were in the best interest of the shareholders.  No transaction has
yet been completed by the Company's current management which involved the
acquisition of oil and gas properties or entities from the Company's affiliates,
and management does not anticipate any such transactions in the future.
However, in the event the Company considers an acquisition from an affiliate in
the future, it would evaluate the transaction on the same terms as it evaluates
transactions from an unaffiliated party.

OTHER EVENTS

     The Company sold shares of its Series "C" Preferred Stock to Mr. Carone, an
officer, director and principal shareholder of the Company, and Messrs. Jenson,
Dillon and Stansfield, principal shareholders of the Company in the private
placement during fiscal 1997.  Such individually purchased 23,664, 1,000,000,
458,334 and 500,000 shares of the Series "C", respectively.  These sales were
made on the same terms and conditions as those made to other purchasers in the
offering.

                                       34
<PAGE>
 
                                    PART IV

ITEM 13.  EXHIBITS, FINANCIAL STATEMENTS SCHEDULES AND REPORTS ON FORM 8-K

     (a)  FINANCIAL STATEMENTS AND SCHEDULES.

          The Financial Statements filed herein are described in the Index
          to Financial Statements included in Item 7 and indexed on page F-1.

     (b)  EXHIBITS.

          Except as otherwise indicated, each of the following documents were
          included as exhibits to the Company's Registration Statement on Form 
          S-18 filed under the Securities Act of 1933, as amended and are
          incorporated herein by this reference.

     EXHIBIT NO.
     -----------

     3.1       Articles of Incorporation of the Company as filed on January 9,
               1989, with the Secretary of State of the State of Colorado.

     3.2       By-laws of the Company.

     3.3       Articles of Amendment of the Company filed on June 7, 1990 with
               the Secretary of State of the State of Colorado.

     3.4/1/    Articles of Amendment of the Company as filed with the
               Secretary of State on September 24, 1996.

     4.1       Certificate for Common Stock.

     9         Not Applicable.

     10.1      1989 Incentive Stock Option Plan of the Company.

     10.2      1990 Non-Qualifying Stock Option Plan.

     10.3.1/2/ Lease Agreement between Mid-America Pipeline Company and
               Producers Service, Incorporated.

     10.3.2/2/ Amendment to Lease Agreement between Mid-America Pipeline Company
               and Producers Service, Incorporated.

     10.4/3/   Stock Purchase Agreement between the Company and Shareholders of
               Performance Petroleum Corporation effective September 1, 1995.

                                       35
<PAGE>
 
     10.5/3/   Stock Purchase Agreement between the Company and shareholders of
               Pacific Osage, Inc. effective September 1, 1995.

     10.6*     Stock Purchase Agreement between the Company and Terry L. Carroll
               and Violet M. Carroll, effective October 1, 1996.

     10.7*     Stock Purchase Agreement between the Company and
               stockholders of ZCA Gas Gathering Co., Inc., effective October 1,
               1996.

     10.8*     Asset Purchase Agreement between the Company and Five Star
               Petroleum, Inc., effective October 1, 1996.

     10.9*     Asset Purchase Agreement between the Company and Demetrie D.
               Carone, Dale M. Jensen, Donald F. Dillon, Roger Campbell and
               Rekco, effective October 1, 1996.

     11        Not applicable.

     13        Not applicable.

     16        Not applicable.

     18        Not applicable.

     19        Not applicable.

     21        List of the Company's subsidiaries.

     22        Not applicable.

     23        Not applicable.

     24        Not applicable.

     27        Financial Data Schedule.

     28        Not applicable.

     99        Not applicable.

---------------------------
     (1)   Filed as an Exhibit to Form 8-K dated September 30, 1996.

     (2)   Filed as an Exhibit to Form 10-KSB for the fiscal year ended March
           31, 1994 and incorporated herein by reference.

     (3)   Filed as an Exhibit to Form 8-K dated September 29, 1995, and
           incorporated herein by reference.

     *     Filed herewith.

                                       36
<PAGE>
 
     (C)   REPORTS ON FORM 8-K.

           The Company has not filed any reports on Form 8-K during the fourth
           quarter of its fiscal year.

                                       37
<PAGE>
 
                                   SIGNATURE
                                   ---------

     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 in Denver, Colorado on
the 14th day of April, 1998.

                              UNITED STATES EXPLORATION, INC.


                              By:   /s/ Bruce D. Benson
                                 ----------------------------------------------
                                    Bruce D. Benson,
                                    President, Chief Executive Officer and
                                    Chairman of the Board

     Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this Report has been signed by the following persons in the capacities
and on the dates indicated.
 
Signatures                               Title                     Date
----------                               -----                     ----
 
/s/ Bruce D. Benson         President, Chief Executive             04/14/98
--------------------------  Officer, and Chairman of
Bruce D. Benson             the Board of Directors  
                                                    
 
/s/ F. Michael Murphy       Vice President, Chief Financial        04/15/98
--------------------------  Officer and Secretary 
F. Michael Murphy           
 
 
/s/ Randall L. Rogers       Chief Accounting Officer               04/15/98
--------------------------
Randall L. Rogers
 
/s/ Robert J. Malone        Director                               04/14/98
--------------------------
Robert J. Malone
 
 /s/ Richard L. Robinson    Director                               04/14/98
--------------------------
Richard L. Robinson            

                                       38
<PAGE>
 
                        UNITED STATES EXPLORATION, INC.
                         INDEX TO FINANCIAL STATEMENTS


                                                                   Page
                                                                   ----
                                                             
                                                             
Report of Independent Certified Public Accounts                    F-1
                                                             
Consolidated Balance Sheets at March 31, 1997 and 1996.........    F-2
                                                               
Consolidated Statements of Operations for the Fiscal Years     
Ended March 31, 1997 and 1996..................................    F-4
                                                               
Consolidated Statements of Changes in Stockholders' Equity     
for the Fiscal Years Ended March 31, 1997 and 1996.............    F-5
                                                               
Consolidated Statements of Cash Flows for the Fiscal Years     
Ended March 31, 1997 and 1996..................................    F-6
                                                               
Notes to Consolidated Financial Statements.....................    F-7

                                       39
<PAGE>
 
               REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

Board of Directors
UNITED STATES EXPLORATION, INC. AND SUBSIDIARIES

We have audited the accompanying consolidated balance sheets of United States
Exploration, Inc. and Subsidiaries as of March 31, 1997 and 1996, and the
related consolidated statements of operations, changes in stockholders' equity
and cash flows for the years then ended.  These financial statements are the
responsibility of the Company's management.  Our responsibility is to express an
opinion on these financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards.  Those standards require that we plan and perform the 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 financial statements referred to above present fairly, in
all material respects, the consolidated financial position of United States
Exploration, Inc. and Subsidiaries as of March 31, 1997 and 1996, and the
consolidated results of their operations and their consolidated cash flows for
the years then ended in conformity with generally accepted accounting
principles.



