FORM 10-KSB

                       SECURITIES AND EXCHANGE COMMISSION

                             Washington, D.C. 20549

(Mark One)

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

       For the fiscal year ended        March 31, 1997     or
                                       ----------------

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

       For the transition period from __________ to __________

       Commission File Number     0-18981

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

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

1901 New Street, Independence, Kansas                      67301
---------------------------------------                    ---------
(Address of principal executive offices)                   (Zip Code)

Registrant's telephone number, including area code: (316) 331-8102
                                                     -------------

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


                         Common Shares, $.0001 par value
                         -------------------------------
                                 Title of Class

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


<PAGE>



Check if there is no disclosure of delinquent  filers in response to Item 405 of
Regulation S-B in this form, and no disclosure will be contained, to the best of
the  registrant's  knowledge,  in  definitive  proxy or  information  statements
incorporated  by reference  in Part III of this Form 10-KSB or any  amendment to
this Form 10-KSB. [ ]

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

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

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


                      DOCUMENTS INCORPORATED BY REFERENCE:

                                      None























<PAGE>



                                TABLE OF CONTENTS

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

                         UNITED STATES EXPLORATION, INC.

PART I                                                                    Page
------                                                                    ----

     Items 1 and 2.    Business and Properties........................      1

     Item 3.           Legal Proceedings..............................      20

     Item 4.           Submission of Matters to a Vote of
                       Security Holders ..............................      20

     Item 5.           Market for Company Securities and Related
                       Shareholders Matters...........................      20

     Item 6.           Management's Discussion and Analysis of
                       Financial Conditions and Results of
                       Operations.....................................      22

     Item 7.           Financial Statements and Supplementary Data....      27

     Item 8.           Changes in and Disagreements with Accountants
                       on Accounting and Financial Disclosure.........      27

PART II

     Item 9.           Directors and Executive Officers...............      28

     Item 10.          Executive Compensation.........................      29

     Item 11.          Security Ownership of Certain Beneficial
                       Owners and Management..........................      31

     Item 12.          Certain Relationships and Related Transactions.      33

PART IV

     Item 13.          Exhibits, Financial Statement Schedules and
                       Reports on Form 8-K............................      34

     Signature Page...................................................      36

     Index to Financial Statements....................................      37

                                       i


<PAGE>



                                GLOSSARY OF TERMS

BBLS:                         Barrels.

BOPD:                         Barrels of oil per day.

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

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

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

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

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

FERC:                         Federal Energy Regulatory Commission.

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

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

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

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

MCF:                          Thousand cubic feet.

MMCF:                         Million cubic feet.


                                       ii
<PAGE>

NGL:                          Natural gas liquids.

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

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

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

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

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


PROVED DEVELOPED              Quantities  of oil and gas  which geological  and 
PRODUCING(PDP):               engineering   data   demonstrate  with  reasonable
                              certainty to be  recoverable  in future years from
                              known  reservoirs  under  existing   economic  and
                              operating conditions at prices and costs as of the
                              date the estimate is made.

PROVED RESERVES:              Those  quantities  of oil  and  gas  which  can be
                              expected  with  little  doubt  to  be  recoverable
                              commercially  at current  prices and costs,  under
                              existing  regulatory  practices  and with existing
                              conventional equipment and operating methods.

PROVED UNDEVELOPED            Reserves  that are expected to be  recovered  from
RESERVES (PUD):               new wells on  undrilled  acreage or from  existing
                              wells  where a  relatively  major  expenditure  is
                              required for recompletion.


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

                                       iii


<PAGE>



                                 INDEX OF TABLES


Table             Description                                            Page 
-----             -----------                                            ----
                                                                       
I                 Average Production Costs and Sales Prices...........    3

II                Average Daily Flow-Through .........................    8

III               Developed Properties ...................... ........    10

IV                Remaining Reserves, March 31, 1997..................    12

V                 Remaining Reserves, March 31, 1996..................    13

VI                Remaining Reserves, March 31, 1995..................    13

VII               Future Net Revenues (non-escalated basis)...........    14

VIII              Present Value of Estimated Future Net Revenues......    15
                    (non-escalated basis)


                             Additional Information

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

                Special Note Regarding Forward Looking Statements

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


                                       iv

<PAGE>



ITEMS 1. AND 2.   BUSINESS AND PROPERTIES

General Development of Business

     United States Exploration,  Inc. (the "Company") was incorporated under the
laws of the State of Colorado  on January 9, 1989.  The  Company  completed  its
initial  public  offering in July of that year.  Since that time,  the Company's
Common Shares have traded in the  over-the-counter  market. The Company's Common
Shares are currently quoted in the NASDAQ Small Cap Market.

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

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

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

     As of the date of filing this Report, the Company is negotiating with Bruce
D.  Benson and  certain  related  entities,  to acquire  additional  oil and gas
assets. Such assets consist of an additional gas gathering system, oil gathering
system,  salt water disposal  system,  producing oil and gas leases in southeast
Kansas and  northeast  Oklahoma,  a processing  plant and related  equipment and



                                        1

<PAGE>


supplies.  Negotiations  with Mr.  Benson,  if  successful,  may  result  in him
assuming a management role with the Company.  However,  as of the date of filing
this Report, no agreement has been executed, and there is no assurance that such
acquisition will be completed.

Oil and Gas Operations

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

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

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


                                        2

<PAGE>



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

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

<TABLE>
<CAPTION>


                                     TABLE I
                                     -------
                           Net Oil and Gas Production,
                    Average Production Costs and Sales Prices
                                                        
                             Net                     Production
Year Ended               Production                  Cost Per                  Average Sales Price
March 31,         Oil (bbl)        Gas(mmcf)         Equivalent Unit(1)        Oil (bbl)      Gas (mcf)
---------         ---------        ---------         ---------------           ---------      ---------

<C>               <C>              <C>               <C>                       <C>             <C>  
1997              88,114           318               $9.42 (2)                 $20.25          $2.57
1996              59,177           186                7.23                      16.48           1.74
1995                1120            78                6.23 (3)                  14.47           1.84
</TABLE>

----------

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

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

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

----------

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

Industry Segment

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

                                        3

<PAGE>



Exploration, Development and Acquisition of Oil and Gas Properties

     Management  and  consultants  of the  Company are  continually  involved in
reviewing  Company  owned  properties  and  other  prospects  to  determine  the
desirability  of exploration,  development  and acquisition of reserves.  Due to
limited working capital,  the Company has drilled no new wells in the last three
fiscal  years.  As of the date of filing this  Report,  the Company has recently
recompleted one gas well and one oil well,  both of which are producing.  During
the three years ended March 31, 1997,  the Company  expended the  following  net
amounts for exploration, development and acquisition of oil and gas properties.

