<PAGE>   1


                                 UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549

   
                                 FORM 10-KSB/A
    


(Mark One)

[X]   Annual report pursuant to section 13 or 15(d) of the Securities Exchange
      Act of 1934

      For the fiscal year ended December 31, 1998 or

[ ]   Transition report pursuant to section 13 or 15(d) of the Securities
      Exchange Act of 1934

      For the transition period from __________ to ___________

      Commission File Number 1-13513
                             -------

                        UNITED STATES EXPLORATION, INC.
         -------------------------------------------------------------
          (Name of small business issuer 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)

Issuer's telephone number: (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) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes  X  No
                                                              ---    ---



<PAGE>   2


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 period were $5,279,921.

The aggregate market value of the common equity held by nonaffiliates of the
Company as of March 31, 1999, was approximately $18,552,838 based upon the last
reported sale of the Company's Common Shares on that date.

The total number of Common Shares outstanding as of March 31, 1999 was
15,491,828.


                      DOCUMENTS INCORPORATED BY REFERENCE:

   
         None.
    

Transitional Small Business Disclosure Format: Yes     No  X
                                                   ---    ---



<PAGE>   3


                               TABLE OF CONTENTS


   
<TABLE>
<CAPTION>
PART I                                                                                                         PAGE
                                                                                                               ----

<S>                        <C>                                                                                   <C>
         Items 1 and 2.    Description of Business and Properties.......................................          1

         Item 3.           Legal Proceedings............................................................          9

         Item 4.           Submission of Matters to a Vote of
                           Security Holders ............................................................          9

PART II

         Item 5.           Market for Common Equity and Related
                           Stockholder Matters..........................................................          9

         Item 6.           Management's Discussion and Analysis or
                           Plan of Operation...........................................................          10

         Item 7.           Financial Statements........................................................          17

         Item 8.           Changes in and Disagreements with Accountants
                            on Accounting and Financial Disclosure ....................................          17

PART III

         Item 9.           Directors, Executive Officers, Promoters and Control
                           Persons; Compliance With Section 16(a) of the Exchange Act..................          18

         Item 10.          Executive Compensation......................................................          21

         Item 11.          Security Ownership of Certain Beneficial Owners and Management..............          23

         Item 12.          Certain Relationships and Related Transactions..............................          25

         Item 13.          Exhibits and Reports on Form 8-K ...........................................          25

Signature Page ........................................................................................          
Index to Financial Statements..........................................................................          
</TABLE>
    

   
    
                                      iii

<PAGE>   4


                             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 (the "Commission"). (See
"Item 13. Exhibits and Reports on Form 8-K.")

                           FORWARD LOOKING STATEMENTS

         See "Special Note Regarding Forward Looking Statements" at the end of
"Item 6. Management's Discussion and Analysis or Plan of Operation" for
cautionary statements concerning forward looking information contained in this
report.




                                       iv

<PAGE>   5


ITEMS 1. AND 2.    DESCRIPTION OF BUSINESS AND PROPERTIES

GENERAL

         United States Exploration, Inc. ("UXP" or the "Company") is an
independent producer of oil and natural gas. Our principal oil and gas
properties are located in the Wattenberg area of the Denver-Julesburg Basin in
northeastern Colorado. Those properties were acquired from Union Pacific
Resources Company ("UPR") in May of 1998. We also hold smaller interests in
Kansas and Oklahoma and operate natural gas gathering systems located near
certain of our properties in Kansas. In January 1999, we sold a portion of our
properties in Oklahoma in order to concentrate our efforts on the Colorado
properties.

OIL AND GAS PRODUCTION

         Net oil and gas production (after royalties), average production costs
and average sales prices for the Company's products for the year ended December
31, 1998, the nine months ended December 31, 1997, and the fiscal year ended
March 31, 1997 are shown in the table below:

                          NET OIL AND GAS PRODUCTION,
                   AVERAGE PRODUCTION COSTS AND SALES PRICES

<TABLE>
<CAPTION>
                                       Net                                                  Average Sales Price  
                                    Production                   Production             --------------------------
                           --------------------------             Cost Per               Per Bb1           Per Mcf
Period                     Oil (mbbl)       Gas(mmcf)         Equivalent Unit(1)         of Oil            of Gas
------                     ----------       ---------         ------------------        ---------          -------

<S>                           <C>             <C>               <C>                       <C>               <C>  
Year ended
December 31, 1998(2)          140.1           1,650             $   6.76(3)               $13.07            $1.71

Nine months ended
December 31, 1997              64.6             274                10.14                   19.31             2.65

Year ended
March 31, 1997                 88.1             318                 9.42                   20.25             2.57
</TABLE>


(1)      Production cost per equivalent unit is calculated at the rate of 6 mcf
         of natural gas per bbl of oil.

(2)      Approximately 54% of the oil production and 80% of the gas production
         in 1998 was attributable to production from the properties acquired
         from UPR during the period from the May 15, 1998 closing date through
         year end. Approximately 31% of the oil production and 11% of the gas
         production during 1998 was attributable to production from the
         Oklahoma properties sold in January of 1999.

                                       1

<PAGE>   6


(3)      The decrease in the cost per equivalent unit of production during the
         year ended December 31, 1998 is attributable to the new properties
         acquired in Colorado, which have lower production costs than the
         Kansas and Oklahoma properties.

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

         Our natural gas is sold at spot prices determined on a monthly basis
by reference to the regional market for gas. Oil is also sold at prevailing
spot prices. During the year ended December 31, 1998, there were four
purchasers or operators who accounted for more than 10% of our revenues from
purchased and produced oil and gas sales. North American Resources Company,
Conoco, HS Resources and Woodward Marketing purchased from the Company or sold
for the Company's account oil and gas constituting 21%, 19%, 18% and 10%,
respectively, of total 1998 sales. The loss of any of these purchasers would
temporarily affect our revenues, but we believe we will continue to have a
market for our products for the foreseeable future. (See Note 10 of Notes to
Consolidated Financial Statements for more detail.)

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

PROPERTIES

         The following table summarizes our gross and net producing wells and
gross and net developed acres at December 31, 1998.

<TABLE>
<CAPTION>
                                             Producing
                                               Wells
                                    -----------------------------                   Developed
         Area                           Gas              Oil                           Acres              
         ----                       ------------     ------------               --------------------
                                    Gross    Net     Gross    Net               Gross            Net
                                    -----    ---     -----    ---               -----            ---
<S>                                  <C>     <C>       <C>     <C>              <C>             <C>      
         Colorado(1)                 276     130       68      43               41,018          39,306(3)
         Kansas                       10      10       --      --                3,728           3,728
         Oklahoma(2)                  --      --       19      19                  885             885
</TABLE>

----------
         (1)   All of the properties and reserves in Colorado were acquired in
May 1998 from UPR.

         (2)   Excludes approximately 100 oil and gas wells and associated
acreage sold in January 1999.

                                       2

<PAGE>   7


         (3)   The net acres represent interests in depths below the
Codell/Neobrara formations. The Company's interests in shallower formations
approximate 28,650 net acres.

----------

         We operate 81 of the wells in which we own an interest in Colorado and
all of the wells in which we own an interest in Kansas and Oklahoma.

         As part of our acquisition of the Colorado properties in May 1998, we
entered into an Exploration Agreement with UPR giving us the right to explore
and develop all of UPR's undeveloped acreage in the Wattenberg area of the
Denver-Julesburg Basin, excluding certain acreage already committed to other
agreements. The Exploration Agreement covers approximately 400,000 gross acres
and will also cover any undeveloped acreage currently committed to another
agreement that reverts to UPR during its term. In order to keep the Exploration
Agreement in effect, we must drill 15 commitment wells during the first 18
months and 20 commitment wells during each succeeding 12-month period for up to
five 12-month option periods. If we do not drill the required number of
commitment wells during any period, the Exploration Agreement will terminate at
the end of the period and we will be required to pay liquidated damages of
$125,000 for each commitment well that we did not drill during the period. As of
March 31, 1999, we had not drilled any commitment wells. The Company has
negotiated (but has not finalized) an amendment to the Exploration Agreement
under which certain future deepenings and re-entries, which are significantly
less expensive than new wells, will count as commitment wells during the initial
18-month term of the Exploration Agreement. Management believes that resources
are available to satisfy the Company's commitment under the Exploration
Agreement during the initial term. The failure to drill the commitment wells
would have a material adverse effect on the financial condition and prospects of
the Company. See "Item 6. Management's Discussion and Analysis or Plan of
Operation--Liquidity and Capital Resources" and Note 16 of Notes to Consolidated
Financial Statements.

         In addition, the Exploration Agreement requires UPR to transfer to us
any working interests in wells in the subject area that UPR acquires under
existing agreements during the term of the Exploration Agreement. That
requirement covers a number of existing wells in which UPR has the right to
obtain a working interest or convert an overriding royalty interest into a
working interest after payout has been reached and will cover other wells that
may be drilled by operators with whom UPR has existing farm-out or similar
agreements. We also have the right to take over wells on the UPR lands that are
required to be offered to UPR prior to abandonment.

         We did not drill any new wells on any of our properties during the
three-year period ended December 31, 1998. After the UPR acquisition, we began a
program of deepening existing wells on the acquired properties to commence
production from other formations in which we had acquired an interest. At
December 31, 1998, we had deepened a total of 16 wells (6.64 net) at a total
cost net to our interests of approximately $1.5 million. All of those deepenings
resulted in production from the deeper zone. As of March 8, 1999, the new zones
in these 16 wells were producing at a rate of approximately 1.8 mmcf of gas and
24 bbl of oil per day net to our interest. Between December 31, 1998 and March
8, 1999, we deepened and brought to production another 8 wells which were

                                       3

<PAGE>   8


producing from the new zones approximately 1.0 mmcf of gas and 3 bbl of oil per
day net to our interest as of March 8, 1999. Subject to capital constraints, we
currently plan to continue this deepening program in 1999. See "Item 6.
Management's Discussion and Analysis or Plan of Operation - Liquidity and
Capital Resources."

         The Company also owns 100 acres of land near Corpus Christi, Texas
that is for sale. The land was the site of an inactive refinery that was
removed during 1998.

RESERVES

         The following is a summary of the Company's estimated proved reserves
as of year-end 1997 and 1998:

<TABLE>
<CAPTION>
                                                          December 31,                                     
                           -----------------------------------------------------------------------------
                                       1997                                           1998                         
                           -----------------------------               ---------------------------------
                           Kansas &                                    Kansas &
                           Oklahoma    Colorado    Total               Oklahoma(1)     Colorado    Total
                           --------    --------    -----               -----------     --------    -----
<S>                       <C>             <C>     <C>                    <C>           <C>        <C>   
Crude Oil - mbbl            252.2         --        252.2                   53.4         2162.2     2215.6
Natural Gas - mmcf        2,518.0         --      2,518.0                1,427.0       57,534.6   58,970.6
Total - mmcfe             4,031.2         --      4,031.2                1,747.4       70,716.8   72,464.2
</TABLE>

---------------------
(1)      Excludes reserves of 1,593 mmcfe associated with Oklahoma properties
         sold in January 1999.

All of the increase in estimated reserves from 1997 to 1998 can be attributed
to the acquisition of the Colorado properties from UPR. (See Note 19 of Notes
to Consolidated Financial Statements for more detailed information concerning
changes in the Company's estimated oil and gas reserves during 1998.)
Notwithstanding the significant increase in reserves provided by this
acquisition, reported year-end 1998 volumes represent a material decrease from
the volumes attributed to this acquisition earlier in the year. In May 1998,
the Company estimated that the UPR properties contained approximately 140 Bcfe
of proved reserves. Approximately one-third of the difference between the May
estimate and the estimated reserves at year-end 1998 can be attributed to price
decreases. Year-end 1998 natural gas and oil prices were $1.85/mcf and
$9.40/bbl, as compared to $1.96/mcf and $16.43/bbl at year-end 1997. The
remainder of the difference is attributable to (1) higher than anticipated
operating and capital costs, (2) the inability, at the time the reserve study
was prepared, to establish the extent of the Company's interests in certain
formations and (3) lower than anticipated predictability of production from the
Dakota formation.

         No reserve estimates were filed with any other federal authorities or
agencies since January 1, 1998.


                                       4

<PAGE>   9


FACILITIES

         The Company occupies a portion of its executive and administrative
offices at 1560 Broadway, Suite 1900, Denver, Colorado, pursuant to a Cost and
Expense Sharing Agreement with Benson Mineral Group, Inc. ("BMG"), an affiliate
of Bruce D. Benson, Chairman of the Board, Chief Executive Officer and
President of the Company. Pursuant to that Agreement, the Company shares
approximately 9,490 square feet of office space with BMG. The Company pays its
pro rata share of office rent, personnel costs, administrative costs and
expenses to BMG on a monthly basis. During 1998, the Company paid approximately
$15,600 in rent and $86,970 in common expenses to BMG under this agreement.

         On July 1, 1998, UXP leased approximately 11,850 square feet of
additional office space adjacent to the space it shares with BMG. The
additional space was obtained to accommodate expansion in our operations
following the UPR acquisition. The term of the lease is 117 months. The rental
is $14,817 per month, increasing to $19,410 per month after 57 months. After
the Company leased this additional office space, BMG waived the right to
collect approximately $50,000 accrued under the Cost and Expense Sharing
Agreement during 1998.

EMPLOYEES

         At March 31, 1999, the Company had 13 employees, of which five are
field employees and the remainder are executive and office personnel. The
Company also engages independent contractors to supplement the services of its
employees as needed. At March 31, 1999, the Company was using the services of
approximately six independent contractors on a full time equivalent basis.