Wichita, Kansas
May 30, 1997

                                      F-1

<PAGE>
 
                UNITED STATES EXPLORATION, INC. AND SUBSIDIARIES

                          CONSOLIDATED BALANCE SHEETS

                                   March 31,

                                     ASSETS
<TABLE>
<CAPTION>
 
 
                                                       1997         1996
                                                    -----------  -----------
<S>                                                 <C>          <C>
 
CURRENT ASSETS
 Cash and cash equivalents                          $15,323,038  $   169,965
 Certificate of deposit                               1,500,000            -
 Restricted cash                                              -       74,697
 Accounts receivable                                    590,237      384,571
 Due from related parties                                 4,300       23,095
 Inventories                                            152,401      161,186
 Prepaid expenses and other                              23,449       25,081
                                                    -----------  -----------
 
        Total current assets                         17,593,425      838,595
 
PROPERTY AND EQUIPMENT, AT COST, NET
 Oil and gas property and equipment -
   full cost method                                   9,636,527    8,208,034
 Natural gas gathering systems                        1,695,394    1,269,221
 Building and equipment                                 478,949    1,019,909
                                                    -----------  -----------
 
                                                     11,810,870   10,497,164
 
OTHER ASSETS
 Assets held for sale
   Crude oil refinery                                 1,775,011    1,775,011
   Natural gas stripping plant                           40,000       80,000
   Equipment                                            146,486            -
 Pipeline lease agreement, less accumulated
   amortization of $159,981 in 1997 and $109,461
   in 1996                                              547,327      597,847
 Investment in joint ventures                                 -      325,139
 Goodwill                                                     -       69,684
 Other                                                        -       40,710
                                                    -----------  -----------
 
                                                      2,508,824    2,888,391
                                                    -----------  -----------
 
                                                    $31,913,119  $14,224,150
                                                    ===========  ===========
</TABLE>
The accompanying notes are an integral part of these statements.

                                      F-2

<PAGE>
 
                     LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
 
 
                                          1997        1996
                                      -----------  ----------
<S>                                   <C>          <C>
 
CURRENT LIABILITIES
 Current maturities of long-term debt $         -  $1,196,947
 Accounts payable                         447,518     308,939
 Accrued liabilities                       68,270     114,424
 Due to related parties                    15,215     175,926
                                      ----------- -----------
 
        Total current liabilities         531,003   1,796,236
 
LONG-TERM DEBT                                  -   5,427,853
 
COMMITMENTS AND CONTINGENCIES                   -           -
 
STOCKHOLDERS' EQUITY
 Preferred stock - $.01 par value
   Authorized - 100,000,000 shares
   Issued and outstanding
     Series A Cumulative Convertible 
       - 250,000 shares in 1996                 -   1,250,000
     Series B Cumulative Convertible 
       - 104,000 shares in 1996                 -     520,000
     Series C Cumulative Convertible 
       - 4,000,000 shares (liquidation 
       preference $24,480,000)         24,000,000           -
 Common stock - $.0001 par value
   Authorized - 500,000,000  shares
   Issued and outstanding - 8,312,358 
     shares in 1997 and 6,469,404 
     shares in 1996                           831         647
 Capital in excess of par value        11,370,867   8,581,466
 Accumulated deficit                   (3,989,582) (3,352,052)
                                      ----------- -----------
 
                                       31,382,116   7,000,061
                                      ----------- -----------
 
                                      $31,913,119 $14,224,150
                                      =========== ===========
 
</TABLE>

                                      F-3
<PAGE>
 
                UNITED STATES EXPLORATION, INC. AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF OPERATIONS

                              Year ended March 31,
<TABLE>
<CAPTION>
 
                                                         1997         1996
                                                      ----------   ----------
<S>                                                   <C>          <C>
 
Revenues
 Sale of purchased gas                                $1,271,372   $  716,496
 Sale of company produced oil and gas                  2,772,284    1,399,195
 Contracting and oil field supplies                      381,978      425,408
 Equity in net income (loss) of joint ventures            87,753      (17,988)
                                                      ----------   ----------
 
                                                       4,513,387    2,523,111
 
Costs and expenses
 Gas acquisition costs                                   831,011      476,814
 Gas transportation costs                                463,377      353,257
 Production costs - oil and gas                        1,329,667      652,632
 Other operating expenses                                163,375      166,015
 Depreciation, depletion and amortization              1,100,749      718,021
 Provision for impairment of assets                      321,397       44,000
 General and administrative                              505,417      544,915
                                                      ----------   ----------
 
                                                       4,714,993    2,955,654
                                                      ----------   ----------
 
Loss from operations                                    (201,606)    (432,543)
 
Other income (expense)
 Interest income                                         346,294        2,064
 Interest expense                                       (307,455)    (367,299)
 Other                                                    75,237       11,613
                                                      ----------   ----------
 
                                                         114,076     (353,622)
                                                      ----------   ----------
 
        NET LOSS                                         (87,530)    (786,165)
 
Preferred stock dividends applicable to the period      (884,250)     (88,500)
                                                      ----------   ----------
 
Net loss applicable to common stockholders            $ (971,780)  $ (874,665)
                                                      ==========   ==========
 
Loss per common share                                      $(.13)       $(.19)
                                                      ==========   ==========
 
</TABLE>
The accompanying notes are an integral part of these statements.

                                      F-4

<PAGE>
 
                UNITED STATES EXPLORATION, INC. AND SUBSIDIARIES

           CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
 
 
                                                   Preferred stock                                              
                       -----------------------------------------------------------------------     Common stock   
                             Series A                 Series B                Series C          ------------------    Capital in
                       ----------------------   --------------------   -----------------------                Par     excess of 
                        Shares      Amount       Shares      Amount      Shares      Amount      Shares      value    par value   
                       --------   -----------   --------   ---------   ----------  -----------  ---------    -----    -----------  
<S>                    <C>        <C>           <C>        <C>         <C>         <C>          <C>          <C>      <C>
                      
Balance at April 1,   
 1995                   250,000   $ 1,250,000    104,000   $ 520,000            -   $        -   4,079,404    $408    $ 7,795,205
Exercise of stock                                                                                      
 options                      -             -          -           -            -            -     390,000      39        286,461  
Shares issued upon                                                                                     
 conversion of                                                                                         
 debentures                   -             -          -           -            -            -   2,000,000     200        499,800  
Net loss for the year         -             -          -           -            -            -           -       -              -
                                                                                                       
Balance at March 31,                                                                                   
 1996                   250,000     1,250,000    104,000     520,000            -            -   6,469,404     647      8,581,466 
                                                                                                       