                           Year Ended
                           March 31,                       Investment
                           ----------                      ----------

                           1997                            $2,093,216
                           1996                             5,598,686
                           1995                                56,684
                                                            

Developments for Fiscal 1997

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

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

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

                                        4

<PAGE>



in the Joint  Venture as a 49% owner with Argas  owning the  remaining  51%. The
Joint  Venture  owned  and  operated  four  gas  gathering  systems,   known  as
Chautauqua,  Havana,  Cowley and Elgin and  operated a fifth for  another  joint
venture in which the Company previously owned a 50% interest.  Subsequent to the
acquisition  of Argas,  the Company holds a 100% interest in the Joint  Venture.
Argas was controlled by a former affiliate of the Company, Terry L. Carroll, and
his wife, Violet M. Carroll. The acquisition price was negotiated by the Company
directly  with Mr.  Carroll and no appraisal  was received  from an  independent
party.

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

     Effective January 15, 1997, the Company completed the acquisition of US Gas
Gathering, Inc. ("US Gas"), a Delaware corporation for a net cash purchase price
of $560,000.  The purchase price for this acquisition was also provided from the
Company's available working capital. Upon completion of the transaction,  US Gas
became a wholly owned subsidiary of the Company.  US Gas owns a 50% interest and
operates a gas  gathering  system  located in Osage  county,  Oklahoma  which is
approximately  ninety (90) miles in length.  In  addition,  US Gas is the Lessee
under the Blanket Lease covering  approximately  64,100 acres of land located in
Osage county, Oklahoma upon which are located approximately 30 producing oil and
gas wells.

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

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

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


                                        5

<PAGE>



     Finally,  effective  December 1, 1996, the Company acquired certain oil and
gas leases (the "Hull Leases") located in Osage County,  Oklahoma for a purchase
price of $200,000,  paid from the  Company's  working  capital.  The Hull leases
cover  approximately  320  acres  and  contain  5 oil  wells,  four of which are
currently  producing  and one of which is shut in. The Hull leases were acquired
from a group of  individuals  including  the  Company's  President,  Demetrie D.
Carone,  who owned or controlled the largest single  interest in and to the Hull
leases. The Company did not obtain an independent  appraisal of the value of the
Hull leases. However, management of the Company believes that the purchase price
for these assets,  as well as the other  acquisitions  discussed above,  were no
less  favorable  than could be obtained  from an  independent  third party.  The
Company intends to continue  operation of all of these assets in the oil and gas
industry.

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

Marketing

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

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

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

     Natural  gas  produced  by  the  Company  and  third  party   producers  is
transported through gas gathering systems owned or operated by the Company or by
third  parties to larger  gas  pipelines  owned by third  parties.  Natural  gas
gathered by the Company is sold at a spot price determined on a monthly basis by
reference to the national market for gas. At March 31, 1997 the Company received
an average of $2.57 per mcf for its natural gas. Oil is also sold at  prevailing
spot prices, which averaged $20.25 at fiscal year end 1997.


                                        6

<PAGE>



Properties

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

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

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

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

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

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

     1. PSI. The PSI  Gathering  System  consists of  approximately  72 miles of
four-inch  steel  gathering line located in southeast  Kansas and traversing the
counties of Chautauqua,  Cowley and Montgomery.  The PSI line generally  extends
from east to west and  collects gas from the three county area for resale to end
users under  contract with the Company.  Prior to  acquisition by the Company in
February,  1994, PSI purchased a majority of natural gas produced by the Company
and gathered through other Company systems.


                                        7

<PAGE>



     PSI is  leased  from an  independent  third  party  pursuant  to a  10-year
agreement  which  expires  in 1998,  with an  additional  10-year  option in the
Company's discretion.  (See Note "J" to the Financial Statements).  PSI sells to
larger gathering systems and end users in proximity to the system.

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

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

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

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

     6. Cowley II Pipeline.  In  connection  with the Company's  acquisition  of
Argas,  Inc. the Company acquired all of Argas' interest in and to the Cowley II
Pipeline  located in extreme  eastern Cowley county,  Kansas.  This pipeline has
been shut in without a  commercial  gas supply for  approximately  4 years.  The
pipeline consists of approximately 4 miles of above ground 6" steel pipe and 1/2
mile  of  buried  2.5  inch  steel  pipe.  The  Company  anticipates   salvaging
approximately  3 miles of the above ground pipe for future use.  Approximately 1
mile of the pipeline will remain in place and will be utilized by an independent
third party for gas sales into the PSI pipeline starting in late 1997.

                                        8

<PAGE>



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

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

     9. US Gas  Gathering.  The US Gas Gathering  System ("US Gas") in which the
Company  owns a 50%  interest,  consists of  approximately  90 miles of pipeline
ranging in size from 2 to 12 inches in diameter. US Gas serves a 6 township (216
square miles) area of eastern Osage County,  Oklahoma. The primary source of gas
for US Gas is the Blanket Lease covering approximately 64,160 acres on which are
located  approximately  30  producing  oil  and gas  wells.  The  pipeline  also
purchases gas from several independently operated properties located both on and
off the  Blanket  lease.  The  primary  source of gas  sales  from US Gas is the
smelting   facility  owned  by  the  Zinc  Corporation  of  America  located  in
Bartlesville,  Oklahoma.  Sales are also  made to local  rural  residential  gas
customers.  Excess  produced gas is transported to the Company owned Pacific Gas
Gathering System which in turn sells gas to Williams Natural Gas Company.

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


                                        9

<PAGE>
<TABLE>
<CAPTION>



                                       TABLE II
                              AVERAGE DAILY FLOW-THROUGH

PIPELINE                   YEAR ENDED                 CURRENT               MAXIMUM
--------                   MARCH 31, 1997             CAPACITY              CAPACITY (2)
                           --------------             --------              --------  

<S>                           <C>                     <C>                   <C>        
PSI                           1,250mcfd (3)           3,000 mcfd            10,000 mcfd
PERU-HALE                       732                   1,200                  6,000
INDEPENDENCE (1)                144                   1,200                  2,500
PACIFIC                         263                   1,250                  5,000
COWLEY I (1)                     28                     200                  1,000
COWLEY II (4)                     0                       0                  1,000                         
ELGIN (5)                         0                       0                  2,000                         
HAVANA-
CHAUTAUQUA (1)                  413                   1,200                  2,500  
US GAS GATHERING (1)(6)         256                   2,500                  4,000
SEK                               0                       0                  1,500
</TABLE>

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

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

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

3.   Includes all gas gathered  through  Peru-Hale,  Independence,  Cowley I and
     Havana-Chautauqua, which is delivered to the PSI Pipeline.

4.   The Cowley II pipeline  has been shut down since  November  30, 1992 due to
     the lack of producing wells within the vicinity which this pipeline serves.