         Pursuant to the Cost and Expense Sharing Agreement between the Company
and BMG, BMG shares the services of nine employees and contractors of the
Company located in its executive and administrative offices. Such individuals
include F. Michael Murphy, Vice President and Secretary of the Company, Murray
N. Brooks, Vice President of Operations and Randall L. Rogers, Treasurer and
Principal Accounting Officer. Prior to February 1999, the nine shared employees
were employed by BMG and the Company reimbursed BMG for a portion of their
salaries and benefits proportionate to the portion of their time spent on UXP
matters. Since February 1999, these shared employees have been employed by the
Company and BMG reimburses the Company for the cost of time spent on BMG
matters. During 1998, the Company paid BMG approximately $558,000 under this
arrangement.

COMPETITION

         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 capital for drilling and acquisitions and may be at a competitive

                                       5

<PAGE>   10


disadvantage compared with more established companies with proven records of
successful operations.

GOVERNMENT REGULATION

         The production and sale of oil and gas are subject to various federal,
state and local governmental regulations, which may be changed from time to
time in response to economic or political conditions. Matters subject to
regulation include discharge permits for drilling operations, drilling bonds,
reports concerning operations, the spacing of wells, unitization and pooling of
properties, taxation and environmental protection. From time to time,
regulatory agencies have imposed price controls and limitations on production
by restricting the rate of flow of oil and gas wells below actual production
capacity in order to conserve supplies of oil and gas. Changes in these
regulations could have a material adverse effect on the Company.

                                       6

<PAGE>   11


                               GLOSSARY OF TERMS

<TABLE>
<S>                                 <C>
BBLS:                               Barrels of oil.

BCFE:                               Billion cubic feet of gas equivalent, calculated on the basis of six mcf
                                    of gas for one bbl. of oil.

GROSS ACRE:                         An acre in which a working interest is owned, without regard to the
                                    size of the interest.

GROSS WELL:                         An oil or gas well in which a working interest is owned, without
                                    regard to the size of the interest.

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, subject
                                    to the payment of rentals, bonuses and/or
                                    royalties.

MBBL:                               Thousand barrels.

MCF:                                Thousand cubic feet.

MMCF:                               Million cubic feet.

NET ACRES:                          One net acre is deemed to exist when the sum of the fractional
                                    working interests owned in gross acres equals one.  The number of
                                    net acres is the sum of the fractional working interests owned in gross
                                    acres.

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

PROVED DEVELOPED                    Proved reserves that are  expected to be recovered through  existing
RESERVES:                           wells with existing equipment and operating methods.

PROVED RESERVES:                    Quantities of oil and gas which geological and engineering data
                                    demonstrate with reasonable certainty to be recoverable in future
                                    years from known reservoirs.
</TABLE>

                                       7

<PAGE>   12


<TABLE>
<S>                                 <C>
PROVED                              Proved reserves that are expected to be recovered from new wells or
UNDEVELOPED                         from existing wells where a relatively major expenditure is required
RESERVES:                           for recompletion.
</TABLE>

                                       8

<PAGE>   13


ITEM 3.           LEGAL PROCEEDINGS

         No material legal proceeding 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

         There were no items submitted to a vote of the Company's Shareholders
during the Company's fourth quarter ended December 31, 1998.

ITEM 5.           MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER
                  MATTERS

         The Company's Common Stock was listed on the American Stock Exchange
effective October 23, 1997. Prior to that date, the Company's Common Stock was
traded over-the-counter and quoted in the Nasdaq Small Cap market.

         The following table sets forth the range of high and low sales prices
for the Common Stock on the American Stock Exchange from October 23, 1997
through December 31, 1998 and the range of high and low bid quotations as
reported for the Common Stock by Nasdaq for the remainder of the period shown.
Nasdaq quotations represent prices between dealers, do not include retail
mark-ups, mark-downs or commissions and do not necessarily represent prices at
which actual transactions were effected.

<TABLE>
<CAPTION>
                                                              HIGH                LOW
YEAR ENDED DECEMBER 31, 1998                                  -----              ------
----------------------------

<S>                                                           <C>                <C>  
Fourth Quarter                                                $3.00              $1.25

Third Quarter                                                 $3.50              $1.88

Second Quarter                                                $4.00              $2.50

First Quarter                                                 $3.31              $2.87

YEAR ENDED DECEMBER 31, 1997
----------------------------

Fourth Quarter                                                $4.06              $2.63
(October 23 to December 31)

Fourth Quarter                                                $3.84              $3.63
(October 1 to October 22)

Third Quarter                                                 $4.50              $3.13

Second Quarter                                                $4.88              $3.00

First Quarter                                                 $4.50              $2.81
</TABLE>

                                       9

<PAGE>   14


          The number of record holders of the Common Shares as of December 31,
1998 was 417, including nominees of beneficial owners. The Company estimates
that there were approximately 1,500 beneficial owners of its Common Shares as
of that date.

          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 on its common stock
until the Series C Preferred Stock is redeemed or converted.

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

INTRODUCTION

          In May 1998, we acquired our Colorado properties from UPR. Those new
properties are many times larger than the properties we have historically
owned. For example, in December 1998, we produced approximately 190 mmcf of gas
and 12.3 mbbl of oil. In the nine months ended December 31, 1997, the average
monthly production was 30.4 mmcf of gas and 7.2 mbbl of oil. As a result of the
impact of this acquisition, comparisons of 1998 to 1997 are not particularly
meaningful. In addition, 1998 was the first full year since we changed our
fiscal year to a calendar year. The 1997 numbers presented are for the
nine-month transition period ended December 31, 1997.

          As a result of the losses experienced by the Company in recent
periods and existing defaults under our principal loan agreement, our auditors
have included a "going concern" qualification in their opinion on our 1998
financial statements. See "Index to Financial Statements - Reports of
Independent Auditors."

LIQUIDITY AND CAPITAL RESOURCES

Bank Credit Facility 

          On May 15, 1998, in connection with the UPR acquisition, we entered
into a Credit Agreement with ING (U.S.) Capital Corporation ("ING")
establishing a revolving credit facility (the "Credit Agreement"). The maximum
available borrowings under the Credit Agreement were initially set at $35
million, subject to periodic redeterminations of the borrowing base. The
original loan amortization schedule included 20 quarterly installments
beginning March 31, 2000. Loan interest

                                       10

<PAGE>   15


is generally payable on a quarterly basis at a rate selected by us which is
determined by reference to LIBOR or the lender's reference rate plus varying
margins. At March 31, 1999, the outstanding loan balance was $32 million with a
weighted-average interest rate of approximately 7.3% per annum.

          Our obligations under the Credit Agreement are secured by
substantially all of the Company's oil and gas properties. The Credit Agreement
prohibits the payment of dividends on our Common Stock and prohibits the
payment of dividends on our Series C Preferred Stock for periods ending after
June 30, 1999. Prior to June 30, 1999, we are prohibited from paying any
dividend on the Series C Preferred Stock if a default under the Credit
Agreement exists. No dividend has been paid on the Series C Preferred Stock
since the quarter ended June 30, 1998.

          On November 18, 1998, we notified ING that we were in default of
several of the Credit Agreement's financial covenants as of September 30, 1998.
As a result, the entire amount of the outstanding bank loan was reclassified as
a current liability on the Company's balance sheet in accordance with the
requirements of generally accepted accounting principles. On January 15, 1999,
we received a Limited Consent and Agreement from ING waiving all outstanding
matters of default in conjunction with the bank's consent to sell certain
Oklahoma assets and a reduction in the Company's borrowing base to $32 million.
The waiver of default expired on February 28, 1999, by which time it had been
anticipated that ING would have completed its year-end review of the Company's
reserves and established a new borrowing base.

          As of April 15, 1999, the bank had not yet completed its review of
reserves or established a new borrowing base level due to delays in finalizing
the estimates of the Company's reserves by third party engineers. Based on
preliminary reports provided to the bank, ING has advised that the new
borrowing base level will most likely be established within a range between $21
million and $26 million dollars. However, ING has provided no commitment that
the borrowing base will be established within this range. The anticipated
reduction in borrowing base value reflects the combined impact of (1) lower
product prices, (2) higher than anticipated operating and capital costs, (3)
the inability, at the time the Company's year-end reserve study was prepared,
to establish the extent of its interests in certain formations and (4) lower
than expected predictability of production from the Dakota formation.

          We have not yet established with the bank a plan for eliminating the
anticipated borrowing base deficiency. However, we have begun discussions with
ING and are evaluating our options. Under the terms of the Credit Agreement,
the bank has the ability to declare the outstanding loan balance to be due and
payable and foreclose on the properties which are pledged as security to the
loan. However, ING has given no indication that it intends to exercise such
remedies in the foreseeable future. On the contrary, the bank has expressed its
desire to work with us to find a mutually acceptable solution to the borrowing
base shortfall.

          ING has recently advised all of the customers of its Natural
Resources Group that this department of the bank has ceased ongoing operations.
However, the bank has retained certain personnel to administer the loans of
existing clients, including UXP, and has stated that their withdrawal from the
oil and gas business is being managed in order to have as little adverse impact
on their clients as possible.

                                       11

<PAGE>   16


Capital Expenditures  

          Until the borrowing base shortfall described above has been resolved,
we will significantly curtail projects requiring cash investment by the
Company, focusing principally on projects that pay back their investment over a
short period of time. We will also seek sources of outside financing which will
allow development of the Company's capital projects with little or no
investment by the Company, but no assurance can be given that such sources will
become available.

          Under the Exploration Agreement with UPR, we have an obligation to
drill 15 commitment wells prior to December 1, 1999. As of April 15, 1999, none
of these wells had been drilled. If the wells are not drilled by the deadline,
the Exploration Agreement is terminated and we will be obligated to pay
liquidated damages of $125,000 for each well not drilled. The Company has
negotiated (but has not finalized) an amendment to the Exploration Agreement
under which certain future deepenings and re-entries, which are significantly
less expensive than new wells, will count as commitment wells during the
initial 18-month term. Management believes that resources are available to
satisfy the Company's commitment under the Exploration Agreement during the
initial term.

Cash Balances and Cash Flow

          As of April 10, 1999, the Company had cash and cash equivalents of
approximately $2.6 million. However, based on current prices and production
levels, the Company is experiencing negative cash flow before capital spending.
Cost reductions are being analyzed. However, there can be no assurance that
cost savings will be sufficient to create positive cash flow. Based on current
projections, we expect existing cash resources would be sufficient to fund
ongoing operations with limited capital expenditures through the end of the
year.

          The Company's cash flow is very sensitive to changes in commodity
prices. A $.25/mcf increase in the price of gas and a $1.00/bbl increase in the
price of oil would increase expected cash flow from the Company's currently
producing wells over the twelve month period beginning May 1, 1999 by
approximately $450,000 and $75,000, respectively.

Conversion of Series C Preferred Stock

          In order to reduce the negative impact to earnings attributable to
common shareholders and cash flow attributable to preferred stock dividends, we
engaged in an active program to convert Series C Preferred Stock into shares of
common stock during 1998. Since December 31, 1997, 3,391,834 shares of Series C
Preferred Stock have been converted into 6,783,668 shares of common stock
(including 50,000 shares of preferred stock converted after December 31, 1998).
This conversion reduces preferred stock dividend requirements by approximately
$1.6 million per year. The annual dividend requirement on the 443,166 shares
that remain outstanding is approximately $200,000. However, no dividends have
been paid on any of the Company's preferred stock since June 30, 1998.

                                       12

<PAGE>   17


Property Sales

          During the first quarter of 1999, we announced the sale of certain
Oklahoma assets for $1,825,000. The proceeds of this sale were used to pay down
the outstanding bank loan. We have also announced our intention to dispose of
the Company's remaining assets in Oklahoma, Kansas and Texas. Any proceeds
realized from these sales will also be applied to reduce the ING loan.
Therefore, such sales will reduce interest expense and may reduce the remaining
borrowing base shortfall, but until such time as the borrowing base shortfall
has been eliminated, the sales cannot be expected to improve the Company's
liquidity.

RESULTS OF OPERATIONS

Year Ended December 31, 1998

          The Company realized a net loss of $21,251,173 for the year compared
to a loss of $7,584,803 for the transition period (nine months) ended December
31, 1997. Including preferred stock dividends, the loss for the year was
$22,286,106 or $1.67 per share.

          The largest component of the net loss was a provision for impairment
of assets totaling $15,351,978, of which $15,206,978 was an adjustment to the
carrying value of the Company's oil and gas property and equipment based upon
engineering reserve studies prepared as of December 31, 1998. See "Items 1 and
2 Description of Business and Properties-Reserves" for a discussion of the
Company's oil and gas reserves. As a result of the reduction in estimated
reserves, the Company recorded an additional depletion, depreciation and
amortization expense in the fourth quarter of 1998 totaling $2,558,311. Without
the provision for impairment of the Company's oil and gas property and
equipment and the additional depletion, depreciation and amortization expense
recorded in the fourth quarter, the Company's net loss would have been
$3,485,884.

          Because of the acquisition of the UPR properties in May 1998,
comparison of the results of operations between the year ended December 31, 1998
and the nine months ended December 31, 1997 is not meaningful. The oil and gas
properties involved in the UPR acquisition dwarf the oil and gas properties
owned by the Company at December 31, 1997. The Company initially borrowed
$29,000,000 in connection with the UPR acquisition and used some $11,000,000 of
existing cash to complete the acquisition. As a result, sales of Company
produced oil and gas, production costs of oil and gas, general and
administrative expenses and interest expense increased substantially, while
interest income declined substantially. Of the $4,376,561 in sales of Company
produced oil and gas, $3,144,919 are attributable to the UPR properties. Of the
$2,692,644 in production costs- oil and gas, $1,638,997 are attributable to the
UPR properties. All interest expense is attributable to the UPR acquisition and
substantially all of the decrease in interest income results from the use of
Company cash in the UPR acquisition. The increase in general and administrative
expense primarily results from additional personnel and associated costs, office
facilities and legal and accounting expenses, all of which are related to the
continuing operations of the UPR properties.