Exercise of stock                                                                                      
 options                      -             -          -           -            -            -   1,015,700     101        669,484 
Conversion of preferred                                                                                
 stock and related                                                                                     
 dividends to common                                                                                   
 stock                 (250,000)   (1,250,000)  (104,000)   (520,000)           -            -     827,254      83      1,959,917  
Issuance of Series C                                                                                   
 Preferred stock              -             -          -           -    4,000,000   24,000,000           -       -              - 
Contribution of accrued                                                                                
 salary by former                                                                                      
 president and stock-                                                                                  
 holder                       -             -          -           -            -            -           -       -        160,000  
Cash dividends paid on                                                                                 
 Series C preferred                                                                                    
 stock                        -             -          -           -            -            -           -       -              - 
Net loss for the year         -             -          -           -            -            -           -       -              -   
                       --------   -----------   --------   ---------    ---------  -----------   ---------   -----    -----------  
Balance at March 31,                                                                                   
 1997                         -   $         -          -   $       -    4,000,000  $24,000,000   8,312,358    $831    $11,370,867  
                       ========   ===========   ========   =========    =========  ===========   =========   =====    ===========  
</TABLE> 
<TABLE> 
<CAPTION> 

               
                              Accumulated        
                                deficit         Total
                              -----------    -----------                             
<S>                            <C>           <C>         
Balance at April 1,           $(2,565,887)   $ 6,999,726               
 1995                            
Exercise of stock                                          
 options                                -        286,500                      
Shares issued upon                  
 conversion of                     
 debentures                             -        500,000    
Net loss for the year            (786,165)      (786,165)  
                              -----------    -----------   
                                                          
Balance at March 31,       
 1996                          (3,352,052)     7,000,061
Exercise of stock
 options                                -        669,585 
Conversion of preferred                          
 stock and related                                                         
 dividends to common          
 stock                           (190,000)             -                      
Issuance of Series C           
 Preferred stock                        -     24,000,000                  
Contribution of accrued           
 salary by former                                  
 president and stock-                              
 holder                                 -        160,000            
Cash dividends paid on                   
 Series C preferred                                
 stock                           (360,000)      (360,000)                  
Net loss for the year             (87,530)       (87,530)
                              -----------    -----------    
Balance at March 31,                               
 1997                                         
                              $(3,989,582)   $31,382,116
                              ===========    ===========     

</TABLE> 

The accompanying notes are an integral part of this statement. 

                                      F-5
<PAGE>
 
                UNITED STATES EXPLORATION, INC. AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

                              Year ended March 31,

                Increase (decrease) in cash and cash equivalents
<TABLE>
<CAPTION>
 
                                                              1997          1996
                                                          ------------  ------------
<S>                                                       <C>           <C>
 
Cash flows from operating activities
 Net loss                                                 $   (87,530)  $  (786,165)
 Adjustments to reconcile net loss to net cash
   provided by operating activities
     Depreciation, depletion and amortization               1,100,749       718,021
     Provision for doubtful accounts                                -        18,604
     Provision for impairment of assets                       321,397        44,000
     Loss on sale of equipment                                  9,820             -
     Equity in net (income) loss of joint ventures            (87,753)       17,988
     Change in assets and liabilities, net of effect
      of acquisitions
       (Increase) decrease in accounts receivable             103,800      (150,754)
       (Increase) decrease in due from related parties         18,795          (629)
       Decrease in inventories                                  8,785         6,743
       Decrease in prepaid expenses and other                   2,632        11,387
       Increase in accounts payable and accrued
          liabilities                                          86,134       111,069
       Increase (decrease) in due to related parties         (160,711)       69,118
                                                          -----------   -----------
 
           Net cash provided by operating
             activities                                     1,316,118        59,382
 
Cash flows from investing activities
 Investment in restricted cash                                (66,000)     (270,000)
 Receipt of restricted cash                                   140,697       195,303
 Purchase of certificate of deposit                        (1,500,000)            -
 Capital expenditures                                        (111,386)     (178,133)
 Acquisition of oil and gas leases                         (1,481,000)            -
 Acquisition of companies, net of cash received              (674,731)   (6,209,473)
                                                          -----------   -----------
 
   Net cash used in investing activities                   (3,692,420)   (6,462,303)
 
Cash flows from financing activities
 Issuance of Series C preferred stock                      24,000,000             -
 Repayment of note payable to bank                           (165,000)     (397,000)
 Repayment of term debt                                    (6,615,210)     (193,620)
 Proceeds from issuance of term debt                                -     6,800,000
 Proceeds from exercise of stock options                      669,585       286,500
 Dividends paid on preferred stock                           (360,000)            -
                                                          -----------   -----------
 
   Net cash provided by financing activities               17,529,375     6,495,880
                                                          -----------   -----------
 
Net increase in cash and cash equivalents                  15,153,073        92,959
Cash and cash equivalents, beginning of year                  169,965        77,006
                                                          -----------   -----------
 
Cash and cash equivalents, end of year                    $15,323,038   $   169,965
                                                          ===========   ===========
</TABLE>
The accompanying notes are an integral part of these statements.

                                      F-6

<PAGE>
 
                UNITED STATES EXPLORATION, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                            March 31, 1997 and 1996


NOTE A - SUMMARY OF ACCOUNTING POLICIES

 A summary of the significant accounting policies consistently applied in the
 preparation of the accompanying consolidated financial statements follows.

 1. Company history and nature of operations
    ----------------------------------------

 United States Exploration, Inc. was incorporated on January 9, 1989.  The
 Company through its subsidiaries operates as a producer of oil and gas and as
 an operator of gas gathering systems and an oil field parts and supply store.
 The Company's operations are located in southeast Kansas and northeast
 Oklahoma.

 2. Principles of consolidation
    ---------------------------

 The consolidated financial statements include the accounts of United States
 Exploration, Inc. and its wholly-owned subsidiaries, USX Operating Co., Inc.,
 Producers Service Incorporated, Performance Petroleum Corporation, Pacific
 Osage, Inc., Argas, Inc. and ZCA Gas Gathering, Inc.  Operations of Performance
 and Pacific are included in the consolidated financial statements from
 September 1, 1995, which was the effective date of their acquisition, while the
 operations of Argas, Inc. and ZCA Gas Gathering, Inc. are included as of
 October 1, 1996, the effective date of their acquisitions.  All significant
 intercompany transactions and balances have been eliminated.

 3. Use of estimates
    ----------------

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

 4. Cash equivalents
    ----------------

 For purposes of the statements of cash flows, the Company considers all highly
 liquid debt instruments purchased with a maturity of three months or less to be
 cash equivalents.

 5. Inventories
    -----------

 Inventories are comprised of valves, pipe, pumps, motors and other
 miscellaneous oil field supplies.  They are stated at the lower of cost or
 market.  Cost is determined by the first-in, first-out method.

                                      F-7

<PAGE>
 
                UNITED STATES EXPLORATION, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                            March 31, 1997 and 1996


NOTE A - SUMMARY OF ACCOUNTING POLICIES - CONTINUED

 6.  Oil and gas interests
     ---------------------

 The Company follows the full cost method of accounting as defined by the
 Securities and Exchange Commission, whereby all costs incurred in connection
 with the acquisition, exploration and development of oil and gas properties,
 whether productive or unproductive, are capitalized.  Capitalized costs which
 relate to proved properties and estimated future costs to be incurred in the
 development of proved reserves are amortized using the units-of-production
 method.  Capitalized costs associated with significant investments in unproved
 properties are excluded from the amortization base until such time as these
 properties are evaluated.  Additionally, no gains or losses are recognized upon
 the disposition of oil and gas properties.  Capitalized costs are subjected to
 an annual test of recoverability by comparison to the present value of future
 net revenues from proved reserves.  Any capitalized costs in excess of the
 present value of future net revenues from proved reserves, adjusted for the
 cost of certain unproved properties, are charged to expense in the year such
 excess occurs.