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

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

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

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

     2. Havana-Chautauqua  Pipeline Region,  Montgomery and Chautauqua Counties,
Kansas.  The Company  has a 100% working  interest  (87.5% net revenue interest)


                                       10

<PAGE>



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

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

     3. Central Oklahoma Properties. As a result of the Performance acquisition,
the Company has a 100% working  interest in six leases in Kay County,  Oklahoma.
As a  result  of the Five  Star  acquisition,  the  Company  has a 100%  working
interest in 5 leases in Logan and Noble  Counties,  Oklahoma.  In the aggregate,
these 11  leases  contain  23  producing  wells  and five  non-producing  wells,
including a certain  number of salt water  disposal  wells.  The  Company's  net
revenue  interest in these properties  ranges from 81.25% to 87.5%.  Drilling to
date has established proved developed producing reserves estimated at 1,227 mmcf
of gas  and  249,490  bbls  of oil.  Daily  production  from  these  leases  was
approximately  494 mcf of natural gas per day and approximately 72 BOPD at March
31, 1997.

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

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

                                       11

<PAGE>




     The following  table  summarizes  gross and net interest  producing  wells,
gross and net  developed  acres and proved  reserves of the Company at March 31,
1997.  Unless otherwise stated, all wells are gas wells.

<TABLE>
<CAPTION>
                                                     TABLE III
                                               Developed Properties

                                                                                                  Proved Reserves
                                                                                                  ---------------
                                        Producing            
                                          Wells                  Acres                  Oil (Bbls)             Gas (mmcf)
                                          -----                  -----                  ----------             ----------
Property              Location      Gross        Net     Gross       Net         Gross         Net        Gross        Net
--------              --------      -----        ---     -----       ---         -----         ---        -----        ---
<S>                 <C>             <C>          <C>     <C>         <C>        <C>           <C>         <C>         <C>
Havana-
Chautauqua
Pipeline            Chautauqua       13           13      2,783       2,783      24,560        21,490      3,134       2,613
Region              County, KS
---------------------------------------------------------------------------------------------------------------------------
Peru-Hale
Pipeline            Chautauqua       11           11(1)   1,998       1,998      31,220        27,310      2,289       1,888
Region              County, KS
---------------------------------------------------------------------------------------------------------------------------
Osage               Osage
Region              County, OK       143          143(2)  8,680       8,680     585,460       479,390      1,300       1,060
---------------------------------------------------------------------------------------------------------------------------
US Gas Pipeline     Osage
Region              County, OK        30           30(3) 64,160      64,160(5)   18,110        14,750      3,524       2,921
---------------------------------------------------------------------------------------------------------------------------
Central             Kay, Noble &
Oklahoma            Logan            23            23(4)  1,440       1,440     296,180       249,490      1,468       1,226
Region              Counties, OK
---------------------------------------------------------------------------------------------------------------------------
TOTALS                               220          220    79,061      79,061     955,530       792,430     11,715       9,708

</TABLE>
----------------
(1)  Includes 2 oil wells.

(2)  Includes 140 oil wells.

(3)  Includes 6 oil wells.

(4)  Includes 22 oil wells.

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

Reserves

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

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

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

                                       12

<PAGE>


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

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

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

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

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

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

                                       13

<PAGE>
<TABLE>
<CAPTION>

                                               TABLE IV (1)
                                  Remaining Reserves at March 31,1997
                                  -----------------------------------

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

<S>                        <C>              <C>                     <C>               <C> 
Proved Developed
Producing                  699,570          579,830                  3,956            3,064
Nonproducing                81,450           68,040                  3,905            3,313
                           -------          -------                 ------            -----
Subtotal                   781,020          647,870                  7,861            6,377

Proved Undeveloped         174,510          144,560                  3,854            3,331

TOTAL PROVED               955,530          792,430                 11,715            9,708
                           -------          -------                 ------            

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

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

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


                                                      TABLE V
                                                      -------
                                        Remaining Reserves at March 31,1996
                                        -----------------------------------

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

Proved Developed
Producing                  710,992         580,850                 1,951           1,451
Nonproducing               102,038          87,682                 3,350           2,873
                         ---------        --------                 -----           -----
   Subtotal                813,030         668,532                 5,301           4,324

Proved Undeveloped       1,418,453        1,128,787                5,923           5,176
                         ---------        ---------                -----           -----

TOTAL PROVED             2,231,483        1,797,319               11,224           9,500
                         =========        =========               ======           =====


                                                        14
<PAGE>


                                                     TABLE VI
                                                     --------
                                        Remaining Reserves March 31, 1995
                                        ---------------------------------

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

Proved Developed
Producing                  2,777            2,432                   260              160
Nonproducing              76,480           66,915                 2,090            1,828
                          ------           ------                 -----            -----
   Subtotal               79,257           69,347                 2,350            1,988

Proved Undeveloped        14,491           12,685                 5,097            4,460
                          ------           ------                 -----            -----

TOTAL PROVED              93,748           82,032                 7,447            6,448
                          ======           ======                 =====            =====

</TABLE>

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

     During fiscal 1997, the geological staff and engineering consultants of the
Company  performed  further  analysis  of these  lease  wells to  determine  the
feasibility of installing  the proposed  field-wide  water flood.  The Company's
further analysis  indicated that the reservoir  targeted for secondary  recovery
did not have characteristics  suitable for a large scale water flood project and
the  expenditures  for such a project  would  bear  considerable  risks.  At the
conclusion  of  this  analysis,  the  Company  and its  independent  engineering
consultants  decided to eliminate  these  reserves for fiscal 1997.  The Company
hopes to modify the proposed  water flood program on this lease  starting with a
smaller  pilot  project.  Reserves for this  modified  program have not yet been
determined by the Company or its engineers.

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

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




                                       15

<PAGE>



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

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

<TABLE>
<CAPTION>
                                         TABLE VII
                                         ---------

                             Estimated Future Net Revenues from
                           Proved Net Oil and Natural Gas Reserves
                                   (non-escalated basis)

                         March 31, 1997             March 31, 1996           March 31, 1995
                         --------------             --------------           --------------
                           ($000's)                    ($000's)                 ($000's)
<S>                       <C>                          <C>                     <C>   
Proved Developed
  Producing                $  7,704                    $  7,186                  $   71
Nonproducing                  3,036                       3,777                   2,048
                           --------                    --------                  ------
Subtotal                     10,740                      10,963                   2,119

Proved Undeveloped         $  4,013                      23,407                   1,786
                           --------                    --------                  ------

TOTAL PROVED               $ 14,753                    $ 34,370                  $3,905
                           ========                    ========                  ======
</TABLE>


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

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


                                       16

<PAGE>
<TABLE>
<CAPTION>

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

                             Present Value of Estimated
                              Future Net Revenues from
                          Proved Oil and Natural Gas Reserves
                            (based upon a 10% discount rate)
                                  (non-escalated basis)

                            March 31, 1997        March 31, 1996       March 31, 1995
                            --------------        --------------       --------------
                                ($000's)             ($000's)             ($000's)
<S>                          <C>                   <C>                     <C>

Proved Developed
  Producing                     $  5,013            $  5,178               $    63
Nonproducing                       2,074               2,679                 1,463
                                --------            --------               -------
Subtotal                           7,087               7,857                 1,526
Proved Undeveloped                 2,549              11,846                 1,086
                                --------            --------               -------

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

</TABLE>


Titles

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

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

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

                                       17

<PAGE>



Facilities

     The Company's executive and administrative  offices are located at 1901 New
Street,   Independence,   Kansas  67301.  The  Company's   telephone  number  is
(316)331-8102.  The Company  currently  occupies  this space on a month to month
basis  pursuant  to a lease  arrangement  with Mr.  Terry  Carroll and his wife,
Violet M.  Carroll.  The Lease  provides  for monthly  payments in the amount of
$806.