          Sales of purchased gas and the related costs of gas acquisition and
gathering and transmission were somewhat affected by price, but the large
reduction in sales of purchased gas is attributable to

                                       13

<PAGE>   18


the shut-in of the Kansas gathering system for five months and the subsequent
period of time needed to get the gathering system completely functioning again
after the shut-in period.

          Preferred stock dividends attributable to the year ended December 31,
1998 are $1,034,933 and include $118,360 for dividends for the last two quarters
of 1998, which were not declared or paid and are not accrued on the balance
sheet. Preferred stock dividends attributable to the nine months ended December
31, 1997 were $1,421,226. Preferred stock dividends attributable to the three
months ended March 31, 1997 were $480,000. The comparison between the two
calendar years is $1,034,933 attributable to 1998 and $1,901,226 attributable to
1997. The large reduction is attributable to the conversion of preferred stock
to common stock during 1998. Most of these conversions were effective
immediately after the cash dividend paid for the second quarter of 1998.

Transition Period (Nine Months) Ended December 31, 1997

          During the Transition Period ended December 31, 1997, the Company
realized a net loss of $7,584,803 on revenues of $3,034,585. This compares to a
profit of $121,627 on revenues of $3,544,961 for the nine months ended December
31, 1996 and a loss of $87,530 on revenues of $4,513,387 for the fiscal year
ended March 31, 1997. Including provision for Preferred Stock dividends
applicable to the period, the net loss for the Transition Period was
$9,006,029, or $1.06 per share.

          The greatest component of the net loss for the Transition Period was
a provision for impairment of assets of $6,320,401. Such provision includes
$4,901,567 for adjustment of the carrying costs of the Company's oil and gas
assets, and $1,075,011 in connection with a write down of a refinery and real
estate owned by the Company. Of the adjustment to the full cost pool,
substantially all is attributable to a revision in the estimate of future
revenue quantities of the Company's oil and gas assets since fiscal year end
March 31, 1997. The adjustment in the carrying costs of the refinery and
associated real estate was made following management's re-evaluation of those
assets and their proposed disposition by the Company. Depreciation, depletion
and amortization expense in the final quarter of the Transition Period
increased $984,461, mostly as the result of the revision of the Company's
proved oil and gas reserve quantities. Excluding provision for impairment of
assets, the Company would have realized a net loss of $1,264,402 for the
Transition Period, which includes extraordinary expenses to clean up the
existing assets in order to maximize productivity. Even without the provision
for the impairment of assets and the substantial increase in depreciation,
depletion and amortization, the Company's revenues were insufficient to cover
its costs and expenses.

          Revenues for the Transition Period decreased from the comparable
period ended December 31, 1996, from $3,544,961 to $3,034,585. A substantial
portion of that decrease is attributable to a reduction of revenues from
contracting services and sale of oil field supplies, as the Company determined
to discontinue those operations. Revenue from the sale of oil and gas produced
by the Company remained generally constant, while revenue from the sale of
purchased gas decreased slightly.

                                       14

<PAGE>   19


          Production costs as a percentage of Company produced oil and gas
increased from the nine months ended December 31, 1996 to the Transition
Period, from 43% to 57% of revenues. Such increase is attributable to the
Company's repair and clean-up effort, although production rates and prices also
contributed to this increase. Gas transportation costs also increased during
the Transition Period, as the Company performed necessary repairs on certain of
its gas gathering systems. Finally, general and administrative expenses
increased substantially, from $359,778 for the nine months ended December 31,
1996 to $841,193 for the Transition Period. Such increase is primarily
attributable to increased staffing, increased legal and accounting costs, a
$50,000 consulting fee paid to Benson Mineral Group, Inc., $80,750 paid to
former directors and employees in the form of stock, and the cost of listing
the Company's stock on the American Stock Exchange.

          Other income during the Transition Period helped reduce the Company's
net loss. The Company realized other income of $736,222 for the Transition
Period, including $677,488 in interest. Interest income increased substantially
from the nine months ended December 31, 1996 to the Transition Period, as the
Company had substantial temporary investments of cash resulting from the
private placement of the Preferred stock during the nine months ended December
31, 1996.

YEAR 2000 COMPLIANCE

          Year 2000 issues result from the inability of computer programs or
equipment to accurately calculate, store or use a date subsequent to December
31, 1999. This could result in a system failure or miscalculations causing
disruptions of the Company's operations, including, among other things, a
temporary inability to process transactions, send invoices or engage in other
normal business operations. Year 2000 problems experienced by the Company's
suppliers and customers could also adversely affect the Company by delaying its
receipt of goods, services or payments.

          The Company believes that its own computer systems are Year 2000
compliant. For reasons unrelated to Year 2000 issues, the Company acquired new
IBM hardware for all of its critical systems during 1998 and has been advised
by the vendor that the new equipment is Year 2000 compliant. The balance of the
Company's operating systems are PC-based and all PCS have been acquired within
the past two years. The Company's software system was purchased in 1992, but
has been continuously maintained by the software vendor, who has advised the
Company that the system is Year 2000 compliant. Accordingly, the Company does
not expect to incur any material costs associated with internal Year 2000
issues.

          The Company is developing a program to have formal communications
with its significant suppliers, business partners and customers to determine
whether those third parties have addressed Year 2000 issues. The primary
companies with which the Company deals are large, publicly-held enterprises
that can be expected to be alert to Year 2000 issues as a result of regulatory
pressures or otherwise. However, there can be no assurance that the Company's
receipt of goods, services or payments will not be complicated or delayed as a
result of Year 2000 problems experienced by third parties, including its
suppliers and customers or others with whom its suppliers and customers deal.

                                       15

<PAGE>   20


               SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

          Portions of this Report contain "forward-looking statements" within
the meaning of the federal securities laws. Such forward-looking statements
include, without limitation, statements regarding the Company's need for and
potential sources of capital, oil and gas reserves, future revenues and results
of operations, plans for future development operations and plans for dealing
with third parties, and are identified by words such as "anticipates," "plans,"
"expects," "intends" and "estimates." Factors that could cause actual results
to differ materially from these contemplated by such forward-looking statements
include, among others, the following:

          Reserve Estimates. The Company's estimates of proved reserves of oil
and gas and future net cash flows therefrom are based on various assumptions
and interpretations and, therefore, are inherently imprecise. Actual future
production, revenue, taxes, development expenditures, operating expenses and
quantities of recoverable oil and gas reserves may be subject to revision based
upon production history, results of future exploration and development,
prevailing oil and gas prices, operating costs and other factors.

          Reliance on Key Personnel. The Company is dependent upon its
executive officers and key employees, particularly Bruce D. Benson, its Chief
Executive Officer. The unexpected loss of the services of one or more of these
individuals could have a detrimental effect on the Company. The Company does
not have key person life insurance on any of its officers.

          Management of Growth. The acquisition of the UPR properties resulted
in a substantial change in the size and extent of the Company's assets and
operations. In order to accommodate this growth, the Company has expanded its
staffing, office space and management information systems. The Company could
experience temporary difficulties in the course of managing the growth within
the Company. Any such difficulties could adversely affect the Company's
business, financial condition or results of operations until resolved.

          Availability of Services and Materials. The Company's expanded
operations will require significantly higher levels of third-party services and
materials. Such services and materials have at times been scarce and the
unavailability of a sufficient number of drilling rigs or other goods or
services could impede the Company's ability to achieve its objectives and
significantly increase the costs of its operations.

          Increased Debt. The Company's ability to service the debt incurred
under the Credit Agreement is in part dependent upon increasing its cash flows
from the UPR properties through further development work. The Company's ability
to conduct that further development work is, in turn, dependent upon the
availability of adequate capital and its ability to enter into appropriate
agreements with the operators of wells in which it owns an interest to deepen
or recomplete the wells for production from additional zones. The Company's
capital resources are quite limited and it is currently in default under its
loan agreement. There can be no assurance that it will be able to resolve the
existing defaults or increase revenues sufficiently to service its debt. These
factors can be expected to adversely affect the Company's ability to obtain
additional financing for working capital, capital expenditures and other
purposes.

                                       16

<PAGE>   21

          Oil and Gas Prices and Markets. The Company's revenues are dependent
upon prevailing prices for oil and gas. Oil and gas prices can be extremely
volatile. Prevailing prices are also affected by the actions of foreign
governments, international cartels and the United States government. Recent
declines in oil and gas prices have adversely affected the Company and have
resulted in a reduction in the estimated proved reserves attributable to the
Company's properties, with a resulting decrease in the Company's borrowing
base. Further price declines could occur in the future with similar results. In
addition, the Company's revenues depend upon the marketability of production,
which is influenced by the availability and capacity of gas gathering systems
and pipelines, as well as the effects of federal and state regulation and
general economic conditions.

          Government Regulation. Changes in government regulations applicable
to the production and sale of oil and gas may adversely affect the Company. See
"Items 1 and 2 - Description of Business and Properties - Government
Regulation."

          Most of these factors are beyond the control of the Company.
Investors are cautioned not to place undue reliance on forward-looking
statements.

ITEM 7.           FINANCIAL STATEMENTS

          Reference is made to the Index to Financial Statements following the
Signature Page of this report for a listing of the financial statements
included in this report.

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

   
          On May 19, 1998 the Company engaged Ernst & Young LLP as its 
independent auditors for the year ending December 31, 1998, as approved by the 
Board of Directors upon recommendation of the Company's audit committee and 
simultaneously dismissed Grant Thornton, LLP.

          The reports of Grant Thornton, LLP on the Company's financial 
statements for the past two fiscal years did not contain an adverse opinion or a
disclaimer of opinion and were not qualified or modified as to uncertainty,
audit scope or accounting principles.

          Since the beginning of the Company's fiscal year ended March 31, 1996,
there were no disagreements with Grant Thornton, LLP on any matters of
accounting principles or practices, financial statement disclosure, or auditing
scope and procedures which, if not resolved to the satisfaction of Grant
Thornton, LLP, would have caused Grant Thornton, LLP to make reference to the
matter in their report on the Company's financial statements. 
    

   
    
                                       17

<PAGE>   22
                                    PART III

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

DIRECTORS AND EXECUTIVE OFFICERS

         The directors and executive officers of the Company are as follows:

<TABLE>
<CAPTION>
         Name                               Age               Position
         ----                               ---               --------
<S>                                         <C>               <C>
         Bruce D. Benson                    60                Chairman of the Board of Directors, Chief
                                                              Executive Officer and President
         Thomas W. Gamel                    59                Director
         Robert J. Malone                   54                Director
         Richard L. Robinson                69                Director
         F. Michael Murphy                  57                Chief Financial Officer, Vice President and
                                                              Secretary
         Murray N. Brooks                   56                Vice President of Operations
         Randall L. Rogers                  43                Treasurer
         John Wallace                       39                Vice President of Exploration and Acquisitions
         Kenton M. Scroggs                  47                Vice President-Finance
         Shirley Kovar                      49                Vice President-Land
</TABLE>

         Bruce D. Benson has been the Chairman of the Board of Directors, Chief
Executive Officer and President of the Company since August 1997. Since 1965,
Mr. Benson has been the owner and president of Benson Mineral Group, Inc.
("BMG"), a privately held company involved in oil and gas production, gas
processing and oil and gas pipeline operations. BMG and Mr. Benson have also 
been active investors in a variety of other industries including real estate,
banking, mortgage servicing, cable television, management of real estate
investment trusts and franchise restaurants. Mr. Benson is a director of Asset
Investors Corporation, a publicly held company listed on the New York Stock
Exchange, and Commercial Assets, Inc., a publicly held company listed on the
American Stock Exchange. He is a trustee and past president and past chairman of
the Denver Area Council of the Boy Scouts of America, Chairman of the Denver
Zoological Foundation, National Chairman of the University of Colorado
Comprehensive Capital Campaign and past chairman of the Colorado Commission on
Higher Education.

         Thomas W. Gamel has been a director of the Company since August 1997.
Since 1992, Mr. Gamel has served as chairman of Rockmont Value Investors, Ltd.,
a privately held investment company. He has been an owner and director of Timpte
Industries, Inc., a diversified private holding company, since 1970, and is an
owner and director of several other private companies. Mr. Gamel is a certified
public accountant.

         Robert J. Malone has been a director of the Company since August 1997.
From 1992 to 1996, Mr. Malone was the chairman and chief executive officer of
Colorado National Bank of
    

                                       18
<PAGE>   23




   
Denver, Colorado (now US Bank of Denver, Colorado) and has continued as the
chairman of the board since 1996. From 1990 to 1992, he was chairman of the
board, president and chief executive officer of Western Capital Investment Inc.
and its principal subsidiary, Bank Western. Western Capital was merged into
First Bank Systems, Inc. (now U.S. Bancorp) in December 1992. He presently
serves on the Board of Commercial Assets, Inc., a publicly held company listed
on the American Stock Exchange. Mr. Malone has served on the boards of several
community and charitable organizations, including the Denver Metro Chamber of
Commerce, and is currently Chairman of the Board of Trustees of Colorado's Ocean
Journey and a Trustee of Regis University. He is past-president of the Young
Presidents Organization and past chairman of the board of Regis University.

         Richard L. Robinson has been a director of the Company since August
1997. Since 1975, Mr. Robinson has served as chairman of the board and chief
executive officer of Robinson Dairy, Inc., a privately held dairy company. He
also serves on the Board of Directors of several other companies, including
Asset Investors Corporation, a publicly held company listed on the New York
Stock Exchange, and Columbia/Health One. In addition to serving on the Board of
Directors of the Milk Industry Foundation, Mr. Robinson serves on the Boards of
many charitable and community organizations including Rose Community Foundation,
Regis University and Children's Hospital of Denver, Colorado.