 7.  Depreciation and amortization
     -----------------------------

 Property and equipment, exclusive of the oil and gas full cost pool, is stated
 at cost and depreciated using the straight-line method over the following
 estimated useful lives once the asset is put into productive use.

     Natural gas gathering systems                        17 years
     Equipment                                        3 to 7 years
     Building (field headquarters)                        30 years

 Maintenance, repairs and renewals which neither materially add to the value of
 the asset nor appreciably prolong its life are charged to expense as incurred.
 Gains or losses on dispositions of these assets are included in operations.

 The capitalized pipeline lease agreement is being amortized using the straight-
 line method over the remaining term of the lease including renewal options.
 Goodwill was amortized using the straight-line method over fifteen years.

                                      F-8
<PAGE>
 
               UNITED STATES EXPLORATION, INC. AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                            March 31, 1997 and 1996


NOTE A - SUMMARY OF ACCOUNTING POLICIES - CONTINUED

 8.  Investment in joint ventures
     ----------------------------

 The Company accounted for its net interest in joint ventures using the equity
 method.  Accordingly, the investments were initially recorded at cost and were
 adjusted thereafter to include the Company's share of post-acquisition
 operations, net of distributions.  Effective October 1, 1996, the Company
 purchased the remaining interest in the joint ventures.  The assets and
 operations of the joint ventures are included in the consolidated financial
 statements subsequent to October 1, 1996.

 9.  Income taxes
     ------------

 United States Exploration, Inc. and its subsidiaries file a consolidated
 federal income tax return. Deferred tax assets and liabilities are determined
 based on the differences between the financial accounting and tax basis of
 assets and liabilities.  Deferred tax assets or liabilities at the end of each
 year are determined using the currently enacted tax rate expected to apply to
 taxable income in the periods in which the deferred tax asset or liability is
 expected to be realized or settled.

 10. Stock-based compensation
     ------------------------

 The Financial Accounting Standards Board issued SFAS No. 123, "Accounting for
 Stock-Based Compensation" in October 1995.  SFAS 123 encourages companies to
 adopt a fair value approach to valuing stock options that would require
 compensation cost to be recognized based on the fair value of stock options
 granted.  The Company has elected, as permitted by the Standard, to continue to
 follow its intrinsic value based method of accounting for stock options
 consistent with Accounting Principles Board (APB) Opinion No. 25, "Accounting
 for Stock Issued to Employees."  Under the intrinsic method, compensation cost
 for stock options is measured as the excess, if any, of the quoted market price
 of the Company's stock at the measurement date over the exercise price.


NOTE B - RELATED PARTY TRANSACTIONS - CONTINUED

 The Company purchased, effective October 1, 1996, 100% of the outstanding
 common stock of Argas, Inc. for $160,000.  Argas, Inc. was purchased from the
 Company's former president who is also a stockholder of the Company.  Argas,
 Inc.'s primary asset was its investment in the joint ventures in which the
 Company was also an investor.  Upon completion of the Argas, Inc. purchase, the
 Company owned 100% of the joint ventures.  The individual assets, consisting
 primarily of pipelines, and the gross operations of the joint ventures are
 included in the consolidated financial statements subsequent to October 1,
 1996.  Prior to the purchase, the joint ventures sold natural gas of
 approximately $228,000 and $122,000 to the Company during 1997 and 1996,
 respectively.  In addition, the joint ventures had contracting expense with the
 Company of approximately $52,000 and $70,500 during 1997 and 1996,
 respectively.

                                      F-9
<PAGE>
 
               UNITED STATES EXPLORATION, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                            March 31, 1997 and 1996


NOTE B - RELATED PARTY TRANSACTIONS - CONTINUED

 The Company also purchased during 1997 the common stock of ZCA Gas Gathering,
 Inc. and certain oil and gas leases from the Company's president and other
 Company stockholders for total cash consideration of $2,030,000.  See Note S
 for additional information.

 In connection with substantial changes in the capitalization of the Company,
 the Company entered into a comprehensive agreement with its former President on
 September 17, 1996.  As a part of the agreement, the President resigned his
 position and released the Company from payment for past services.  Accordingly,
 the Company transferred $160,000 of accrued salary to paid in capital.

 The Company utilized during 1996 a financial public relations consulting firm,
 MCM Capital Management, Inc. (MCM).  MCM is a related party in that a
 stockholder and former director of United States Exploration, Inc. is an
 officer, director and stockholder of MCM.  The Company incurred fees to MCM of
 $6,656 during 1996.

 The Company leases its premises from its former president under an operating
 lease.  The lease provides for monthly payments of $806.

 A summary of account balances with related parties at March 31 is as follows:

 
                                          1997        1996     
                                         -------    --------  
                                                              
Due from related parties                                      
 USX-Argas 1996 Joint Venture            $     -    $ 21,895  
 Individual stockholders                   4,300       1,200  
                                         -------    --------  
                                                              
                                         $ 4,300    $ 23,095  
                                         =======    ========  
                                                              
                                                              
                                          1997        1996    
                                         -------    --------  
                                                              
Due to related parties                                        
 Individual stockholder                  $15,215    $      -  
 T. L. Carroll (accrued compensation)          -     145,081  
 USX-Argas 1996 Joint Venture                  -      18,798  
 MCM Capital Management, Inc.                  -      10,548  
 Individual stockholder                        -         938  
 Argas, Inc.                                   -         561  
                                         -------    --------  
                                                              
                                         $15,215    $175,926  
                                         =======    ========  
 

                                      F-10
<PAGE>
 
               UNITED STATES EXPLORATION, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                            March 31, 1997 and 1996


NOTE C - RESTRICTED CASH

 The Company's note payable to bank (see Note K) required that cash received
 from the sale of assets or equity proceeds be placed in an escrow account with
 the bank.  The use of the cash was restricted to loan prepayments and monthly
 loan payments should the net production revenue from the Performance properties
 be less than $210,000 in a given month.  This note payable was paid off in
 fiscal 1997.