     The Company owns an oil field parts and supply store  located in Barnsdall,
Oklahoma. The store consists of approximately 10,000 square feet of retail space
devoted to presentation of inventory and sales offices.  In addition,  the store
has warehouse  facilities and related real property covering  approximately 6.54
acres of land.  The  business of the store is to provide  wholesale,  retail and
contracting  services  to end  users of oil  field  parts  and  supplies,  which
supplies consist of various supplies used in the industry.

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

Employees

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

     In connection  with his  appointment  as the Company's  President and Chief
Executive Officer,  Mr. Carone serves at the pleasure of the Board of Directors.
Under the terms and  conditions of his  appointment,  Mr. Carone serves in these
positions for no compensation  and is not subject to the terms and conditions of
any formal employment contract with the Company.

     The Company may engage additional employees as its business requires in the
future.

Competition

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



                                       18

<PAGE>



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

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

Government Regulation

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

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

Miscellaneous

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

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






                                       19

<PAGE>



ITEM 3. LEGAL PROCEEDINGS

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

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

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

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

     The  Company's  Common  Shares are traded in the  over-the-counter  market.
Commencing  April 1, 1993,  the Common  Shares were  approved for listing in the
National   Association  of  Securities   Dealer's  Automated   Quotation  System
("NASDAQ") under the symbol "USXP".  The following table sets forth the range of
high and low bid quotations as reported for the Common Shares of the Company for
the periods indicated as reported in NASDAQ. Quotations represent prices between
dealers, and do not include retail markups, markdowns or commissions, and do not
necessarily represent prices at which actual transactions were effected. 


                                                         Common Shares 
                                                     High              Low
                                                     ----              ---
FISCAL YEAR 1997                               
----------------                               
First Quarter
(April 1 to June 30)                                 $1.19             $ .63

Second Quarter
(July 1 to Sept. 30)                                 $5.63             $ .69

Third Quarter
(October 1 to Dec. 31)                               $5.38             $3.63

Fourth Quarter
(January 1 to March 31)                              $4.38             $2.81

FISCAL YEAR 1996
----------------
First Quarter
(April 1 to June 30)                                 $1.03             $ .56

Second Quarter
(July 1 to Sept. 30)                                 $1.47             $ .91

Third Quarter

                                       20

<PAGE>



(October 1 to Dec. 31)                               $1.50             $ .75

Fourth Quarter
(January 1 to March 31)                              $1.44             $ .69

     The number of record  holders of the Common Shares as of March 31, 1997 was
402,  including  nominees of beneficial owners. The Company estimates that there
were approximately 1,000 beneficial owners of its Common Shares as of that date.

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


                                       21

<PAGE>



ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
        CONDITION AND RESULTS OF OPERATIONS

Introduction

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

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

Liquidity and Capital Resources

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

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

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

     The Company  completed a private  placement of equity securities during the
second and third fiscal quarters of 1997. The Company sold 4,000,000 shares of a
newly created Series "C" Preferred Stock to qualified  investors  pursuant to an
exemption from the  registration  requirements  of Federal and state  securities
laws. Proceeds from the offering of $24,000,000 were budgeted for development of
currently owned property, acquisition and development of additional property and
repayment of debt. The Preferred  Stock carries a cumulative  dividend of 8% per
annum.  The Series C Preferred  Stock  Dividends  applicable for the period were
$840,000.  The Series C Preferred Stock is redeemable at the Company's option at
any time at the issue price of $6 per share,  plus accrued but unpaid dividends,
and is convertible at the holder's option into 2 shares of Common Stock for each
share of Preferred. The Series C Preferred Stock has a liquidation preference of
$6 per share.

                                       22

<PAGE>

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

     Cash flow from  operations  also  contributed  to an  increase  in  working
capital during fiscal 1997. Cash flow from operating activities for the year was
$1,316,118,  compared  to  $59,382  for the year  ended  March 31,  1996.  

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

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

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

     The working  capital  deficit at March 31, 1996 was $957,641  compared to a
deficit of $850,880 at March 31, 1995, an increase of $106,761.  Current  assets
and current  liabilities  both increased  during fiscal 1996,  although  current
liabilities  increased in a greater amount.  The greatest  factor  affecting the
decrease  in  working  capital  was  debt  associated  with the  acquisition  of
Performance and Pacific Osage. Those acquisitions were financed with a term loan
in the  amount  of  $6.8  million,  of  which  approximately  $1.2  million  was
classified  as a current  liability at March 31, 1996.  This note was payable at
the rate of $141,000 per month until July, 1997, when the remaining  balance was
due and payable in full. The note  represented  the Company's  greatest need for
liquidity and working capital during 1996.

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


                                       23

<PAGE>



result of its limited cash and insufficient  cash flow,  management  anticipated
that the  Company  required  additional  cash from  outside  sources to make the
monthly payments during fiscal 1997 and pay the remaining  balance when the note
matures in July, 1997. The private  placement in fiscal 1997  accomplished  that
objective.

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

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

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

     Substantially  all of  the  increase  in  current  assets  during  1996  is
attributable to the acquisition of Performance and Pacific. The increase in cash
and accounts  receivable are directly  attributable to the increased  production
from the Performance properties and sales and operations from Pacific Osage. The
increase in inventories  from fiscal 1995 to fiscal 1996 is associated  with the
parts and supplies store operated by Pacific Osage.  The increase in liabilities
is also primarily attributable to the acquisition of Performance and Pacific. In
addition to current  maturities of the long term debt, both accounts payable and
amounts due related parties  increased.  Such increases are also attributable to
the operations of Performance and Pacific.


                                       24

<PAGE>



Results of Operations

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

     During the fiscal year ended  March 31,  1997,  the Company  realized a net
loss of  $87,530 on  revenues  of  $4,513,387.  This  compares  to a net loss of
$786,165  for the year ended  March 31,  1996.  Taking into  account  Series "C"
Preferred Stock dividends applicable to the period, the net loss for fiscal 1997
equates to $0.13 per  share,  compared  to a net loss of $0.19 per share  during
fiscal 1996.  Excluding provision for the impairment of assets, which management
does not  anticipate to be repeated  during fiscal 1998,  the Company would have
realized a profit of $233,867 for the year ended March 31, 1997.