         F. Michael Murphy was appointed Chief Financial Officer, Vice
President and Secretary of the Company in August 1997. He has been employed by
BMG since 1977, first as tax manager and since 1980 as chief financial officer.
Mr. Murphy is a certified public accountant, having begun his career with Arthur
Young (now Ernst & Young).

         Murray N. Brooks has been the Vice President of Operations of the
Company since August 1997. Mr. Brooks has more than 30 years experience in the
oil and gas industry. He has been employed by BMG since 1984. During that time
he has worked in virtually every aspect of BMG's business with special emphasis
on management, engineering, production and drilling. From 1965 through 1984, Mr.
Brooks was employed by Husky Oil Company, rising to the division manager of the
Mid-Continent Region with overall responsibility for engineering.

         Randall L. Rogers has been Treasurer of the Company since August 1997.
He has been employed by BMG since 1985. Until 1996, he was BMG's tax manager and
since that time he has been its controller. Mr. Rogers is a Certified Public
Accountant.

         John Wallace was appointed Vice President of Exploration and
Acquisitions in May 1998. For more than five years prior to joining the Company,
Mr. Wallace was President of The Esperanza Corporation, a privately held oil and
gas acquisition company, and Vice President of Dual Resources, Inc., a privately
held oil and gas exploration company. Esperanza has effected more than 25
acquisitions of producing properties throughout the United States. In addition,
Esperanza formed and administered royalty programs for private investors,
primarily in the Rocky Mountain region, and has participated in a number of
international exploration projects. Dual Resources is in the business of
generating and selling exploration prospects, several of which have resulted in
new field discoveries.
    


                                       19
<PAGE>   24




   
         Kenton M. Scroggs was appointed Vice President - Finance of the
Company on September 29, 1998. Mr. Scroggs currently provides services to the
Company as an independent consultant rather than as an employee. Prior to his
appointment as an officer of the Company, Mr. Scroggs was employed by Forest Oil
Corporation where he served as Vice President and Treasurer from 1993 through
1997.

         Shirley Kovar was appointed Vice President-Land of the Company in
January 1999. Ms. Kovar joined UXP in April 1998 as Manager of the Land
Department. Prior to that she worked as an independent consultant in the oil and
gas industry for more than five years. Ms. Kovar has more than 27 years of
experience in the industry and is a member of the American, Colorado and Denver
Bar Associations.

         Directors are elected annually to serve until the next annual meeting
of shareholders and until their successors are elected. Executive officers serve
at the pleasure of the Board. There is no family relationship between any of the
Company's directors or executive officers. Messrs. Benson, Murphy, Brooks and
Rogers continue to serve as officers of BMG and do not devote their full
business time to the Company.

BOARD OF DIRECTORS' MEETINGS AND COMMITTEES

         During 1998, the Company's Board of Directors met 11 times and took
action three times by unanimous written consent. Each of Messrs. Benson, Gamel,
Malone and Robinson were present, either in person or by telephone, at each
meeting of the Board of Directors and each committee of which he was a member
during the period he served as a director.

         The Board of Directors of the Company maintains a standing Audit
Committee and a standing Compensation Committee. The Audit Committee is
responsible for reviewing and evaluating the Company's financial controls and
financial reporting obligations. The members of the Audit Committee are Messrs.
Gamel (Chairman), Malone and Robinson. The Compensation Committee is responsible
for reviewing and evaluating the duties and performance of the Company's
officers and key employees and making recommendations concerning their
compensation. The members of the Compensation Committee are Messrs. Malone
(Chairman), Gamel and Robinson. During 1998, the Audit Committee met once and
the Compensation Committee met once. The Company does not maintain a standing
nominating committee.

COMPENSATION OF DIRECTORS

         Each member of the Board of Directors who is not an employee of the
Company is entitled to receive $1,000 for each Board meeting and $500 for each
committee meeting not held in conjunction with a Board Meeting attended in
person or by telephone. Effective April 1, 1998, the Board of Directors adopted
a Director's Fee Stock Plan whereunder directors fees are paid in common stock
of the Company rather than in cash. The number of shares issued to each outside
director each year is determined by dividing the director's fees earned by that
director during the year by the average of the trading prices of the Company's
common stock on the first and last trading days
    


                                       20
<PAGE>   25




   
of the year. If a director joins or leaves the Board during the year, the day of
his appointment or resignation is substituted for the first or last trading day
in that calculation. For their services from April 1 through December 31, 1998,
the Company's outside directors were each issued 3,879 shares of stock under
this plan.

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

         Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's directors and executive officers, and any persons who own more than 10
percent of the Company's Common Stock, to file with the Securities and Exchange
Commission ("SEC") initial reports of ownership and reports of changes in
ownership of Common Stock. The Company believes that all such Section 16(a)
reports were filed on a timely basis during the fiscal year ended December 31,
1998, except as follows: Kenton M. Scroggs, who was elected Vice President -
Finance of the Company on September 29, 1998, filed his initial statement of
beneficial ownership on Form 3 on December 7, 1998 and Shirley Kovar, who was
elected Vice President-Land of the Company on January 13, 1999, filed her
initial statement of beneficial ownership on Form 3 on April 8, 1999.

ITEM 10.       EXECUTIVE COMPENSATION

         The following table summarizes the total compensation of the Chief
Executive Officer, who was the only executive officer of the Company whose
compensation exceeded $100,000 for services rendered during 1998 (the "Named
Executive Officer").


                           Summary Compensation Table
                           --------------------------
<TABLE>
<CAPTION>
                                                             Annual Compensation                 Long-Term Compensation
                                                             --------------------                ----------------------

                                                                    Salary                        Securities Underlying
Name and Principal Position                  Year                     ($)                               Options (#)
---------------------------                  ----                    -----                        ---------------------
<S>                                         <C>                   <C>                               <C>
Bruce D. Benson, Chairman                
of the Board, Chief Executive
Officer and President                        1998                  $150,000                                    --
                                             1997(1)                 53,077                                 4,000,000
</TABLE>

-------------
(1)  From commencement of employment on August 7, 1997 through December 31,
     1997.
    

                                       21
<PAGE>   26


   
         No options were granted to or exercised by the Named Executive Officer
during 1998. The following table sets forth the value of unexercised options
held by the Named Executive Officer at December 31, 1998:


                           1998 Year-End Option Values
                           ---------------------------

<TABLE>
<CAPTION>
                                                 Number of Securities
                                                Underlying Unexercised                   Value of Unexercised
                                                   Options at Fiscal                     In-the-Money Options
                                                     Year End (#)                         at Fiscal Year end
Name                                           Exercisable/Unexercisable                         ($)
----                                           -------------------------                 -------------------
<S>                                                   <C>                                         <C>
Bruce D. Benson                                       4,000,000/0                                 (1)
</TABLE>
-----------
(1) None of the unexercised options reflected in the table were in-the-money as
of December 31, 1998, based upon the last sales price of the Common Stock on The
American Stock Exchange on December 31, 1998 of $1.5625.

EMPLOYMENT AGREEMENT

         The Company has an employment agreement with Mr. Benson dated August 7,
1997. The employment agreement provides for a base salary of not less than
$150,000 per year and bonuses at the discretion of the Board of Directors. It
has an initial term of three years, but renews automatically for successive
one-year terms unless terminated by either party. During the initial or any
renewal term, Mr. Benson's employment may be terminated at any time by the Board
of Directors, with or without cause, but Mr. Benson may terminate only upon the
occurrence of certain events, including a change in control of the Company as
defined in the employment agreement. The Company would not be required to pay
Mr. Benson any compensation as a result of or after any termination of his
employment. Mr. Benson is not required to devote his full business time to the
Company.

         Pursuant to his employment agreement, Mr. Benson received options to
acquire up to 4,000,000 shares of the Company's Common Stock. Of those options,
options to acquire 1,000,000 shares at $4.50 per share and 1,000,000 shares at
$6.00 per share vested immediately and options to purchase 1,000,000 shares at
$9.00 per share and 1,000,000 shares at $12.00 per share vested on August 7,
1998. All of the options have a term of ten years from the date of the
employment agreement. However, the options would expire 90 days after the
termination of Mr. Benson's employment for cause, as defined in the employment
agreement, or one year after Mr. Benson's death or disability. The termination
of employment for any other reason would not affect the term of the options.
    


                                       22
<PAGE>   27




   
ITEM 11.          SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
                  MANAGEMENT

         The following table sets forth as of March 31, 1999 the beneficial
ownership of each class of the Company's equity securities by the Named
Executive Officer, each director of the Company and all directors and executive
officers as a group. The table also reflects the beneficial ownership of each
class of the Company's voting securities by each person known by the Company to
own beneficially more than 5% of any such class. Shares issuable upon exercise
of outstanding options that are currently exercisable or will become exercisable
within 60 days are treated as outstanding for the purpose of computing the
beneficial ownership of the person who holds the options, but not for the
purpose of computing the percentage ownership of any other person or group. To
the Company's knowledge, the shareholders listed below have sole voting and
investment power, except as otherwise noted. All information is based upon
filings with the Securities and Exchange Commission or upon information provided
to the Company.


<TABLE>
<CAPTION>

                                                                             Common Stock
                                                              -------------------------------------------

                                                                 Number
Name and Beneficial Owner                                       of Shares             Percent of Class(1)
-------------------------                                     ------------            -------------------
<S>                                                            <C>                          <C>   
Bruce D. Benson                                                4,220,100(2)                 21.65%
1560 Broadway, Suite 1900
Denver, CO 80202

Thomas W. Gamel                                                  392,667(3)                  2.51%
700 Broadway, Suite 800
Denver, CO 8022

Robert J. Malone                                                 309,479(4)                  1.97%
335 St. Paul St.
Denver, CO 80202

Richard L. Robinson                                              308,979(4)                  1.97%
646 Bryant
Denver, CO 80202

Demetrie D. Carone                                             1,028,618(5)                  6.64%
6623 East 117th St.
Bixby, OK 74008

Dale M. Jensen                                                 3,368,770                    21.75%
26796 N. 98th Way
Scottsdale, AZ 85255
</TABLE>
    


                                       23
<PAGE>   28


   
<TABLE>
<CAPTION>

                                                                             Common Stock
                                                              -------------------------------------------

                                                                 Number
Name and Beneficial Owner                                       of Shares             Percent of Class(1)
-------------------------                                     ------------            -------------------
<S>                                                            <C>                          <C>   
Lancaster Ventures, LLC                                          916,668                     5.92%
5561 South 40th Street
Suite 220
Lincoln, NE 68516

Donald Dillon                                                    916,668(6)                  5.92%
6600 South 56th Street
Lincoln, NE 68516

Thomas Stansfield                                              1,417,600                     9.15%
7052 East Fremont Place
Englewood, CO 80112

Directors and Executive Officers as a                          5,231,225(7)                 26.12%
Group (10 individuals)
</TABLE>
----------

         (1) Based on 15,491,828 shares of Common Stock outstanding on March 31,
1999 plus, in the case of each individual or group, the number of shares that
such individual has, or the members of such group have, the right to acquire
within 60 days after that date.

         (2) Includes 4,000,000 shares of Common Stock underlying options that
are currently exercisable.

         (3) Includes (i) 106,288 shares held indirectly through a corporation
of which Mr. Gamel has voting control and (ii) 179,000 shares of Common Stock
underlying options that are currently exercisable.

         (4) Includes 179,000 shares of Common Stock underlying options that are
currently exercisable.

         (5) Includes 519,261 shares held jointly with spouse.

         (6) Includes 916,668 shares of Common Stock owned by Lancaster
Ventures, LLC, of which Mr. Dillon is a member.

         (7) Includes an aggregate of 4,537,000 shares of Common Stock
underlying options that are currently exercisable.
    


                                       24
<PAGE>   29

   
ITEM 12.          CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         The Company shares certain facilities, equipment and personnel with BMG
pursuant to a Cost and Expense Sharing Agreement. Bruce D. Benson, Chairman of
the Board of Directors, Chief Executive Officer and President of the Company, is
also the President, a Director and sole shareholder of BMG. Pursuant to the Cost
and Expense Sharing Agreement, the Company reimburses BMG for office rent,
personnel costs and other overhead and administrative expenses associated with
operation of its business based upon actual use of the facilities and personnel
by the Company. The Cost and Expense Sharing Agreement is effective so long as
Mr. Benson's employment agreement is in effect. During the year ended December
31, 1998, the Company paid or accrued an aggregate of $660,570 to BMG pursuant
to this arrangement. Management believes that the terms and conditions of this
arrangement are no less favorable than could be obtained from an unaffiliated
third party or than could be obtained by the Company in leasing separate office
space and retaining separate personnel.
    

ITEM 13.          EXHIBITS AND REPORTS ON FORM 8-K

          (a)     EXHIBITS.

          EXHIBIT NO.

          3.1(1)      Articles of Incorporation of the Company as filed on
                      January 9, 1989, with the Secretary of State of the State
                      of Colorado.

                                       25
<PAGE>   30


          3.2(1)      By-laws of the Company.

          3.3(1)      Articles of Amendment of the Company filed on June 7,
                      1990 with the Secretary of State of the State of
                      Colorado.

          3.4(2)      Articles of Amendment of the Company as filed with the
                      Secretary of State of the State of Colorado on September
                      24, 1996.

          3.5(3)      Amended and Restated Bylaws of the Company.

          10.1(1)     1989 Incentive Stock Option Plan of the Company.

          10.2(1)     1990 Non-Qualifying Stock Option Plan.

          10.3.1(4)   Lease Agreement between Mid-America Pipeline Company and
                      Producers Service, Incorporated.

          10.3.2(4)   Amendment to Lease Agreement between Mid-America Pipeline
                      Company and Producers Service, Incorporated.