NOTE D - INVESTMENT IN JOINT VENTURES

 The Company participated in two joint ventures which operated gas pipelines.
 During fiscal 1997 a joint venture, in which the Company was a 49% participant,
 settled a claim against a gas purchaser.  The joint venture income of $87,753
 recognized in fiscal 1997 primarily relates to the settlement of that claim.
 The Company acquired the remaining interests in these joint ventures during
 fiscal 1997.  The carrying value of the investment in the joint ventures is
 summarized as follows:

 
                                                      1997        1996
                                                    ---------   --------
 
 Carrying value, beginning of year                  $ 325,139   $221,498
 Investment in joint venture                                -    143,566
 Equity in net earnings (loss) of joint ventures       87,753    (17,988)
 Amortization of investment                           (34,487)   (21,937)
 Termination of joint venture and inclusion in
   consolidated financial statements                 (378,405)         -
                                                    ---------   --------
 
 Carrying value, end of year                        $       -   $325,139
                                                    =========   ========
 

NOTE E - OIL AND GAS PROPERTIES

 The Company's oil and gas activities are conducted within the continental
 United States with the exception of one insignificant lease located in Alberta,
 Canada which was sold during 1997.  The following schedules present capitalized
 costs at March 31, 1997 and 1996 and results of operations for producing
 activities for the years then ended.  At March 31, 1997 and 1996 costs
 associated with acquisition and development activities of $14,561,258 and
 $12,468,395, respectively, are considered evaluated and subject to
 amortization.

 
                                                           March 31,
                                                  -------------------------
                                                     1997           1996
                                                  -----------   -----------   
 Capitalized costs
   Oil and gas properties                         $14,561,258   $12,468,395
   Accumulated depreciation, depletion,
     amortization and valuation allowance           4,924,731     4,260,361
                                                  -----------   -----------
 
      Net capitalized costs                       $ 9,636,527   $ 8,208,034
                                                  ===========   ===========
 

                                      F-11
<PAGE>
 
                UNITED STATES EXPLORATION, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                            March 31, 1997 and 1996


NOTE E - OIL AND GAS PROPERTIES - CONTINUED
 
                                                        Year ended March 31,   
                                                      ------------------------- 
                                                          1997         1996    
                                                      ------------  ----------- 
                                                                               
 Results of operations for producing activities                                
   Oil and gas sales                                  $ 2,772,284   $1,399,195 
   Production costs                                    (1,329,667)    (652,632) 
   Depreciation, depletion and amortization              (623,291)    (268,735) 
   Full cost pool valuation allowance                     (41,432)           - 
                                                      -----------   ---------- 
                                                                               
 Results of operations from producing activities                               
   (excluding overhead expenses)                      $   777,894   $  477,828 
                                                      ===========   ========== 
                                               
 Amortization per equivalent physical unit     
   (barrels) of production (excludes full cost 
   pool valuation allowance)                                $4.42        $2.98
                                                      ===========   ==========
 
 Costs incurred in oil and gas acquisition and development activities during the
   years ended March 31 are as follows:
 
                                                          1997         1996    
                                                      ------------  ----------- 
 
 Property acquisition costs                           $  1,981,830  $ 5,438,061
 Development costs                                         111,386      160,625
                                                      ------------  -----------
 
                                                      $  2,093,216  $ 5,598,686
                                                      ============  ===========


 Capitalized costs are subjected to an annual test of recoverability by
 comparison to the present value of future net revenues from proved reserves.
 Any capitalized costs in excess of the present value of future net revenues are
 required to be expensed.  At March 31, 1997, capitalized costs exceeded the
 present value of future net revenues by $41,432 which resulted in a write down
 of the carrying value of the oil and gas properties.

                                      F-12
<PAGE>
 
               UNITED STATES EXPLORATION, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                            March 31, 1997 and 1996


NOTE F - NATURAL GAS GATHERING SYSTEMS

 Natural gas gathering systems consist of the following at March 31:

 
                                     1997        1996
                                  ----------  ----------
 
 Peru-Hale                        $1,132,108  $1,132,108
 Southeast Kansas                    453,588     453,588
 Pacific Gas                         480,431     480,431
 Independence                        400,663           -
 US Gas                              269,757           -
 Chautauqua                          200,440           -
 Havanna                              53,735           -
 Elgin                                25,452           -
 Cowley                                8,484           -
                                  ----------  ----------
 
                                   3,024,658   2,066,127
 Less accumulated depreciation     1,329,264     796,906
                                  ----------  ----------
 
                                  $1,695,394  $1,269,221
                                  ==========  ==========
 

NOTE G - BUILDING AND EQUIPMENT

 Building and equipment consists of the following at March 31:
 
                                     1997         1996     
                                  ----------   ----------
                                                           
 Building                         $  130,588   $  126,800  
 Oil field equipment               1,024,954    1,343,590  
 Autos and trucks                    133,631       76,677  
 Office equipment                     51,903       62,448  
                                  ----------   ----------  
                                                           
                                   1,341,076    1,609,515  
 Accumulated depreciation           (731,127)    (589,606) 
 Valuation allowance                (131,000)           -  
                                  ----------   ----------  
                                                           
                                  $  478,949   $1,019,909  
                                  ==========   ==========   


 The valuation allowance of $131,000 relates to oil field equipment held by the
 Company.  See also Note T.

                                      F-13
<PAGE>
 
               UNITED STATES EXPLORATION, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                            March 31, 1997 and 1996


NOTE H - CRUDE OIL REFINERY

 The Company owns a crude oil refinery and tank storage farm located in
 Ingleside, Texas, which it acquired in July 1994.  The refinery has a capacity
 of 10,400 bbls per day and is located on a small portion of approximately 100
 acres of undeveloped real estate also owned by the Company.

 The refinery which has been nonoperational since the early 1980's is skid
 mounted and has been preserved internally with noncorrosive oil-based liquid.
 The Company intends to resell both the refinery and real estate.


NOTE I - CONVERTIBLE DEBENTURES

 On June 15, 1993, pursuant to an exchange agreement with Cirque Energy Ltd. (a
 majority stockholder of the Company at that date), the Company exchanged
 2,000,000 each of Series A, B and C Company Convertible Debentures for
 6,000,000 Company common shares.  The Series A, B and C Debentures were
 noninterest-bearing and had an aggregate principal value of $1,200,000.  The
 debentures were recorded at their present value of $1,069,815, discounted at
 10%.  The Company repaid the Series A and B Debentures prior to March 31, 1995.

 The remaining 2,000,000 Series C Company Debentures matured on June 30, 1995.
 The Company did not make the required $500,000 payment on that date.  As the
 sole remedy for default any debentures which were not retired at maturity could
 be converted into common shares of the Company on a one-for-one basis at the
 holder's option.  In conjunction with the acquisitions of Performance and
 Pacific Osage discussed in Note S, the sellers acquired the Series C
 debentures.  The Company agreed to allow the purchasers of the debentures to
 convert them into Company stock.  On December 28, 1995, the debentures were
 converted into 2,000,000 common shares of the Company.


NOTE J - PIPELINE LEASE

 The Company leases and operates a seventy-two mile gas pipeline under an
 operating lease which was acquired for a total cost of $707,308.  The lease
 expires January 31, 1998 with a ten-year renewal option which can be exercised
 at that time.  The lease provides for minimum monthly payments of $6,500 per
 month.  A volume rent adjustment is computed at each six-month anniversary
 date.  The recomputed monthly rent is equal to the average monthly MCF's
 transported through the pipeline during the previous six months times $.08 but
 not less than $6,500.  The maximum monthly rental under the formula is $13,600
 a month.  The pipeline transported an average of 37,640 and 31,030 MCF's per
 month during the years ended March 31, 1997 and 1996, respectively.  The
 agreement includes a purchase option for $1,800,000 which can be exercised at
 any time during the term of the lease.