     The  improved  operations  for fiscal 1997 are  primarily  attributable  to
acquisitions  completed during fiscal 1996 and 1997, together with increased oil
and gas prices  during  1997  compared  to those  prevailing  during  1996.  The
acquisition  of  Performance  Petroleum  and,  to a  lesser  extent,  Five  Star
Petroleum,  resulted  in an  increase  of  Company-produced  oil  and  gas.  The
acquisition of Pacific-  Osage  contributed to the increase of sale of purchased
gas. Finally, the Company received an average of $2.57 per mcf of gas and $20.25
per  bbl of  oil  during  1997,  compared  to  $1.74  and  $16.48  during  1996,
respectively.  Those two factors resulted in revenues from the sale of purchased
gas and the Company-produced oil and gas almost doubling from 1996 to 1997.

     Primarily as a result of these  acquisitions,  the  Company's  revenues are
sufficient   to  offset   operating   expenses,   together   with   general  and
administrative  costs.  Operating  expenses  increased from fiscal 1996 to 1997,
commensurate with an increase in revenues.  General and administrative  expenses
actually decreased,  from $544,915 for the year ended March 31, 1996 to $505,417
for the year ended March 31, 1997.  Part of that decrease is attributable to the
Company's president serving without compensation during fiscal 1997.
     
     Other factors affecting the Company's loss are interest income and expense.
Interest  income  increased  from  $2,064 from fiscal 1996 to $346,294 in fiscal
1997,  as a result  of  temporary  investment  of the  proceeds  of the  private
placement.  Interest expense  decreased  slightly from fiscal 1996 to 1997, from
$367,299 to $307,455. Such expense was attributable to the term debt incurred by
the Company in connection with the acquisition of Performance and Pacific-Osage.
It is not anticipated  that such interest expense will be repeated during fiscal
1998, as the Company is presently  debt free.  



                                       25

<PAGE>



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

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

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

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

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

                                       26

<PAGE>



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

ITEM 7.           FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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

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

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


                                       27

<PAGE>



                                    PART III

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

     The  following  table sets  forth the names and ages of the  members of the
Company's Board of Directors and its executive officers:

    NAME                        AGE         POSITION
    ----                        ---         --------

    Demetrie D. Carone          57          President, Chief Executive Officer,
                                            Chairman of the Board and Director

    Ronald R. McGinnis          61          Vice-President, Secretary
                                            and Director

    Jack MacIsaac               56          Director


     DEMETRIE D. CARONE. Mr. Carone has served as the President, Chief Executive
Officer,  Chairman of the Board and a director of the Company  since  September,
1996.  He currently  devotes  approximately  30 hours per week to the  Company's
affairs.  Since 1977,  Mr. Carone has also been  president of WP&G  Distributing
Co.,  Inc., a privately  held  Colorado  corporation  involved in the  wholesale
distribution  of dairy  products.  From  September,  1995 to January,  1997, Mr.
Carone served as the president of Five Star Petroleum,  Inc., a  privately-owned
Oklahoma corporation involved in the exploration,  development and production of
oil and gas and from which the Company acquired certain assets during the fiscal
year.  Prior  to  that,  he was the  president  and a  director  of  Performance
Petroleum  Corporation and Pacific-Osage,  acquired by the Company in September,
1995. Finally, from July, 1996 to January,  1997, he served as the president and
a director of US Gas Gas Gathering,  Inc., a privately held Delaware corporation
acquired by the Company in fiscal 1997.

     RONALD R. McGINNIS.  Mr. McGinnis has served as Vice  President,  Secretary
and a  Director  of the  Company  since  May  18,  1990.  He  presently  devotes
approximately 10 to 20 hours per week to its affairs,  primarily in the areas of
strategic planning and corporate finance.  Concurrently,  Mr. McGinnis serves as
the vice-president and a director of Wallstreet Racing Stables, Inc., a publicly
traded Colorado  corporation engaged in the business of acquiring,  training and
racing thoroughbred race horses. He has occupied that position since July, 1995.
From 1990 to January, 1997, Mr. McGinnis also served as the vice-president and a
director of  Consolidated  Capital of North  America,  Inc.,  a publicly  traded
Colorado corporation engaged in the real estate industry.  Finally, from 1990 to
1995,  Mr.  McGinnis was the president,  sole director and  shareholder of Argas
Pipeline Company,  a private Kansas corporation which owned an interest in a gas
gathering system.


                                       28

<PAGE>



     JACK  MacISAAC.  Mr.  MacIsaac has been a director of the Company since May
26, 1992. Since 1986, Mr. MacIsaac has been engaged as a private investor. Prior
to that, he was employed in the real estate industry.

     Each  director is serving a term of office which shall  continue  until the
next  annual  meeting  of  shareholders  and until his  successor  has been duly
elected  or  appointed  and  qualified.  Officers  of the  Company  serve at the
pleasure of the Board of Directors.  The Company held its last annual meeting of
shareholders on November 14, 1994.  None of the Company's  officers or directors
are party to any  material  legal  proceeding,  nor are such  legal  proceedings
contemplated to the best  information of such officers and directors.  No family
relationships exist between any of the officers and directors of the Company.

     Compliance with Section 16(a) of the Securities Act of 1934.

     The following  information sets forth each officer,  director or beneficial
owner of more than ten percent of any class of equity  securities of the Company
registered  pursuant  to Section  12 of the 1934 Act who,  based  solely  upon a
review of Forms 3, 4 and 5 received by the Company  pursuant to Rule  16(a)-3 of
the 1934 Act,  failed to file on a timely basis,  Forms 3, 4 or 5 as required by
Section 16(a) during the most recent fiscal year or prior fiscal years:

Name of Reporting Person      Late Form 4    Late Form 5     No. of Transactions
------------------------      -----------    -----------     -------------------

Thomas Stansfield                     1                1                      1
Donald F. Dillon                      1                1                      2
Lancaster, LLC                        1                1                      1


ITEM 10. EXECUTIVE COMPENSATION

     All of the officers and  directors of the Company  presently  serve without
compensation,  although each officer and director is entitled to  participate in
the Company's  Incentive Stock Option and Non-Qualifying  Stock Option Plans and
to be reimbursed for reasonable and necessary expenses incurred on behalf of the
Company.  Neither did the  Company  grant any stock  options to its  officers or
directors during fiscal 1997.  However,  the Company may enter into compensation
arrangements  with one or more of its officers or  directors  in the future,  as
deemed reasonable and prudent in the discretion of the Board of Directors.