          10.4(5)     Executive Employment Agreement, dated August 7, 1997, by
                      and between the Company and Bruce D. Benson.

          10.5(5)     Cost and Expense Sharing Agreement, dated August 7, 1997,
                      by and between the Company and Benson Mineral Group, Inc.

          10.6(5)     Form of Non-Qualified Stock Option Agreement.

          10.7(6)     Purchase and Sale Agreement between the Company and Union
                      Pacific Resources Company dated April 10, 1998.

          10.8(6)     Exploration Agreement between the Company and Union
                      Pacific Resources Company dated May 15, 1998.

          10.9(6)     Credit Agreement dated as of May 15, 1998 among the
                      Company and ING (U.S.) Capital Corporation.

          10.10(6)    Mortgage, Assignment, Security Agreement, Fixture Filing
                      and Financing Statement from United States Exploration,
                      Inc. to ING (U.S.) Capital Corporation, dated May 15,
                      1998.

          10.11(6)    Mortgage, Assignment, Security Agreement, Fixture Filing
                      and Financing Statement from Performance Petroleum Co.,
                      United States Gas Gathering Co., Inc. and Pacific Osage,
                      Inc. to ING (U.S.) Capital Corporation, dated May 15,
                      1998.

                                       26

<PAGE>   31


          10.12(6)    Pledge Agreement made as of May 15, 1998, by United
                      States Exploration, Inc., in favor of ING (U.S.) Capital
                      Corporation.

          10.13(6)    Guaranty made as of May 15, 1998, by Performance
                      Petroleum Co., United States Gas Gathering Co., Inc.,
                      Pacific Osage, Inc. and Producers Service Incorporated,
                      in favor of ING (U.S.) Capital Corporation.

          10.14(7)    Pipeline Purchase Agreement between USGG and Northern
                      Osage Gas Association L.L.C. dated as of December 31,
                      1998.

          10.15(7)    Stock Purchase Agreement between the Company and the
                      several buyers named therein relating to the sale of USGG
                      dated as of December 31, 1998.

          10.16(7)    Stock Purchase Agreement between the Company and Demetrie
                      D. Carone relating to the sale of Pacific and Performance
                      dated as of December 31, 1998.

          10.17(8)    Directors Fee Stock Plan

          10.18(8)    Office Lease Agreement between the Company and EOP-One
                      Civic Center Plaza, L.L.C. dated October 15, 1998.

   
          16(9)       Letter on change in certifying accountant.
    

          21(8)       List of the Company's subsidiaries.

          23.1(8)     Consent of Grant Thornton LLP, independent certified
                      public accountants, to incorporation of this report by
                      reference into the issuer's Registration Statement on
                      Form S-8.

          23.2(8)     Consent of Ernst & Young LLP, independent certified
                      public accountants, to incorporation of this report by
                      reference into the issuer's Registration Statement on
                      Form S-8.

          24(8)       Powers of Attorney

          27(8)       Financial Data Schedule.

----------

          (1) Filed as an Exhibit to Form S-18 dated March 8, 1989.

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

          (3) Filed as an Exhibit to Form S-8 filed August 7, 1998
              (Registration No. 333-60983).

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

                                       27

<PAGE>   32


          (5) Filed as an Exhibit to Form 10-QSB for the quarter ended June 30,
              1997, and incorporated herein by reference.

          (6) Filed as an Exhibit to Form 8-K dated May 26, 1998 and
              incorporated herein by reference.

          (7) Filed as an Exhibit to Form 8-K dated February 2, 1999 and
              incorporated herein by reference.

   
          (8) Filed as an Exhibit to this Form 10-KSB as originally filed April 
              15, 1999.

          (9) Filed as an Exhibit to Form 8-K/A dated May 19, 1998.
    

          (b) REPORTS ON FORM 8-K.

              No reports on Form 8-K were filed during the fourth quarter of
              1998.

                                       28

<PAGE>   33

                        United States Exploration, Inc. and Subsidiaries

                               Consolidated Financial Statements


                       Year ended December 31, 1998 and nine months ended
                                       December 31, 1997





                                            CONTENTS

<TABLE>
<S>                                                                                                    <C>
Reports of Independent Auditors .......................................................................F-1

Audited Consolidated Financial Statements

Consolidated Balance Sheets............................................................................F-3
Consolidated Statements of Operations..................................................................F-5
Consolidated Statements of Changes in Stockholders' Equity.............................................F-6
Consolidated Statements of Cash Flows .................................................................F-7
Notes to Consolidated Financial Statements ............................................................F-8
</TABLE>

<PAGE>   34

                         Report of Independent Auditors

Board of Directors
United States Exploration, Inc.

We have audited the accompanying consolidated balance sheet of United States
Exploration, Inc. and subsidiaries as of December 31, 1998, and the related
consolidated statements of operations, changes in stockholders' equity and cash
flows for the year 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 audit.

We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of United States
Exploration, Inc. and subsidiaries at December 31, 1998, and the consolidated
results of their operations and their cash flows for the year then ended in
conformity with generally accepted accounting principles.

The accompanying financial statements have been prepared assuming that United
States Exploration, Inc. and subsidiaries will continue as a going concern. As
more fully described in Note 2, the Company has incurred operating losses and is
currently in default of certain covenants of a note payable with a bank. These
conditions raise substantial doubt about the Company's ability to continue as a
going concern. Management's plans in regard to this matter are also described in
Note 2. The financial statements do not include any adjustments to reflect the
possible future effects on the recoverability and classification of assets or
the amounts and classification of liabilities that may result from the outcome
of this uncertainty.



                                         /s/ Ernst & Young LLP
Denver, Colorado
April 9, 1999




                                      F-1
<PAGE>   35

                         Report of Independent Auditors

Board of Directors
United States Exploration, Inc. and Subsidiaries

We have audited the accompanying consolidated balance sheet of United States
Exploration, Inc. and Subsidiaries as of December 31, 1997, and the related
consolidated statements of operations, changes in stockholders' equity and cash
flows for the nine months 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 audit.

We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of United States
Exploration, Inc. and Subsidiaries as of December 31, 1997, and the consolidated
results of their operations and their consolidated cash flows for the nine
months then ended in conformity with generally accepted accounting principles.




                                             /s/ Grant Thornton LLP
Wichita, Kansas
March 6, 1998



                                      F-2
<PAGE>   36
                United States Exploration, Inc. and Subsidiaries

                           Consolidated Balance Sheets



<TABLE>
<CAPTION>
                                                                 DECEMBER 31
                                                            1998              1997
                                                        ------------      ------------

<S>                                                     <C>               <C>
ASSETS
Current assets:
   Cash and cash equivalents                            $  1,000,661      $ 15,988,152
   Accounts receivable                                     2,980,700           562,016
   Due from related parties                                    4,761              --
   Inventory                                                   9,684            14,889
   Prepaid expenses, well costs and deposits                 806,947            31,267
   Assets held for sale                                    1,825,000              --
                                                        ------------      ------------
Total current assets                                       6,627,753        16,596,324

Property and equipment, at cost, net:
   Oil and gas property and equipment--
     full cost method                                     25,166,770         3,390,640
   Natural gas gathering systems                             977,050         1,367,267
   Building and equipment                                    295,046           392,644
                                                        ------------      ------------
                                                          26,438,866         5,150,551

Other assets:
   Land held for resale                                      700,000           700,000
   Natural gas stripping plant                                  --              20,000
   Equipment                                                    --              10,000
   Pipeline lease agreement, less accumulated
     amortization of $248,481 and $197,871 at
     December 31, 1998 and 1997, respectively                462,358           509,437
   Loan costs, less accumulated amortization
     of $44,695 at December 31, 1998                         429,076              --
                                                        ------------      ------------
                                                           1,591,434         1,239,437
                                                        ------------      ------------
Total assets                                            $ 34,658,053      $ 22,986,312
                                                        ============      ============
</TABLE>



                                      F-3
<PAGE>   37

<TABLE>
<CAPTION>
                                                                                              DECEMBER 31
                                                                                         1998               1997
                                                                                     ------------       ------------

<S>                                                                                  <C>                <C>
LIABILITIES AND STOCKHOLDERS' EQUITY 
Current liabilities:
   Accounts payable                                                                  $  2,365,983       $    371,898
   Accrued liabilities                                                                    450,449             33,266
   Due to related parties                                                                  47,379             62,334
   Dividends payable                                                                         --              460,200
   Due bank under credit facility                                                      31,900,000               --
                                                                                     ------------       ------------
Total current liabilities                                                              34,763,811            927,698

Commitments and contingencies

Stockholders' equity (deficit):
   Preferred stock - $.01 par value
     Authorized - 100,000,000 shares
       Series C Cumulative Convertible
     Issued and outstanding - 493,166 and 3,835,000 
       shares at December 31, 1998
       and 1997, respectively (liquidation preference of
       $3,077,356 at December 31, 1998)                                                 2,958,996         23,010,000
   Common stock - $.0001 par value:
     Authorized - 500,000,000 shares
     Issued and outstanding - 15,480,194 and
       8,795,400 shares at December 31, 1998 and
       1997, respectively                                                                   1,548                880
Capital in excess of par value                                                         32,577,053         12,523,345
Accumulated deficit                                                                   (35,643,355)       (13,475,611)
                                                                                     ------------       ------------
Total stockholders' equity (deficit)                                                     (105,758)        22,058,614
                                                                                     ------------       ------------
Total liabilities and stockholders' equity (deficit)                                 $ 34,658,053       $ 22,986,312
                                                                                     ============       ============
</TABLE>


See accompanying notes.




                                      F-4
<PAGE>   38


                United States Exploration, Inc. and Subsidiaries

                      Consolidated Statements of Operations



<TABLE>
<CAPTION>
                                                                             NINE MONTHS
                                                         YEAR ENDED             ENDED
                                                         DECEMBER 31         DECEMBER 31
                                                             1998                1997
                                                        -------------       -------------

<S>                                                     <C>                 <C> 
REVENUES
Sale of purchased gas                                   $     844,437       $     950,369
Sale of company produced oil and gas                        4,376,561           1,974,033
Operating fees, contracting, drilling and oil
   field supplies                                              58,923             110,183
                                                        -------------       -------------
                                                            5,279,921           3,034,585

COSTS AND EXPENSES
Gas acquisition costs                                         406,228             673,831
Gathering and transmission costs                              604,215             416,921
Production costs - oil and gas                              2,692,644           1,118,342
Other operating expenses                                      118,316             219,447
Depletion, depreciation and amortization                    4,087,740           1,765,475
Provision for impairment of assets                         15,351,978           6,320,401
General and administrative expenses                         2,157,044             841,193
                                                        -------------       -------------
                                                           25,418,165          11,355,610
                                                        -------------       -------------

Loss from operations                                      (20,138,244)         (8,321,025)

OTHER INCOME (EXPENSE)
Interest income                                               332,674             677,488
Interest expense                                           (1,431,563)             (2,092)
Other                                                         (14,040)             60,826
                                                        -------------       -------------
Net loss                                                  (21,251,173)         (7,584,803)
Preferred stock dividends applicable to the period         (1,034,933)         (1,421,226)
                                                        -------------       -------------
Net loss applicable to common stockholders              $ (22,286,106)      $  (9,006,029)
                                                        =============       ============= 
Basic and diluted loss per common share                 $       (1.67)      $       (1.06)
                                                        =============       ============= 
Weighted average common shares outstanding                 13,322,519           8,487,667
                                                        =============       ============= 
</TABLE>


See accompanying notes.



                                      F-5
<PAGE>   39

                United States Exploration, Inc. and Subsidiaries

           Consolidated Statements of Changes in Stockholders' Equity

      Year ended December 31, 1998 and nine months ended December 31, 1997


<TABLE>
<CAPTION>
                                                SERIES C                       COMMON STOCK
                                        ---------------------------      ---------------------------
                                          SHARES          AMOUNT           SHARES          AMOUNT
                                        ---------      ------------      -----------     ----------

<S>                                     <C>            <C>               <C>             <C>
Balance, March 31, 1997                 4,000,000      $ 24,000,000        8,312,358        $   831
  Issuance of common stock for
     compensation                              --                --           19,000              2
  Exercise of stock options                    --                --          133,700             14
  Conversion of preferred stock to
     common stock                        (165,000)         (990,000)         330,000             33
  Dividends on Series C
     preferred stock                           --                --               --             --
  Net loss for the period                      --                --               --             --
  Issuance of common stock                     --                --              342             --
                                        ---------      ------------      -----------       --------
Balance, December 31, 1997              3,835,000        23,010,000        8,795,400            880
  Conversion of preferred stock to
     common stock                      (3,341,834)      (20,051,004)       6,683,668            668
  Dividends on Series C
     preferred stock                           --                --            1,126             --
  Net loss for the year                        --                --               --             --
                                        ---------      ------------      -----------       --------
Balance, December 31, 1998                493,166      $  2,958,996       15,480,194       $  1,548
                                        =========      ============      ===========       ========

<CAPTION>

                                        CAPITAL IN
                                         EXCESS OF      ACCUMULATED
                                         PAR VALUE         DEFICIT            TOTAL
                                       ------------    -------------      -------------

<S>                                    <C>              <C>               <C>         
Balance, March 31, 1997                $ 11,370,867     $  (3,989,582)    $ 31,382,116
  Issuance of common stock for
     compensation                            80,748               --            80,750
  Exercise of stock options                  80,737               --            80,751
  Conversion of preferred stock to
     common stock                           989,967               --                --
  Dividends on Series C
     preferred stock                             --       (1,901,226)       (1,901,226)
  Net loss for the period                        --       (7,584,803)       (7,584,803)
  Issuance of common stock                    1,026               --             1,026
                                       ------------    -------------      ------------- 
Balance, December 31, 1997               12,523,345      (13,475,611)       22,058,614
  Conversion of preferred stock to
     common stock                        20,050,336               --                --
  Dividends on Series C
     preferred stock                          3,372         (916,571)         (913,199)
  Net loss for the year                          --      (21,251,173)      (21,251,173)
                                       ------------    -------------      ------------- 
Balance, December 31, 1998             $ 32,577,053    $ (35,643,355)     $    (105,758)
                                       ============    =============      ============= 
</TABLE>


See accompanying notes.