                                      F-14

<PAGE>
 
                UNITED STATES EXPLORATION, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                            March 31, 1997 and 1996

NOTE K - LONG-TERM DEBT

 Long-term debt consisted of the following at March 31, 1996:

 Term note payable to a bank with monthly interest only
      payments through January 1, 1996 and monthly
      interest and principal payments of $141,000 from
      February 1, 1996 through July 1, 1997 at which 
      time the balance of the principal was due. The 
      note bore interest at the bank's national rate
      (8.25% at March 31, 1996) - collateralized by all 
      Company assets and was guaranteed by certain 
      stockholders of the Company. The note was repaid 
      in full September 1996                                  $     6,612,545  
 
 7% note payable to a bank with monthly payments of $599
      through February 1998 - collateralized by a vehicle              12,255
                                                              ---------------
 
                                                                    6,624,800
 Less current maturities                                            1,196,947
                                                              ---------------
 
                                                              $     5,427,853
                                                              ===============
 
NOTE L - INCOME TAXES

 The tax effects of temporary differences that give rise to deferred tax assets
 and liabilities are as follows at March 31:

                                                           1997        1996
                                                        ----------  ----------
 Deferred tax liabilities
   Purchase accounting adjustment - book basis of
     acquired assets greater than tax basis
       Equipment                                        $  248,993  $  334,660
       Lease agreement                                     207,984     227,182
       Other                                                     -      30,782
   Oil and gas properties - tax depletion greater
     than full cost pool amortization                    2,195,993   2,107,440
   Depreciation on equipment                                49,958      68,739
                                                        ----------  ----------
 
                                                         2,702,928   2,768,803
 
 Deferred tax assets
   Net operating loss carryforwards                      2,934,053   3,266,493
   Provision for doubtful accounts                               -      30,553
   Valuation allowance (natural gas stripping plant)        31,920      16,720
   Accrued compensation                                          -      67,992
   Other                                                    12,048      29,119
                                                        ----------  ----------
 
                                                         2,978,021   3,410,877
   Less valuation allowance                                275,093     642,074
                                                        ----------  ----------
 
                                                         2,702,928   2,768,803
                                                        ----------  ----------
 
   Net deferred amount                                  $        -  $        -
                                                        ==========  ==========

 The valuation allowance was decreased by $366,981 in 1997 and $1,275,134 in
 1996 to reduce the deferred tax asset to zero.

                                     F-15
<PAGE>
 
                UNITED STATES EXPLORATION, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                            March 31, 1997 and 1996


NOTE L - INCOME TAXES - CONTINUED

 The net operating loss carryforwards available to United States Exploration,
 Inc. for income tax purposes are as follows. The Company is limited in its use
 of its net operating loss carryforwards.  The Company may use, in any one tax
 year, up to $507,000 of net operating losses from carryforwards expiring in
 years before 2009 and up to $2,285,000 of net operating losses from
 carryforwards expiring after 2008, for a maximum of $2,792,000 in any one year.
 
    Expiration
      dates
    ----------
 
      2003                                $  361,000
      2004                                 2,545,000
      2005                                 1,300,000
      2006                                   293,000
      2007                                   448,000
      2008                                    37,000
      2009                                 1,765,000
      2010                                   537,000
      2011                                   435,000
                                          ---------- 
 
                                          $7,721,000
                                          ==========

NOTE M - OTHER INCOME

 Other income for the years ended March 31 is comprised of the following:
 
                                         1997     1996  
                                        -------  -------
                                                        
 Chart income                           $28,424  $ 8,887
 Gas Contract settlement                 25,000        -
 Other                                   21,813    2,726
                                        -------  -------
                                                        
                                        $75,237  $11,613
                                        =======  ======= 

                                     F-16
<PAGE>
 
                UNITED STATES EXPLORATION, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                            March 31, 1997 and 1996


NOTE N - MAJOR CUSTOMERS

 The Company sold approximately 77% in 1997 and 83% in 1996 of its gas to four
 and six purchasers, respectively.  The Company sold approximately 91% and 99%
 of its oil to one purchaser during 1997 and 1996, respectively.


NOTE O - STOCK OPTION PLANS

 Effective January 13, 1989, the Company adopted an Incentive Stock Option Plan
 (the Plan) and reserved a total of 1,000,000 common shares for issuance
 pursuant to the Plan.  As of March 31, 1997, there were 841,900 options
 available for issuance.  The Plan, designed as an incentive for key employees,
 is administered by the compensation committee of the Board of Directors, which
 selects optionees and determines the number of common shares subject to each
 option.  The Plan provides that no option may be granted at an exercise price
 less than the fair market value of the common shares of the Company on the date
 of grant.  Unless otherwise specified, the options expire five years from date
 of grant. Thereafter, options may be exercised in whole or in part, depending
 on terms of the particular option.

 Effective May 25, 1990, the Board of Directors adopted a Nonqualifying Stock
 Option Plan (NQSOP) for the benefit of nonemployee directors of the Company and
 others having rendered significant services to the Company.  To date, an
 aggregate of 2,900,000 common shares have been reserved to be issued pursuant
 to the NQSOP.  As of March 31, 1997, there were 716,200 options available for
 issuance.  The NQSOP is administered in the discretion of the compensation
 committee of the Board of Directors.  Unless otherwise specified, the options
 expire ten years from the date of the grant.  All options issued in 1996 were
 to nonemployees.

                                     F-17
<PAGE>
 
                United States Exploration, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                            March 31, 1997 and 1996


NOTE O - STOCK OPTION PLANS - CONTINUED

 A summary of the Company's two stock option plans as of March 31, 1997 and 1996
 and changes during the years ending on those dates is presented below:
 
                                                         
                                                         Weighted
                                         Shares          average 
                                  ---------------------  exercise 
                                  The Plan     NQSOP      price
                                  ---------  ----------  --------
 
 Outstanding at April 1, 1995      262,800     917,700      $1.49
   Granted                               -   1,667,800       1.29
   Exercised                             -    (390,000)       .73
   Canceled                              -    (650,000)      2.35
                                  --------   ---------
 
 Outstanding at March 31, 1996     262,800   1,545,500       1.16
   Exercised                      (148,900)   (866,800)       .66
   Canceled                       (113,900)   (475,000)      2.00
                                  --------   ---------
 
 Outstanding at March 31, 1997           -     203,700       1.28
                                  ========   =========

 All options outstanding at March 31, 1997 and 1996 were exercisable.  Options
 outstanding at March 31, 1997 can be summarized as follows:
 
                                      Exercise         Remaining 
       Shares                          price             life    
       ------                         --------         ---------        
                                                                 
       130,000                        $ .55            5 months   
        30,000                         2.00            7 years    
         3,700                         2.50            6 years    
        40,000                         3.00            6 years    
       -------
       203,700
       =======

                                     F-18
<PAGE>
 
                UNITED STATES EXPLORATION, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                            March 31, 1997 and 1996


NOTE P - PREFERRED STOCK

 The Company's Series A and Series B Cumulative Convertible Preferred Stock had
 an issue price and preference on liquidation of $5 per share and accrued
 dividends at the rate of $.25 per share per annum, payable in cash or common
 shares of the Company.  The preferred shares were convertible at the option of
 the holder into common shares of the Company based upon a conversion price of
 $2.25 per common share.  All outstanding shares were converted on September 30,
 1996 into 786,667 common shares of the Company.  In addition, 40,587 common
 shares were issued in satisfaction of all accrued but unpaid dividends.