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


                                       29

<PAGE>
<TABLE>
<CAPTION>
                                                        SUMMARY COMPENSATION

                                            Annual Compensation            Long Term Compensation
                                            --------------------           ----------------------
                                                          Other Annual     Restricted        Stock    LTIP        All other
Name                      Year      Salary     Bonus      Compensation     Stock Awards      Option   Payouts     Compensation
----                      ----      ------     -----      ------------     ------------      ------   -------     ------------

<S>                       <C>          <C>       <C>          <C>               <C>             <C>      <C>           <C>
Demetrie D. Carone (1),   1997        -0-       -0-          -0-               -0-             -0-      -0-           -0-
  Chairman of the Board,
   President and Chief
   Executive Officer.
Terry L. Carroll,         1997     $24,000
  Chairman of the Board,  1996      96,000      -0-           -0-              -0-             -0-      -0-           -0-
  Chief Executive
  Officer and President.  1995      96,000      -0-           -0-              -0-             -0-      -0-           -0-

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

(1)  See Item 12, Certain  Relationships  and Related Party  Transactions  for a
     description of certain  options  issued to executive  officer in connection
     with a previous acquisition.
</TABLE>


Option Grants for Fiscal 1996

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

Value Realized Upon Exercise of Options

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

<TABLE>
<CAPTION>


             Aggregated Option/SAR Exercises in Last Fiscal Year and Fiscal Year End Option/SAR Values
-------------------------------------------------------------------------------------------------------------------
Name                      Shares            Value            Number of                 Value of unexercised
                          acquired          realized         unexercised               in-the-money options/SARS's
                          on                  ($)            options/SAR's at          at Fiscal Year end ($)
                          exercise ($)                       Fiscal Year end (#)
                          exercisable/                       exercisable/
                          unexcercisable                     unexercisable
--------------------------------------------------------------------------------------------------------------------
<S>                       <C>               <C>                  <C>                            <C>
Terry L. Carroll          131,400           $75,555 (1)          -0-                            -0-
Demetrie D. Carone        480,000           $1,369,000 (2)       -0-                            -0-


</TABLE>


(1)  On August 5, 1996,  the  reporting  person  exercised  options to  purchase
     131,400  shares of the Company's  Common Stock at a purchase  price of $.55
     per  share.  The value  realized  represents  the  difference  between  the
     exercise  price and the last reported price of the stock as reported by the
     NASDAQ Stock Market.

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


                                       30

<PAGE>



Compensation of Directors

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

     Incentive  Stock  Option  Plan.  Effective  January 13,  1989,  the Company
adopted an  Incentive  Stock  Option Plan (the  "Plan") and  reserved a total of
1,000,000 Common Shares for issuance pursuant to the Plan. The Plan, designed as
an incentive for key employees,  is  administered  by a  compensation  committee
which  is  formed  by the  Board  of  Directors,  which  selects  optionees  and
determines the number of Common Shares subject to each option. The Plan provides
that no option  may be granted at an  exercise  price less than the fair  market
value of the Common Shares of the Company on the date of grant. Unless otherwise
specified,  the  options  expire  five  years  from date of grant and may not be
exercised  during the initial  one year  period from date of grant.  Thereafter,
options  may be  exercised  in  whole  or in  part,  depending  on  terms of the
particular option.

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

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

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







                                       31

<PAGE>



ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

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

     The following  table sets forth as of March 31, 1997,  certain  information
with  respect to the  Company's  Common  Stock  owned  beneficially  by (i) each
executive  officer  and  director  of the  Company;  (ii) each  person  who owns
beneficially  more than five percent (5%) of the  Company's  outstanding  Common
Stock; and (iii) all directors and officers as a group. Unless otherwise stated,
the address of each person  listed is the  Company's  address,  1901 New Street,
Independence, Kansas 67301, and the type of ownership is record and beneficial.



                        [SPACE INTENTIONALLY LEFT BLANK]


                                       32
<PAGE>


Name and Address of                       Number of          Percent of Class
Beneficial Owner                          Shares             Beneficially Owned
----------------                          ------             ------------------

Officers & Directors
--------------------
Demetrie D. Carone                        2,042,866(1)              24.69%
Jack MacIsaac                                 4,000(2)               *
Ronald R. McGinnis                          321,515                  3.87%

Principal Shareholders

Dale Jensen                               3,368,770(3)              32.67%
2417 Ridge Road
Lincoln, Nebraska 68512

Donald F. Dillon                          1,132,818(4)              12.27%
6600 South 56th Street
Lincoln, NE 68516

Thomas Stansfield                         1,377,000(5)              14.79%
7052 East Fremont Place
Englewood, CO 80112

Jerome and Betty Fenna                      432,134                  5.1%
13631 Balsam Lane
Dayton, MN

All Directors and Executive               2,368,381                 28.33%
Officers as a Group (3 Persons)

---------------
*    Less than 1%

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

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

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

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

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

Changes in Control
------------------

     The Company  knows of no  arrangements  or events,  the  happening of which
might  result in a change in control  of the  Company,  except  the  discussions
referred to on page 1 of this Report with Bruce  Benson,  the happening of which
there is no assurance.


                                       33

<PAGE>



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

Recent Acquisitions

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

     Contemporaneously,  the Company  completed  the  acquisition  of US Gas , a
privately-held Delaware corporation. The assets of US Gas include an interest in
a gas  gathering  system  and oil and gas  leases.  The  purchase  price of this
acquisition  was  $560,000,  paid in cash.  Messrs.  Carone and Jensen were sole
shareholders  of US Gas,  owning an equal  interest in that  entity.  US Gas was
acquired  by Messrs.  Carone and  Jensen in July,  1996 for a purchase  price of
$800,000.

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

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

     Management is of the opinion that the terms of these  acquisitions  were no
less favorable than could be obtained from unaffiliated third parties.

Other Events
------------

     The Company sold shares of its Series C Preferred  Stock to Mr. Carone,  an
officer,  director and principal shareholder of the Company, and Messrs. Jenson,
Dillon  and  Stansfield,  principal  shareholders  of the  Company  in a private
placement  during fiscal 1997. Such  individuals  purchased  23,665,  1,000,000,
458,334 and 500,000 shares of the Series C, respectively.  These sales were made
on the same  terms  and  conditions  as those  made to other  purchasers  in the
offering.


                                       34

<PAGE>


                                   SIGNATURES

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

                                    UNITED STATES EXPLORATION, INC.

Date:     07/14/97                  By:  /s/ Demetrie D. Carone
                                       -------------------------------------
                                       Demetrie D. Carone, President


     Pursuant to the  requierments of the Securities  Exchange Act of 1934, this
report has been signed by the following  persons on behalf of the Registrant and
in the capacities and on the dates indicated.