                                      F-6
<PAGE>   40

                        United States Exploration, Inc. and Subsidiaries

                             Consolidated Statements of Cash Flows


<TABLE>
<CAPTION>
                                                                                                      NINE MONTHS
                                                                                  YEAR ENDED             ENDED
                                                                                  DECEMBER 31         DECEMBER 31
                                                                                     1998                1997
                                                                                 -------------       -------------

<S>                                                                              <C>                 <C>           
CASH FLOWS FROM OPERATIONS
Net loss                                                                         $ (21,251,173)      $  (7,584,803)
Adjustments to reconcile net loss to net cash
   (used in) provided by operating activities:
     Depreciation, depletion and amortization                                        4,087,740           1,765,475
     Provision for impairment of assets                                             15,351,978           6,320,401
     Stock issued as compensation                                                         --                80,750
     Loss (gain) on sale of assets                                                      20,827             (21,089)
     Change in assets and liabilities, net of effect of 
       acquisitions:
         (Increase) decrease in accounts receivable                                 (2,418,684)             28,221
         (Increase) decrease in due from related parties                                (4,761)              4,300
         Decrease in inventory                                                           5,205             137,512
         Increase in prepaid expenses                                                 (775,680)             (7,818)
         Increase (decrease) in accounts payable and
           accrued expenses                                                          2,411,268            (110,624)
         (Decrease) increase in due to related parties                                 (14,955)             47,119
         Other                                                                           1,999                --
                                                                                 -------------       -------------
Net cash (used in) provided by operating activities                                 (2,586,236)            659,444

CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures                                                                (2,954,355)           (364,654)
Proceeds from sale of equipment                                                         62,865             229,573
Maturity of certificate of deposit                                                        --             1,500,000
Acquisition of oil and gas leases                                                  (39,559,220)               --
                                                                                 -------------       -------------
Net cash (used in) provided by investing activities                                (42,450,710)          1,364,919

CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from debt                                                                  31,900,000                --
Loan costs related to acquisition financing                                           (473,772)               --
Dividend paid on preferred stock                                                    (1,376,773)         (1,440,000)
Proceeds from exercise of stock options                                                   --                80,751
                                                                                 -------------       -------------
Net cash provided by (used in) financing activities                                 30,049,455          (1,359,249)
                                                                                 -------------       -------------

Net (decrease) increase in cash and cash equivalents                               (14,987,491)            665,114
Cash and cash equivalents, beginning of year                                        15,988,152          15,323,038
                                                                                 -------------       -------------
Cash and cash equivalents, end of year                                           $   1,000,661       $  15,988,152
                                                                                 =============       =============


Noncash investing and financing activities
   Conversion of preferred stock and accrued dividends to
shares of common stock                                                           $  20,051,004       $     990,000
   Preferred dividends paid with common stock                                            3,372               1,026
   Cash paid during the year for interest                                            1,152,144               2,092
   Liabilities assumed with acquisition                                                355,881                --
</TABLE>


See accompanying notes 




                                      F-7
<PAGE>   41

                United States Exploration, Inc. and Subsidiaries

                   Notes to Consolidated Financial Statements

                           December 31, 1998 and 1997


1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

COMPANY HISTORY AND NATURE OF OPERATIONS

United States Exploration, Inc. (the Company) was incorporated on January 9,
1989. The Company operates as a producer of oil and gas, as an operator of gas
gathering systems and, prior to August 1997, as an owner of an oil field supply
store and a contract oil field servicing business. The Company's operations are
located in southeast Kansas, northeast Oklahoma and, effective May 1998,
northeast Colorado. During 1997 the Company changed its year end from March 31
to December 31.

PRINCIPLES OF CONSOLIDATION

The accompanying 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 United States Gas Gathering Co., Inc.
(formerly ZCA Gas Gathering, Inc.). On December 31, 1997, Argas, Inc. and USX
Operating Co., Inc. were merged into United States Exploration, Inc. On January
20, 1999, the stock of Performance Petroleum Corporation, Pacific Osage, Inc.
and United States Gas Gathering Co. Inc. was sold in two separate transactions.
All significant intercompany transactions and balances have been eliminated in
consolidation.

USE OF ESTIMATES

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.

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. The Company has no cash equivalents at December 31, 1998. Cash
equivalents at December 31, 1997 are comprised primarily of $15,900,000 of
Pharmacia and UpJohn Treasury Services AB Commercial Paper which matured January
7, 1998.



                                      F-8
<PAGE>   42
                        United States Exploration, Inc. and Subsidiaries

                     Notes to Consolidated Financial Statements (continued)


1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

INVENTORY

Inventory is valued at the lower of cost or market with cost determined by the
first-in, first-out (FIFO) method and is mainly comprised of miscellaneous oil
field parts and supplies.

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 and estimated future dismantlement and
abandonment costs 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 periodic tests 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.

PROPERTY AND EQUIPMENT

Property and equipment, exclusive of property and equipment included in the full
cost pool, is stated at cost and depreciated using the straight-line method over
the estimated useful lives of the assets as follows:

<TABLE>
<S>                                                                                  <C>     
         Leasehold improvements                                                           10 years
         Building (field headquarters)                                                    30 years
         Natural gas gathering systems                                                    17 years
         Equipment                                                                    3 to 7 years
</TABLE>

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.



                                      F-9
<PAGE>   43
                United States Exploration, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)


1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

The capitalized pipeline lease agreement is being amortized using the
straight-line method over the remaining term of the lease.

The capitalized loan costs are being amortized over the stated term of the
credit facility.

INCOME TAXES

United States Exploration, Inc. and its subsidiaries file a consolidated federal
income tax return. Deferred income taxes are based on the liability method as
prescribed by Statement of Financial Standards No. 109, Accounting for Income
Taxes (SFAS 109). Under SFAS 109, deferred income taxes are provided for
temporary differences in recognizing certain income and expense items for
financial reporting and tax reporting purposes.

STOCK OPTIONS

The Company has elected to follow Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees (APB 25), and related interpretations
in accounting for outstanding stock options. Under APB 25, when the exercise
price of the Company's stock options equals or exceeds the market price of the
underlying stock on the date of grant, no compensation expense is recognized. If
the market price of the underlying stock on the date of grant exceeds the
exercise price of Company's stock options, compensation expense would be
recognized.

LOSS PER SHARE

Basic loss per share is computed by dividing net loss applicable to common
stockholders by the weighted-average common shares outstanding for the period.
Diluted loss per share reflects the potential dilution that could occur if
common stock options were exercised and preferred stock was converted into
common stock. Basic and diluted loss per share are the same for all periods
presented as the exercise of stock options and the conversion of preferred stock
have an antidilutive effect on all periods.



                                      F-10
<PAGE>   44
                United States Exploration, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)


2. FINANCIAL RESULTS AND LIQUIDITY

The Company has incurred net losses of $21,251,173 and $7,584,803 for the year
ended December 31, 1998 and the nine months ended December 31, 1997,
respectively. Included in these amounts are provisions for impairment of assets
of $15,351,978 and $6,320,401, respectively. In addition, the Company is not in
compliance with certain covenants under a credit facility with a bank, and as a
result, the loan may be called. Accordingly, $31,900,000 outstanding at December
31, 1998 under the credit facility has been classified as a current liability in
the accompanying balance sheet. As more fully described in Note 18, the
Company's management is evaluating its options and continuing its discussions
with the bank.

3.  RELATED PARTY TRANSACTIONS

Effective August 12, 1997, the Company relocated its principal executive office
from Independence, Kansas to Denver, Colorado and shares office space with
Benson Mineral Group,, Inc. (BMG). In connection with that move, the Company
entered into a cost and expense sharing agreement with BMG, a privately held
Oklahoma corporation. The Company's current president is also the president, a
director and sole shareholder of BMG. Pursuant to the cost and expense sharing
agreement, the Company has agreed to compensate BMG for office rent, personnel
costs and other overhead and administrative expenses associated with operation
of its business based upon actual use of the facilities and personnel by the
Company. During the year ended December 31, 1998, the Company paid or accrued
$660,646 to BMG pursuant to this arrangement, of which $47,379 was payable at
December 31, 1998. During the nine months ended December 31, 1997, the Company
paid or accrued $229,345 to BMG, of which $62,324 was payable at December 31,
1997. The cost and expense sharing agreement is effective so long as the current
president functions in such capacity. Prior to entering into the expense sharing
agreement with BMG, the Company also paid $50,000 to BMG for consulting services
rendered in 1997.

In addition, the Company entered into an executive employment agreement with its
current president dated August 7, 1997. The agreement provides for a base salary
of not less than $150,000 per year and bonuses at the discretion of the Board of
Directors. It has an initial term of three years, but renews automatically for
successive one-year terms unless terminated by either party. The agreement also
provides for the granting of options to purchase shares of the Company's common
stock (see Note 11).



                                      F-11
<PAGE>   45
                United States Exploration, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)


3.  RELATED PARTY TRANSACTIONS (CONTINUED)

In August 1997, each of the three retiring members of the Company's Board of
Directors received 5,000 shares of the Company's common stock as compensation
for past services. In addition, each of the three new members of the Board of
Directors, excluding the Chairman of the Board, received 179,000 stock options
at an option price of $4.13 per share. The three outside directors each received
3,879 shares of the Company's common stock in 1999 as payment for directors fees
earned from April 1, 1998 through December 31, 1998.

4. OIL AND GAS PROPERTIES

The Company's oil and gas activities are conducted within the continental United
States. The following schedules present capitalized costs at December 31, 1998
and 1997 and results of operations for producing activities for the year ended
December 31, 1998 and nine months ended December 31, 1997. At December 31, 1998
and 1997, costs associated with acquisition and development activities of
$51,803,057 and $14,681,417, respectively, are considered evaluated and subject
to amortization.

<TABLE>
<CAPTION>
                                                                   DECEMBER 31
                                                              1998              1997
                                                         ------------       ------------

<S>                                                      <C>                <C> 
Capitalized costs:
   Oil and gas properties                                $ 51,803,057       $ 14,681,417
   Accumulated depreciation, depletion
     amortization and valuation allowance                  26,636,287         11,290,777
                                                         ------------       ------------
Net capitalized costs                                    $ 25,166,770       $  3,390,640
                                                         ============       ============

Results of operations for producing activities:
   Oil and gas sales                                     $  4,376,561       $  1,974,033
   Production costs                                        (2,692,644)        (1,118,342)
   Depreciation, depletion and amortization                (3,669,802)        (1,464,479)
   Full cost pool valuation allowance                     (15,206,978)        (4,901,567)
                                                         ------------       ------------
Results of operations from producing activities
   (excluding overhead expenses)                         $(17,192,863)      $ (5,510,355)
                                                         ============       ============

Amortization per equivalent physical unit (barrels)
   of production (excludes full cost pool
   valuation allowance)                                  $       8.91       $      13.28
                                                         ============       ============
</TABLE>



                                      F-12
<PAGE>   46

                United States Exploration, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)


4. OIL AND GAS PROPERTIES (CONTINUED)

Costs incurred in oil and gas acquisition and development activities are as
follows:

<TABLE>
<CAPTION>
                                             DECEMBER 31
                                        1998               1997
                                    ------------      ------------

<S>                                 <C>               <C>         
Property acquisition costs          $ 39,559,220      $     53,075
Development costs                      1,583,158            67,200
                                    ------------      ------------
                                    $ 41,142,378      $    120,275
                                    ============      ============
</TABLE>

Capitalized costs are subject 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 December 31, 1998 and 1997, capitalized costs
exceeded the present value of future net revenues by $15,206,978 and $4,901,567,
respectively, which resulted in a write-down of the carrying value of the oil
and gas properties.

For the year ended December 31, 1998, the primary reasons for the write-down of
the carrying value of the oil and gas properties were: (1) lower oil and gas
prices at December 31, 1998, (2) higher than originally anticipated operating
and capital costs on the properties acquired from UPR, (3) the inability to
establish for the purposes of year-end reserve estimates the extent of the
Company's interest in certain formations within the UPR properties and (4)
predictability of production from the Dakota formation of the UPR properties
less than originally anticipated.

For the nine months ended December 31, 1997, the revision of previous quantity
estimates was the primary reason for the write-down of the carrying value of the
oil and gas properties.



                                      F-13
<PAGE>   47

                United States Exploration, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)


5. NATURAL GAS GATHERING SYSTEMS

Natural gas gathering systems consisted of the following:

<TABLE>
<CAPTION>
                                                                  DECEMBER 31
                                                            1998               1997
                                                        ------------       ------------

<S>                                                     <C>                <C>         
Kansas systems                                          $  2,432,096       $  2,274,470
Oklahoma systems                                                --              750,188
                                                        ------------       ------------
                                                           2,432,096          3,024,658
Accumulated depreciation and valuation allowance          (1,455,046)        (1,657,391)
                                                        ------------       ------------
                                                        $    977,050       $  1,367,267
                                                        ============       ============
</TABLE>

6. EQUIPMENT, LEASEHOLD IMPROVEMENTS AND BUILDING

Equipment, leasehold improvements and building consisted of the following:

<TABLE>
<CAPTION>
                                                                 DECEMBER 31
                                                            1998            1997
                                                        ----------       ----------

<S>                                                     <C>              <C>     
Leasehold improvements                                  $    5,013       $     --
Building                                                      --            130,588
Oil field equipment                                        238,689          512,808
Autos and trucks                                           121,180          163,774
Office equipment and furniture                             210,260           52,124
                                                        ----------       ----------
                                                           575,142          859,294
Accumulated depreciation                                  (280,096)        (466,650)
                                                        ----------       ----------
                                                        $  295,046       $  392,644
                                                        ==========       ==========
</TABLE>

7. LAND HELD FOR RESALE

The Company owns land located in Ingleside, Texas, which it acquired in July
1994. Until 1998, a refinery was located on 20 acres of the approximately 100
acres of undeveloped real estate.