 During the year ended March 31, 1997 the Company completed a private placement
 of 4,000,000 shares of Series "C" Convertible Preferred Stock at $6.00 per
 share.  Total proceeds received were $24,000,000.  The stock carries an 8%
 cumulative per annum dividend and is convertible at the option of the holder
 into two shares of Company common stock for each share of Series C Preferred
 Stock.  This conversion rate is subject to adjustment for common stock
 dividends, additional common stock issuances, or any stock rights and warrant
 issuances.  The Series C Preferred Stock has a liquidation preference of $6.00
 per share, plus accred and unpaid dividends.  The Company may redeem the stock,
 subsequent to March 17, 1997, at the price of $6.00 per share plus accrued and
 unpaid dividends.


NOTE Q - LOSS PER COMMON SHARE

 Loss per common share has been computed by dividing net loss, after reduction
 for preferred stock dividends applicable to the period, by the weighted average
 number of common shares outstanding during the year.


NOTE R - SUPPLEMENTAL CASH FLOW INFORMATION
 
                                                             1997       1996  
                                                          ----------  --------
                                                                              
  Noncash investing and financing activities                                  
   Conversion of 354,000 shares of preferred                                  
     stock and accrued dividends into 827,254 
     shares of common stock                               $1,960,000  $      -
   2,000,000 Series C Debentures with principal                               
     value of $430,621 and accrued interest of 
     $69,379 converted to 2,000,000 shares of    
     common stock                                                  -   500,000
   Liabilities assumed in connection with acquisitions       346,291   112,763
   Accounts receivable exchanged for                                          
     interest in joint venture                                     -    94,237
   Transfer of accrued salary to paid in capital             160,000         -
                                                                              
  Cash paid during the year                                                   
   Interest                                                  353,788   320,759 
 

                                     F-19
<PAGE>
 
                UNITED STATES EXPLORATION, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                            March 31, 1997 and 1996


NOTE S - ACQUISITIONS

 Effective October 1,1996, the Company acquired 100% of the common stock of ZCA
 Gas Gathering, Inc. for total consideration of $549,000.  ZCA Gas Gathering,
 Inc. was purchased from the Company's president and another  significant
 stockholder.  ZCA Gas Gathering, Inc. owns oil and gas leases and owns a 50%
 interest in and operates a gas gathering system.  The Company also acquired
 during November and December 1996 oil and gas leases located in the State of
 Oklahoma for cash consideration of $1,481,000.  The leases were purchased from
 Five Star Petroleum, Inc. a related party in that the owners of Five Star
 petroleum, Inc. are also stockholders of Unites States Exploration, Inc. (Five
 star leases) and from the Company's president and other individuals who are
 stockholders of the Company (Hull lease).  The transactions were accounted for
 based upon the fair value of the assets acquired.  The purchase price of the
 acquisitions was approximately equal to or less than the sellor's cost.  Fair
 values were assigned to individual assets primarily based upon reserve studies.

 The Company purchased, effective October 1, 1996, 100% of the common stock of
 Argas, Inc. for $160,000 which was considered to be the fair value of the
 assets acquired.  See Note B for additional information.

 The pro forma unaudited results of operations for the years ended March 31,
 1997 and 1996, assuming consummation of the purchase of ZCA Gas Gathering,
 Inc., the Oklahoma leases and Argas at the beginning of each period are as
 follows:

                                             Year ended March 31, 
                                            ----------------------
                                               1997        1996   
                                            ----------  ----------
                                                                  
 Revenue                                    $5,026,915  $3,412,861
 Net loss                                       35,445     621,829
 Loss per common share                             .12         .15 

 Effective September 1, 1995 the Company purchased all the outstanding stock of
 Performance Petroleum Corporation and Pacific Osage, Inc.  Performance holds
 working interests in oil and gas leases located in Osage and Kay counties in
 northeast Oklahoma.  Pacific operates a natural gas gathering system and an oil
 field parts and supply store.

 The Company paid $800,000 to the former stockholders of Performance and
 satisfied outstanding notes payable of Performance in the approximate amount of
 $4,600,000.  The Company also issued 1,000 shares of Company common stock.  The
 Company acquired Pacific for approximately $840,000 in cash.  The acquisitions
 were financed through the issuance of a $6,800,000 term bank note (see Note K).
 In addition, the Company entered into consulting agreements with certain
 stockholders of Performance and Pacific and issued 720,000 stock options at
 $.75 per share and 322,800 stock options at $.55 per share.

                                     F-20
<PAGE>
 
                UNITED STATES EXPLORATION, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                            March 31, 1997 and 1996


NOTE T -  IMPAIRMENT OF ASSETS

 The Company purchased its subsidiary, USX Operating Co., Inc., in February
 1994.  USX Operating owns and operates oil field drilling, production and
 service equipment for outside parties as well as for Company projects.  During
 the fourth quarter of fiscal 1997 Company management decided to discontinue its
 drilling and service business.  In connection with this decision, management
 identified certain equipment which will be liquidated.  Impairment of $19,000
 was recorded to write down the equipment to be sold to its net realizable
 value.  Other equipment which will be retained and used in Company operations
 were written down $131,000 to their estimated fair value.  Certain inventory
 held in connection with the discontinued business was written down $32,000.  In
 addition, the goodwill recorded in connection with the purchase of USX
 Operating was written off.  Revenues received from outside parties in 1997 and
 1996 for drilling and contracting services were not significant.

 The impairment provision in 1997 also includes a $41,432 write down of the full
 cost pool, a $40,000 write down of the natural gas stripping plant and the
 write off of $25,000 of other assets.


NOTE U - FOURTH QUARTER ADJUSTMENTS

 During the fourth quarter of fiscal 1997 the company recorded additional
 depletion of $140,000 and recorded a write down of the full cost pool of
 $41,432.  These adjustments were made based upon the March 31, 1997 reserve
 study.  Also in the fourth quarter, the Company decided to discontinue its
 drilling and service business.  As a result of that decision, the Company made
 adjustments totaling $246,000 to write down equipment goodwill and supplies
 inventory to their liquidation and or fair values.  The Company also recorded
 additional impairment of $65,000 to adjust the gas stripping plant and other
 assets to their net realizable values.