Signature                      Title                                Date
---------                      -----                                ----

/s/ Demetrie D. Carone         President, Chief Executive           07/14/97
-------------------------      Officer, Chief Financial and
Demetrie D. Carone             Accounting Officer, Chief
                               Operating Officer, Treasurer
                               and Director

/s/ Ronald R. McGinnis         Vice President, Secretary and        07/14/97 
-------------------------      Director            
Ronald R. McGinnis             

    

                                       35
<PAGE>

                                     PART IV

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

     (a)  Financial Statements and Schedules.

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

     (b)  Exhibits.

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

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

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

       3.2           By-laws of the Company.

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

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

       4.1           Certificate for Common Stock.

       9             Not Applicable.

       10.1          1989 Incentive Stock Option Plan of the Company.

       10.2          1990 Non-Qualifying Stock Option Plan.

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

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

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


                                       36




<PAGE>

       10.53         Stock Purchase Agreement between the Company and
                     shareholders of Pacific Osage, Inc. effective
                     September 1, 1995.

       11            Not applicable.

       13            Not applicable.

       16            Not applicable.

       18            Not applicable.

       19            Not applicable.

       21*           List of the Company's subsidiaries.

       22            Not applicable.

       23            Not applicable.

       24            Consent of Grant Thornton.

       27            Financial Data Schedule

       28            Not applicable.

       99            Not applicable.

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

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

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

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

     *    Filed herewith.

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

     (C)  Reports on Form 8-K.

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




                                       37





<PAGE>





                         UNITED STATES EXPLORATION, INC.
                          INDEX TO FINANCIAL STATEMENTS


                                                                  Page
                                                                  ----


Report of Independent Certified Public Accounts .................  F-1


Consolidated Balance Sheets at March 31, 1997 and 1996 ..........  F-2


Consolidated Statements of Operations for the Fiscal Years
Ended March 31, 1997 and 1996 ...................................  F-4


Consolidated Statements of Changes in Stockholders' Equity
for the Fiscal Years Ended March 31, 1997 and 1996 ..............  F-5


Consolidated Statements of Cash Flows for the Fiscal Years
Ended March 31, 1997 and 1996 ...................................  F-6


Notes to Consolidated Financial Statements ......................  F-7





                                       38

<PAGE>



               REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

Board of Directors
United States Exploration, Inc. and Subsidiaries

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

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

In our opinion,  the financial  statements  referred to above present fairly, in
all material  respects,  the  consolidated  financial  position of United States
Exploration,  Inc.  and  Subsidiaries  as of March 31,  1997 and  1996,  and the
consolidated  results of their operations and their  consolidated cash flows for
the  years  then  ended  in  conformity  with  generally   accepted   accounting
principles.




                                                 GRANT THORNTON LLP


Wichita, Kansas
May 30, 1997


                                       F-1


<PAGE>
<TABLE>
<CAPTION>
                          United States Exploration, Inc. and Subsidiaries

                                     CONSOLIDATED BALANCE SHEETS

                                              March 31,

                                               ASSETS


                                                                    1997                    1996
                                                                    ----                    ----

CURRENT ASSETS
<S>                                                             <C>                      <C>        
   Cash and cash equivalents                                    $15,323,038              $   169,965
   Certificate of deposit                                         1,500,000                     --
   Restricted cash                                                     --                     74,697
   Accounts receivable                                              590,237                  384,571
   Due from related parties                                           4,300                   23,095
   Inventories                                                      152,401                  161,186
   Prepaid expenses and other                                        23,449                   25,081
                                                                -----------              -----------

               Total current assets                              17,593,425                  838,595

PROPERTY AND EQUIPMENT, AT COST, NET
   Oil and gas property and equipment -
      full cost method                                            9,636,527                8,208,034
   Natural gas gathering systems                                  1,695,394                1,269,221
   Building and equipment                                           478,949                1,019,909
                                                                -----------              -----------

                                                                 11,810,870               10,497,164

OTHER ASSETS
   Assets held for sale
      Crude oil refinery                                          1,775,011                1,775,011
      Natural gas stripping plant                                    40,000                   80,000
      Equipment                                                     146,486                     --
   Pipeline lease agreement, less accumulated
      amortization of $159,981 in 1997 and $109,461
      in 1996                                                       547,327                  597,847
   Investment in joint ventures                                        --                    325,139
   Goodwill                                                            --                     69,684
   Other                                                               --                     40,710
                                                                -----------              -----------

                                                                  2,508,824                2,888,391
                                                                -----------              -----------

                                                                $31,913,119              $14,224,150
                                                                ===========              ===========
</TABLE>


The accompanying notes are an integral part of these statements.

                                                F-2





<PAGE>
<TABLE>
<CAPTION>


                                       LIABILITIES AND STOCKHOLDERS' EQUITY


                                                                        1997                     1996
                                                                        ----                     ----

CURRENT LIABILITIES
<S>                                                                 <C>                      <C>         
   Current maturities of long-term debt                             $       --               $  1,196,947
   Accounts payable and accrued liabilities                              515,788                  423,363
   Due to related parties                                                 15,215                  175,926
                                                                    ------------             ------------

               Total current liabilities                                 531,003                1,796,236


LONG-TERM DEBT                                                              --                  5,427,853


COMMITMENTS AND CONTINGENCIES                                               --                       --


STOCKHOLDERS' EQUITY
   Preferred stock - $.01 par value
      Authorized - 100,000,000 shares
      Issued and outstanding
         Series A Cumulative Convertible - 250,000
             shares in 1996                                                 --                  1,250,000
         Series B Cumulative Convertible - 104,000
             shares in 1996                                                 --                    520,000
         Series C Cumulative Convertible - 4,000,000
             shares (liquidation preference $24,480,000)              24,000,000                     --
   Common stock - $.0001 par value
      Authorized - 500,000,000  shares
      Issued and outstanding - 8,312,358 shares in
         1997 and 6,469,404 shares in 1996                                   831                      647
   Capital in excess of par value                                     11,370,867                8,581,466
   Accumulated deficit                                                (3,989,582)              (3,352,052)
                                                                    ------------             ------------

                                                                      31,382,116                7,000,061
                                                                    ------------             ------------

                                                                    $ 31,913,119             $ 14,224,150
                                                                    ============             ============

</TABLE>



                                                        F-3




<PAGE>
<TABLE>
<CAPTION>
                            United States Exploration, Inc. and Subsidiaries

                                  CONSOLIDATED STATEMENTS OF OPERATIONS

                                          Year ended March 31,

                                                                  1997                      1996
                                                                  ----                      ----

Revenues
<S>                                                            <C>                       <C>        
   Sale of purchased gas                                       $ 1,271,372               $   716,496
   Sale of company produced oil and gas                          2,772,284                 1,399,195
   Contracting and oil field supplies                              381,978                   425,408
   Equity in net income (loss) of joint ventures                    87,753                   (17,988)
                                                               -----------               -----------