                                      F-14
<PAGE>   48

                United States Exploration, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)


7. LAND HELD FOR RESALE (CONTINUED)

The refinery had been nonoperational since the early 1980s and marketing efforts
for the refinery were unsuccessful. Management decided to dismantle and salvage
the refinery and sell the real estate, writing down the refinery and land to a
net realizable value of $700,000 by recognizing an impairment loss of $1,075,011
for the nine months ended December 31, 1997. During 1998, the Company spent
approximately $145,000 to dismantle the refinery, but concluded the net
realizable value of the land was still approximately $700,000. This resulted in
an additional impairment loss of approximately $145,000 for the year ended
December 31, 1998.

8. 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, 2008 and requires 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. Average
monthly MCF's transported during any six month period during the year ended
December 31, 1998 and the nine months ended December 31, 1997 did not result in
any volume rent adjustments. The agreement includes a purchase option for
$1,800,000 which can be exercised at any time during the term of the lease.



                                      F-15
<PAGE>   49

                United States Exploration, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)


9. INCOME TAXES

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

<TABLE>
<CAPTION>
                                                                            DECEMBER 31
                                                                      1998               1997
                                                                  ------------       ------------

<S>                                                               <C>                <C>
Deferred tax liabilities:
   Purchase accounting adjustment - book basis of
     acquired assets greater than
     tax basis - lease
     equipment                                                    $    176,377       $    193,586

Deferred tax assets:
   Net operating loss carryforwards                                  6,615,199          3,535,787
   Valuation allowance (natural gas stripping plant)                      --               39,520
   Oil and gas properties - full cost pool amortization
     greater than tax depletion                                      6,611,637            463,672
   Depreciation on equipment                                           328,518            371,825
                                                                  ------------       ------------
                                                                    13,555,354          4,410,804
   Less valuation allowance                                        (13,378,977)        (4,217,218)
                                                                  ------------       ------------
                                                                       176,377            193,586
                                                                  ------------       ------------
Net deferred amount                                               $       --         $       --
                                                                  ============       ============
</TABLE>

The valuation allowance was increased by $9,161,759 and $3,942,125 at December
31, 1998 and 1997, respectively, to reduce the deferred tax asset to zero.

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
$9,724,000 in any one year.



                                      F-16
<PAGE>   50

                United States Exploration, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)


9. INCOME TAXES (CONTINUED)

The net operating loss carryforwards available to United States Exploration,
Inc. for income tax purposes are as follows:

<TABLE>
<CAPTION>
       EXPIRATION DATES
       ----------------

<S>                                                                                       <C>
              2002                                                                         $     868,000
              2003                                                                             2,545,000
              2004                                                                             1,300,000
              2005                                                                               293,000
              2006                                                                               448,000
              2007                                                                                37,000
              2008                                                                             2,162,000
              2009                                                                               537,000
              2010                                                                               435,000
              2011                                                                               301,000
              2012                                                                             1,499,000
              2013                                                                             6,983,000
                                                                                           -------------
                                                                                           $  17,408,000
                                                                                           =============
</TABLE>

10. MAJOR CUSTOMERS

The Company sold substantially all of its produced and purchased gas to six
purchasers for the year ended December 31, 1998 and sold approximately 78% to
four purchasers for the nine months ended December 31, 1997. The Company sold
substantially all of its oil to five purchasers for the year ended December 31,
1998 and substantially all of its oil to two purchasers for the nine months
ended December 31, 1997.

11. STOCK OPTION PLANS

The Company has elected to follow Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees, and related interpretations in
accounting for its employee stock options because, as discussed below, the
alternative fair value accounting provided for under Statement of Financial
Standards No. 123, Accounting for Stock-Based Compensation (SFAS 123), requires
use of option valuation models that were not developed for use in valuing
employee stock options. Under APB 25, because the exercise price of the
Company's employee stock options equals the market price of the underlying stock
on the date of grant, no compensation expense is recognized.



                                      F-17
<PAGE>   51

                United States Exploration, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)


11. STOCK OPTION PLANS (CONTINUED)

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 expired on January 13, 1999 and no new options can be
granted. All options granted prior to the expiration remain outstanding until
they have expired or been canceled.

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 December 31, 1998 and 1997, there were 179,200 options
available for issuance. The NQSOP is administered at 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.

In August 1997, the Company entered into an employment agreement with its
current president which provided for the issuance of nonqualified stock options.
A total of 4,000,000 options were issued with 1,000,000 shares each being
exercisable at $4.50, $6.00, $9.00 and $12.00 per share. The options exercisable
at $4.50 and $6.00 were exercisable immediately and the remaining options became
exercisable in August 1998. The options have a ten-year life.



                                      F-18
<PAGE>   52

                United States Exploration, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)


11. STOCK OPTION PLANS (CONTINUED)

A summary of the Company's stock option plans as of December 31, 1998 and 1997
is presented below. No compensation expense related to stock options granted in
1998 was recorded as the option exercise prices were greater than the fair
market value on date of grant.

<TABLE>
<CAPTION>
                                                            WEIGHTED AVERAGE
                                                SHARES       EXERCISE PRICE
                                              ----------    ----------------

<S>                                           <C>           <C>
Outstanding at March 31, 1997                    203,700       $   1.28
   Granted                                     4,562,000           7.41
   Exercised                                    (133,700)           .60
                                              ----------
Outstanding at December 31, 1997               4,632,000           7.34
   Granted                                       225,600           4.00
   Expired                                       (40,000)          3.00
                                              ==========
Outstanding at December 31, 1998               4,817,600           7.22
                                              ==========

Options exercisable at December 31, 1997       2,612,000           4.94
                                              ==========
Options exercisable at December 31, 1998       4,577,000           7.39
                                              ==========
</TABLE>

Options outstanding at December 31, 1998 have exercise prices ranging from $2 to
$12 with a weighted-average contractual life of 8.65 years. They can be
summarized as follows:

<TABLE>
<CAPTION>
                                         EXERCISE                             REMAINING
           SHARES                          PRICE                                 LIFE
         ---------                       ---------                            ---------

<S>                                     <C>                               <C>
            55,000                       $2.00-3.25                       3.25 - 5.5 years
           762,600                        4.00-4.25                       8.66 - 9.5 years
         1,000,000                             4.50                             8.66 years
         1,000,000                             6.00                             8.66 years
         1,000,000                             9.00                             8.66 years
         1,000,000                            12.00                             8.66 years
        ----------
         4,817,600
        ==========
</TABLE>


                                      F-19
<PAGE>   53

                United States Exploration, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)


11. STOCK OPTION PLANS (CONTINUED)

Pro forma information regarding net income and earnings per share is required by
SFAS 123, and has been determined as if the Company had accounted for its
employee stock options under the fair value method of that statement. The fair
value for these options was estimated at the date of grant using the minimum
value method available to nonpublic companies under SFAS 123. Under this method,
option value is determined as the excess of the fair value of the stock at the
date of grant over the present value of both the exercise price (lump sum) and
the expected dividend payments (annuity), each discounted at the risk-free rate,
over the expected exercise life of the option. A risk-free interest rate of
5.25%, a dividend yield of 0%, a volatility factor of .63 and .61 for 1998 and
1997, respectively, and a weighted-average expected life of five years were
applied.

For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma net loss and net loss per share for the year ended December 31, 1998 and
nine months ended December 31, 1997 are as follows:

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

<S>                                                                    <C>                <C>           
Net loss - as reported                                                 $ (21,251,173)     $  (7,584,803)
Net loss - pro forma                                                     (24,623,587)       (17,453,029)
Basic loss per common share - as reported                                     (1.67)             (1.06)
Basic loss per common share - pro forma                                       (1.93)             (2.22)
Weighted average fair value of options granted
 during the period                                                             1.81               2.93
</TABLE>

12. SERIES C CONVERTIBLE PREFERRED STOCK

In late 1996, 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 accrued and unpaid dividends.
The Company may redeem the stock at the price of $6.00 per share plus accrued
and unpaid dividends.



                                      F-20
<PAGE>   54

                United States Exploration, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)



12. SERIES C CONVERTIBLE PREFERRED STOCK (CONTINUED)

During 1998, 3,341,834 shares of Series C Convertible Preferred Stock were
converted into 6,683,668 shares of common stock, leaving 493,166 shares of
Series C Convertible Preferred Stock outstanding on December 31, 1998. Dividends
were declared and paid for all of 1997 and for the first two quarters of 1998.
No dividends have been declared for the last two quarters of 1998. Dividends
applicable to the last two quarters total $118,360. The Company has commitment
letters from two holders of the preferred stock wherein 67,000 shares of
preferred stock are to be converted to 134,000 shares of common stock effective
June 30, 1998, but at December 31, 1998 the preferred stock certificates had not
been received for conversion. Subsequent to December 31, 1998, a certificate
covering 50,000 shares of the committed 67,000 shares was received.

13. ACQUISITIONS

On May 15, 1998, the Company acquired from Union Pacific Resources Company
(UPR), all of UPR's working interests in producing oil and gas wells in 34 oil
and gas fields in the Wattenberg area of the Denver-Julesburg Basin in
northeastern Colorado. The purchase price for the wells, as adjusted, was
approximately $39,560,000. Included in accounts receivable at December 31, 1998
is $1,686,118 due from UPR as a final settlement of the purchase price. At the
closing of the acquisition, the Company also entered into an Exploration
Agreement with UPR giving the Company the right to explore and develop all of
UPR's undeveloped acreage in the area, excluding certain acreage already
committed to other agreements.

The Exploration Agreement covers approximately 400,000 gross acres and will also
cover any undeveloped acreage currently committed to another agreement that
reverts to UPR during its term. In order to keep the Exploration Agreement in
effect, the Company must drill 15 commitment wells during the first 18 months
and 20 commitment wells during each succeeding 12-month period for up to five
12-month option periods. If the Company does not drill the required number of
commitment wells during any period, the Exploration Agreement will terminate at
the end of the period and the Company will be required to pay liquidated damages
of $125,000 for each commitment well that was not drilled during the period. The
Company has negotiated (but has not finalized) an amendment to the Exploration
Agreement wherein certain future deepenings and reentries of wells will qualify
as commitment wells during the initial 18-month period. Deepenings and reentries
of wells require less capital than drilling of new wells.




                                      F-21
<PAGE>   55

                United States Exploration, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)


14. IMPAIRMENT OF ASSETS

During the nine months ended December 31, 1997, the Company decided to
concentrate its efforts on the core business of oil and gas production. As a
result, in addition to its decision to discontinue its drilling and service
business, the Company closed its supply store and identified certain equipment
for disposal. This process resulted in an additional provision for impairment of
$151,000. All significant equipment items identified for disposal had been sold
as of December 31, 1997.

The Company also determined that the crude oil refinery located on the land held
for sale was not a part of the assets directly related to its core business and
that long-term development efforts of real estate or disposition of the refinery
were not consistent with its business plan. Management also concluded that
carrying costs of the refinery and real estate could be eliminated by
accelerated sales efforts, and that the proceeds from that sale could be
immediately put to use in the Company's core business. Based on this decision,
the refinery (not operational since the early 1980s) was determined to have
negligible value after considering clean-up and dismantling costs. The real
estate and refinery were written down $1,075,011 to their estimated fair market
value of $700,000, based on the estimated proceeds of a sale occurring in the
reasonably near future. During the year ended December 31, 1998, the Company
dismantled the refinery at a cost of $145,000, which was considered an
additional impairment expense.

For the nine months ended December 31, 1997, the Company determined that it
would discontinue operating certain segments of its natural gas gathering system
in Kansas and Oklahoma. The Company recorded a $172,823 impairment provision to
reduce the carrying value of these assets to their estimated net realizable
value.

The Company recorded a write-down of the oil and gas properties and equipment,
based upon the full cost pool ceiling test, of $15,206,978 at December 31, 1998
and $4,901,567 at December 31, 1997. See Notes 4 and 19 for additional
information regarding the oil and gas property and equipment write-down.

Subsequent to December 31, 1997, the Company sold the natural gas stripping
plant held for sale. Based upon that sale, the Company provided an additional
provision for impairment of $20,000 at December 31, 1997.

During the last quarter of the year ended December 31, 1998, the Company
recorded additional depletion of $2,258,311 based upon the December 31, 1998
reserve study.



                                      F-22
<PAGE>   56
                United States Exploration, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)


15. 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 fair value of the Company's
financial instruments, consisting of cash and cash equivalents and borrowings
under the credit facility, are considered to approximate their carrying amounts
in the Company's balance sheet.

16. COMMITMENTS

The Company entered into a 117 month lease, effective July 1, 1998, for office
space. Approximately 12,000 square feet were leased with monthly payments of
$14,817 for the first 57 months and $19,411 for the remainder of the lease term.
The Company has incurred costs of approximately $100,000 for leasehold
improvements, substantially all of which were incurred subsequent to December
31, 1998. The approximate minimum aggregate rental commitment under the office
space lease is as follows:

<TABLE>
<S>                                                                                          <C>
              1999                                                                           $   177,804
              2000                                                                               177,804
              2001                                                                               177,804
              2002                                                                               177,804
              2003                                                                               219,150
              Thereafter                                                                         989,961
                                                                                             -----------
                                                                                             $ 1,920,327
                                                                                             ===========
</TABLE>

The Company has committed to drill 15 wells by November 30, 1999 under the
Exploration Agreement which is a part of the acquisition of properties from UPR
(see Note 13). At December 31, 1998 no wells have been drilled pursuant to the
Exploration Agreement. Liquidated damages of $125,000 per commitment well not
drilled will be due UPR, resulting in a total of $1,875,000 if no commitment
wells are drilled by November 30, 1999. See Note 13 for further details of an
amendment to the Exploration Agreement which will reduce the capital required to
fulfill this commitment.