NOTE V - OIL AND GAS INFORMATION (UNAUDITED)

 The estimates of the Company's proved oil and gas reserves are based upon
 evaluations prepared by independent petroleum engineers as of March 31, 1997
 and 1996.  All reserves are located within the United States.  Reserves are
 estimated in accordance with guidelines established by the Securities and
 Exchange Commission and the Financial Accounting Standards Board which require
 that reserve estimates be prepared under existing economic and operating
 conditions with no provision for price and cost escalation except by
 contractual arrangements.  Proved reserves are estimated quantities of oil and
 natural gas which geological and engineering data demonstrate with reasonable
 certainty to be recoverable in future years from known reservoirs.  Proved
 developed reserves are those which are expected to be recovered through
 existing wells with existing equipment and operating methods.  Reserves are
 stated in barrels of oil and millions of cubic feet of natural gas.

                                     F-21
<PAGE>
 
                UNITED STATES EXPLORATION, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                            March 31, 1997 and 1996


NOTE V - OIL AND GAS INFORMATION (UNAUDITED) - CONTINUED
 
                                             1997                  1996
                                     --------------------  ------------------
                                         Oil        Gas       Oil       Gas
                                       (bbls)     (mmcf)     (bbls)    (mmcf)
                                     -----------  -------  ----------  ------
 
 Proved developed and undeveloped
   reserves, beginning of year        1,797,319    9,500      82,032   6,448
 
 Revisions of previous estimates     (1,085,609)  (3,180)      2,037     902
 Production                             (88,114)    (318)    (59,177)   (186)
 Purchase of minerals in place          168,834    3,706   1,772,427   2,336
                                     ----------   ------   ---------   -----
 
 Proved developed and undeveloped
   reserves, end of year                792,430    9,708   1,797,319   9,500
                                     ==========   ======   =========   =====
 
 Proved developed reserves
   Beginning of year                    668,532    4,324      69,347   1,988
                                     ==========   ======   =========   =====
 
   End of year                          647,870    6,377     668,532   4,324
                                     ==========   ======   =========   =====
 

 Included in proved undeveloped reserves at March 31, 1996 are the Fitzpatrick
 leases which assumed the installation of a field-wide waterflood project.
 Reserves of 1,351,000 barrels had been assigned to this project at March 31,
 1996.

 During fiscal year 1997 the geological staff and engineering consultants of the
 Company performed an analysis of the Fitzpatrick main and north lease wells to
 determine the feasibility of installing the proposed field-wide waterflood.
 The Company's analysis indicated that the Bartlesville sandstone reservoir
 targeted for secondary recovery did not have characteristics suitable for a
 large scale waterflood project and expenditures for such a project would bear
 considerable risk.  At the conclusion of this analysis the Company and its
 independent engineering consultants decided to remove the Fitzpatrick proved
 undeveloped oil reserves from its proved oil reserves at March 31, 1997.  The
 Company intends to modify the waterflood program on the Fitzpatrick leases
 starting with a smaller pilot project.  Oil reserves for this modified program
 have not yet been determined by the Company.

 Geological and engineering estimates of proved oil and gas reserves at one
 point in time are highly interpretive, inherently imprecise and subject to
 ongoing revisions that may be substantial in amount.  Although every reasonable
 effort is made to ensure that the reserve estimates reported represent the most
 accurate assessments possible, these estimates are by their nature generally
 less precise than other estimates presented in connection with financial
 statement disclosures.

                                      F-22
<PAGE>
 
                UNITED STATES EXPLORATION, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                            March 31, 1997 and 1996

NOTE V - OIL AND GAS INFORMATION (UNAUDITED) - CONTINUED

 Standardized measure of discounted future net cash flows - The following
 --------------------------------------------------------                
 schedules present the standardized measure of estimated discounted future net
 cash flows from the Company's proved reserves and an analysis of the changes in
 these amounts for the years indicated.  Estimated future cash flows are
 determined by using year-end prices for March 31, 1997 and 1996 adjusted only
 for fixed and determinable increases in natural gas prices provided by
 contractual agreements.  Estimated future production and development costs are
 based on economic conditions at March 31, 1997 and 1996.  The standardized
 measure of future net cash flows was prepared using the prevailing economic
 conditions existing at March 31, 1997 and 1996 and such conditions continually
 change.  Accordingly, such information should not serve as a basis in making
 any judgment on the potential value of recoverable reserves or in estimating
 future results of operations.

               STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH
                 FLOWS RELATING TO PROVED RESERVES (UNAUDITED)
 
                                                    1997           1996
                                                    ----           ----
 
 Future cash inflows                            $ 27,126,992   $ 50,680,390
 Future production and development costs         (12,374,014)   (16,310,051)
                                                ------------   ------------
 
 Future net cash flows before income taxes        14,752,978     34,370,339
 Future income taxes                                (367,425)    (6,771,724)
                                                ------------   ------------
 
 Future net cash flows                            14,385,553     27,598,615
 10% annual discount for estimated timing of
   cash flows                                     (4,848,224)   (11,254,017)
                                                ------------   ------------
 
 Standardized measure of discounted future
   net cash flows                               $  9,537,329   $ 16,344,598
                                                ============   ============

            CHANGES IN STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET
               CASH FLOWS RELATING TO PROVED RESERVES (UNAUDITED)
 
                                                         1997           1996
                                                         ----           ----
 
 Amount at beginning of year                         $ 16,344,598   $ 2,612,411
 
 Sales and transfers of oil and gas production,
   net of production costs                             (1,442,617)     (746,563)
 Development costs incurred                               111,386       160,625
 Revisions of previous quantity estimates, net
   of changes in previous estimates of develop-
   ment and production costs and timing revisions     (11,855,103)     (177,833)
 Purchase of minerals in place                          2,390,684    14,666,467
 Accretion of discount                                    560,286     1,169,783
 Net changes in prices and production costs               168,571     2,018,430
 Net change in income taxes                             3,259,524    (3,358,722)
                                                     ------------   -----------
 
                                                       (6,807,269)   13,732,187
                                                     ------------   -----------
 
 Amount at end of year                               $  9,537,329   $16,344,598
                                                     ============   ===========
 

                                     F-23
<PAGE>
 
               UNITED STATES EXPLORATION, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                            March 31, 1997 and 1996


NOTE W - FAIR VALUE OF FINANCIAL INSTRUMENTS

 Statement of Financial Accounting Standards No. 107, "Disclosures About Fair
 Value of Financial Instruments," requires that the Company disclose estimated
 fair values for its financial instruments.  Such information is based on the
 requirements set forth in that Statement and does not purport to represent the
 aggregate net fair value of the Company.  The carrying amounts are the amounts
 at which the financial instruments are listed in the Company's balance sheet.
 The following methods and assumptions were used to estimate the fair value of
 each class of financial instrument:

 Cash, cash equivalents, certificate of deposit and restricted cash:  The
 carrying amounts reported in the balance sheet for cash, cash equivalents,
 certificate of deposit and restricted cash approximate their fair value.

 Long-term debt:  The carrying amount of the Company's long-term debt with a
 variable rate approximated its fair value.  The fair value of long-term debt
 with fixed rates is estimated using a discounted cash flow calculation using
 current rates.  At March 31, 1996, there was no significant difference between
 carrying amount and estimated fair value.

                                     F-24