                                      F-23
<PAGE>   57

                United States Exploration, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)


17. ASSETS HELD FOR SALE

On January 20, 1999, the Company sold, effective as of December 31, 1998, the
stock of three wholly owned subsidiaries. Performance Petroleum Corporation and
Pacific Osage, Inc. were sold in one of the transactions for $650,000. United
States Gas Gathering Co., Inc. was sold in the other transaction for $1,175,000.
As required by the Company's credit agreement with its lender, proceeds were
used to reduce the Company's borrowings. The underlying properties sold
consisted of the following:

<TABLE>
<S>                                                                                           <C>        
Current assets                                                                                $   134,542
Natural gas gathering systems, net                                                                371,622
Oil and gas property and equipment, net                                                         1,159,076
Building and other equipment, net                                                                 218,203
                                                                                              -----------
                                                                                                1,883,443
Current liabilities                                                                               (58,443)
                                                                                              -----------
                                                                                              $ 1,825,000
                                                                                              ===========
</TABLE>

18. CREDIT AGREEMENT

In connection with the acquisition of the UPR properties, the Company entered
into a Credit Agreement with ING (U.S.) Capital Corporation establishing a
revolving credit facility (the Credit Agreement). The maximum available
borrowings under the Credit Agreement were initially set at $35 million, subject
to periodic redeterminations of the borrowing base. The Company borrowed $29
million under the Credit Agreement to pay a portion of the purchase price of the
UPR properties, and the balance was paid with the Company's existing funds.
Principal is repayable in 20 quarterly installments beginning March 31, 2000.
Interest is generally payable on a quarterly basis at a rate, selected by the
Company, which is determined by reference to LIBOR or the lender's reference
rate plus varying margins. At December 31, 1998, the outstanding loan balance of
$31.9 million bore interest at rates varying from 7.6875% to 8.5% per annum. The
obligations of the Company under the Credit Agreement are secured by
substantially all of the Company's oil and gas properties. The Credit Agreement
prohibits the payment of dividends on Common Stock and prohibits the payment of
dividends on the Series C Preferred Stock for periods ending after June 30,
1999. Prior to June 30, 1999, no dividend can be paid on the Series C Preferred
Stock if a default under the Credit Agreement exists or would exist after the
payment.



                                      F-24
<PAGE>   58

                United States Exploration, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)


18. CREDIT AGREEMENT (CONTINUED)

At September 30, 1998 and December 31, 1998, the Company did not meet certain
financial ratios and net worth requirements contained in the Credit Agreement.
The Credit Agreement requires the Company to have a ratio of EBITDA (Earnings
Before Interest, Taxes, Depreciation and Amortization) to interest expense of
not less than 2.75:1, a ratio of current assets to current liabilities of not
less than 1:1, and to maintain tangible net worth of at least $20 million.

As a result of the Company's failure to meet these ratios and requirements at
December 31, 1998, the loan is in default and can be called by the bank,
Therefore, the Company is required by generally accepted accounting principles
to classify the entire $31,900,000 due to the lender as a current liability even
though the loan is payable by its terms over a five-year period beginning March
31, 2000 as follows:

<TABLE>
<S>                                                           <C> 
                 1999                                              $         --
                 2000                                                 8,000,000
                 2001                                                 7,500,000
                 2002                                                 7,000,000
                 2003                                                 7,000,000
                 Thereafter                                           2,400,000
                                                                   ------------
                                                                   $ 31,900,000
                                                                   ============
</TABLE>

As of April 9, 1999, the Company's bank had not yet completed its review of
reserves or established a new borrowing base level for the Company. Based on
preliminary reports provided to the bank, it has advised that the new borrowing
base level will most likely be established within a range between $21 and $26
million dollars. However, the bank has provided no commitment that the borrowing
base will be established within this range. These amounts are substantially less
than the outstanding loan balance on April 9, 1999 of $32 million.

The Company has not yet established with the bank a plan for eliminating the
anticipated borrowing base deficiency. However, the Company has begun
discussions with the bank and is evaluating its options.



                                      F-25
<PAGE>   59

                United States Exploration, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)


19. 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 December 31, 1998
and 1997. 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 reserves. 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.

<TABLE>
<CAPTION>
                                                                       DECEMBER 31
                                           ---------------------------------------------------------------------
                                                          1998                              1997
                                           -------------------------------      --------------------------------
                                                 Oil              Gas               Oil               Gas
                                               (bbls)            (mmcf)            (bbls)           (mmcf)
                                               ------            ------            ------           ------

<S>                                              <C>                <C>             <C>                 <C> 
Proved developed and
   undeveloped reserves,
   beginning of period                           252,215            2,518           792,430             9,708

Revisions of previous estimates                    7,556              (21)         (475,612)           (6,916)
Production                                      (140,112)          (1,650)          (64,603)             (274)
Purchase of minerals in place                  2,238,422           58,863                --                --
Dispositions of minerals
   in place (See Note 17)                       (142,441)            (739)
                                              ----------          -------         ---------           -------


Proved developed and
   undeveloped reserves,
   end of period                               2,215,640           58,971           252,215             2,518

Proved developed reserves:
   Beginning of period                           207,202            1,565          647,870              6,377
   End of period                                 717,419           23,237          207,202              1,565
</TABLE>



                                      F-26
<PAGE>   60

                United States Exploration, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)


19. OIL AND GAS INFORMATION (UNAUDITED) (CONTINUED)

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.

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 periods indicated. Estimated future cash flows
are determined by using period-end prices for December 31, 1998 and 1997
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 December 31, 1998 and 1997. The
standardized measure of future net cash flows was prepared using the prevailing
economic conditions existing at December 31, 1998 and 1997, 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)

<TABLE>
<CAPTION>
                                                             DECEMBER 31
                                                       1998                1997
                                                  -------------       -------------

<S>                                               <C>                 <C>          
Future cash inflows                               $ 129,807,936       $  10,090,059
Future production and development costs             (71,530,056)         (5,554,269)
                                                  -------------       -------------
Future net cash flows                                58,277,880           4,535,790
10% annual discount for estimated timing of
   cash flows                                       (33,111,110)         (1,145,150)
                                                  -------------       -------------
Standardized measure of discounted future
   net cash flows                                 $  25,166,770       $   3,390,640
                                                  =============       =============
</TABLE>




                                      F-27
<PAGE>   61

                United States Exploration, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)


19. OIL AND GAS INFORMATION (UNAUDITED) (CONTINUED)

<TABLE>
<CAPTION>
                                                                           NINE MONTHS
                                                          YEAR ENDED          ENDED
                                                         DECEMBER 31       DECEMBER 31
                                                             1998              1997
                                                        -------------      -------------

<S>                                                     <C>                <C>         
Amount at beginning of period                           $  3,390,640       $  9,537,329

Sales of minerals in place                                  (860,754)              --
Sales and transfers of oil and gas production,
   net of production costs                                (1,683,918)          (855,691)
Development costs incurred                                      --               67,200
Revisions of previous quantity estimates, net
   of changes in previous estimates of development
   and production costs and timing revisions                    --           (5,518,632)
Purchase of minerals in place                             25,950,822               --
Accretion of discount                                           --              953,733
Net changes in prices and production costs                (1,630,020)          (892,497)
Net change in income taxes                                      --               99,198
                                                        ------------       ------------
                                                          21,776,130         (6,146,689)
                                                        ------------       ------------
Amount at end of period                                 $ 25,166,770       $  3,390,640
                                                        ============       ============
</TABLE>



                                      F-28
<PAGE>   62


                                   SIGNATURE

          In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.

                                       UNITED STATES EXPLORATION, INC.


   
<TABLE>
<S>                                    <C>
                                       By: /s/ F. Michael Murphy
                                           -------------------------------------------
                                           F. Michael Murphy, Vice President

                                       Date: April 30, 1999
                                            ------------------------------------------
</TABLE>
    


          In accordance with the Exchange Act, this report has been signed by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.

   
<TABLE>
<CAPTION>
Signatures                                                    Title                                   Date
----------                                                    -----                                   ----

<S>                                                  <C>                                         <C>
/s/ F. Michael Murphy                                Vice President, Chief Financial             April 30, 1999
-----------------------------------                  Officer and Secretary
F. Michael Murphy                                    

Bruce D. Benson                                      President, Chief Executive
                                                     Officer, and Chairman of
                                                     the Board of Directors
Thomas W. Gamel                                      Director
Robert J. Malone                                     Director
Richard L. Robinson                                  Director
Randall L. Rogers                                    Chief Accounting Officer

By: /s/ F. Michael Murphy                                                                        April 30, 1999
    --------------------------------
    F. Michael Murphy
    Attorney-In-Fact
</TABLE>
    



<PAGE>   63


                                 EXHIBIT INDEX


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

<S>                   <C>
          3.1(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(1)      By-laws of the Company.

          3.3(1)      Articles of Amendment of the Company filed on June 7,
                      1990 with the Secretary of State of the State of
                      Colorado.

          3.4(2)      Articles of Amendment of the Company as filed with the
                      Secretary of State of the State of Colorado on September
                      24, 1996.

          3.5(3)      Amended and Restated Bylaws of the Company.

          10.1(1)     1989 Incentive Stock Option Plan of the Company.

          10.2(1)     1990 Non-Qualifying Stock Option Plan.

          10.3.1(4)   Lease Agreement between Mid-America Pipeline Company and
                      Producers Service, Incorporated.

          10.3.2(4)   Amendment to Lease Agreement between Mid-America Pipeline
                      Company and Producers Service, Incorporated.

          10.4(5)     Executive Employment Agreement, dated August 7, 1997, by
                      and between the Company and Bruce D. Benson.

          10.5(5)     Cost and Expense Sharing Agreement, dated August 7, 1997,
                      by and between the Company and Benson Mineral Group, Inc.

          10.6(5)     Form of Non-Qualified Stock Option Agreement.

          10.7(6)     Purchase and Sale Agreement between the Company and Union
                      Pacific Resources Company dated April 10, 1998.

          10.8(6)     Exploration Agreement between the Company and Union
                      Pacific Resources Company dated May 15, 1998.

          10.9(6)     Credit Agreement dated as of May 15, 1998 among the
                      Company and ING (U.S.) Capital Corporation.

          10.10(6)    Mortgage, Assignment, Security Agreement, Fixture Filing
                      and Financing Statement from United States Exploration,
                      Inc. to ING (U.S.) Capital Corporation, dated May 15,
                      1998.

          10.11(6)    Mortgage, Assignment, Security Agreement, Fixture Filing
                      and Financing Statement from Performance Petroleum Co.,
                      United States Gas Gathering Co., Inc. and Pacific Osage,
                      Inc. to ING (U.S.) Capital Corporation, dated May 15,
                      1998.
</TABLE>



<PAGE>   64


   
<TABLE>
<S>                   <C>
          10.12(6)    Pledge Agreement made as of May 15, 1998, by United
                      States Exploration, Inc., in favor of ING (U.S.) Capital
                      Corporation.

          10.13(6)    Guaranty made as of May 15, 1998, by Performance
                      Petroleum Co., United States Gas Gathering Co., Inc.,
                      Pacific Osage, Inc. and Producers Service Incorporated,
                      in favor of ING (U.S.) Capital Corporation.

          10.14(7)    Pipeline Purchase Agreement between USGG and Northern
                      Osage Gas Association L.L.C. dated as of December 31,
                      1998.

          10.15(7)    Stock Purchase Agreement between the Company and the
                      several buyers named therein relating to the sale of USGG
                      dated as of December 31, 1998.

          10.16(7)    Stock Purchase Agreement between the Company and Demetrie
                      D. Carone relating to the sale of Pacific and Performance
                      dated as of December 31, 1998.

          10.17(8)    Directors Fee Stock Plan

          10.18(8)    Office Lease Agreement between the Company and EOP-One
                      Civic Center Plaza, L.L.C. dated October 15, 1998.

          16(9)       Letter on change in certifying accountant.

          21(8)       List of the Company's subsidiaries.

          23.1(8)     Consent of Grant Thornton LLP, independent certified
                      public accountants, to incorporation of this report by
                      reference into the issuer's Registration Statement on
                      Form S-8.

          23.2(8)     Consent of Ernst & Young LLP, independent certified
                      public accountants, to incorporation of this report by
                      reference into the issuer's Registration Statement on
                      Form S-8.

          24(8)       Powers of Attorney

          27(8)       Financial Data Schedule.
</TABLE>
    

----------

          (1) Filed as an Exhibit to Form S-18 dated March 8, 1989.

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

          (3) Filed as an Exhibit to Form S-8 filed August 7, 1998
              (Registration No. 333-60983).

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



<PAGE>   65


          (5) Filed as an Exhibit to Form 10-QSB for the quarter ended June 30,
              1997, and incorporated herein by reference.

          (6) Filed as an Exhibit to Form 8-K dated May 26, 1998 and
              incorporated herein by reference.

          (7) Filed as an Exhibit to Form 8-K dated February 2, 1999 and
              incorporated herein by reference.

   
          (8) Filed as an Exhibit to this Form 10-KSB as originally filed April 
              15, 1999.

          (9) Filed as Exhibit to Form 8-K/A dated May 19, 1998.