                                                                 4,513,387                 2,523,111

Costs and expenses
   Gas acquisition costs                                           831,011                   476,814
   Gas transportation costs                                        463,377                   353,257
   Production costs - oil and gas                                1,329,667                   652,632
   Other operating expenses                                        163,375                   166,015
   Depreciation, depletion and amortization                      1,100,749                   718,021
   Provision for impairment of assets                              321,397                    44,000
   General and administrative                                      505,417                   544,915
                                                               -----------               -----------

                                                                 4,714,993                 2,955,654
                                                               -----------               -----------

Loss from operations                                              (201,606)                 (432,543)

Other income (expense)
   Interest income                                                 346,294                     2,064
   Interest expense                                               (307,455)                 (367,299)
   Other                                                            75,237                    11,613
                                                               -----------               -----------

                                                                   114,076                  (353,622)
                                                               -----------               -----------

               NET LOSS                                            (87,530)                 (786,165)

Preferred stock dividends applicable to the period                (884,250)                  (88,500)
                                                               -----------               -----------

Net loss applicable to common stockholders                     $  (971,780)              $  (874,665)
                                                               ===========               ===========

Loss per common share                                          $      (.13)              $      (.19)
                                                               ===========               ===========


The accompanying notes are an integral part of these statements.


                                                     F-4

</TABLE>




<PAGE>
<TABLE>
<CAPTION>
                                          United States Exploration, Inc. and Subsidiaries

                                     CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY


                                         Preferred stock                         Common stock  
                   ----------------------------------------------------------    -------------     
                        Series A            Series B             Series C                       Capital in                        
                   ----------------     --------------     ------------------            Par     excess of  Accumulated
                   Shares    Amount     Shares  Amount     Shares      Amount    Shares  value   par value   deficit       Total
                   ------    ------     ------  ------     ------      ------    ------  -----   ---------  ---------      -----

Balance at       
  April 1,
<S>                <C>     <C>         <C>     <C>         <C>        <C>       <C>        <C>   <C>        <C>          <C>
  1995            250,000  $1,250,000  104,000 $520,000          -   $      -   4,079,404 $408  $7,795,205$(2,565,887)   $6,999,726
Exercise of
  stock
  options               -           -        -        -          -          -     390,000   39     286,461         -        286,500
Shares issued
  upon
  conversion of
  debentures            -           -        -        -          -          -   2,000,000  200     499,800         -        500,000
Net loss for
   the year             -           -        -        -          -          -           -    -           -   (786,165)     (786,165)
                  -------   ---------  -------  -------   --------   --------   ---------  ---   ---------  ---------    ----------

Balance at
  March 31,
  1996            250,000   1,250,000  104,000  520,000          -           -  6,469,404  647   8,581,466 (3,352,052)    7,000,061

Exercise of
  stock
  options               -           -        -        -          -           -  1,015,700  101     669,484          -       669,585
Conversion of
  preferred
  stock and
  related
  dividends to 
  common stock   (250,000) (1,250,000)(104,000)(520,000)         -           -    827,254   83   1,959,917   (190,000)            -
Issuance of
  Series C
  Preferred stock       -          -        -        -   4,000,000  24,000,000          -    -           -          -    24,000,000
Contribution of
  accrued salary
   by former
   president and
   stockholder          -         -         -        -           -           -          -    -     160,000          -       160,000
Cash dividends
   paid
   on Series C
   preferred
   stock                -         -         -        -           -           -          -    -           -   (360,000)     (360,000)
Net loss for
   the year             -         -         -        -           -           -          -    -           -    (87,530)      (87,530)
                 --------  --------  --------  -------   --------- -----------  --------- ---- ----------- -----------  -----------

Balance at
  March 31,
  1997                  -  $     -          -  $     -   4,000,000 $24,000,000  8,312,358 $831 $11,370,867 $(3,989,582) $31,382,116
                 ========  ========  ========  =======   ========= ===========  ========= ==== =========== ===========  ===========

The accompanying notes are an integral part of this statement.

</TABLE>

                                                               F-5


<PAGE>
<TABLE>
<CAPTION>


                                 United States Exploration, Inc. and Subsidiaries

                                       CONSOLIDATED STATEMENTS OF CASH FLOWS

                                               Year ended March 31,

                                 Increase (decrease) in cash and cash equivalents

                                                                            1997                   1996
                                                                            ----                   ----

Cash flows from operating activities
<S>                                                                    <C>                     <C>          
   Net loss                                                            $    (87,530)           $   (786,165)
   Adjustments to reconcile net loss to net cash
      provided by operating activities
         Depreciation, depletion and amortization                         1,100,749                 718,021
         Provision for doubtful accounts                                       --                    18,604
         Provision for impairment of assets                                 321,397                  44,000
         Loss on sale of equipment                                            9,820                    --
         Equity in net (income) loss of joint ventures                      (87,753)                 17,988
         Change in assets and liabilities, net of effect
            of acquisitions
              (Increase) decrease in accounts receivable                    103,800                (150,754)
              (Increase) decrease in due from related parties                18,795                    (629)
              Decrease in inventories                                         8,785                   6,743
              Decrease in prepaid expenses and
                 other                                                        2,632                  11,387
              Increase in accounts payable                                   86,134                 111,069
              Increase (decrease) in due to related parties                (160,711)                 69,118
                                                                       ------------            ------------

                    Net cash provided by operating
                        activities                                        1,316,118                  59,382

Cash flows from investing activities
   (Increase) decrease in restricted cash                                    74,697                 (74,697)
   Purchase of certificate of deposit                                    (1,500,000)                   --
   Capital expenditures                                                    (111,386)               (178,133)
   Acquisition of oil and gas leases                                     (1,481,000)                   --
   Acquisition of companies, net of cash received                          (674,731)             (6,209,473)
                                                                       ------------            ------------

      Net cash used in investing activities                              (3,692,420)             (6,462,303)

Cash flows from financing activities
   Issuance of Series C preferred stock                                  24,000,000                    --
   Repayment of note payable to bank                                       (165,000)               (397,000)
   Proceeds from issuance of term debt                                            0               6,800,000 
   Repayment of term debt                                                (6,615,210)               (193,620)
   Proceeds from exercise of stock options                                  669,585                 286,500
   Dividends paid on preferred stock                                       (360,000)                   --
                                                                       ------------            ------------

      Net cash provided by financing activities                          17,529,375               6,495,880
                                                                       ------------            ------------

Net increase in cash and cash equivalents                                15,153,073                  92,959
Cash and cash equivalents, beginning of year                                169,965                  77,006
                                                                       ------------            ------------

Cash and cash equivalents, end of year                                 $ 15,323,038            $    169,965
                                                                       ============            ============

The accompanying notes are an integral part of these statements.

                                                          F-6


</TABLE>


<PAGE>


                United States Exploration, Inc. and Subsidiaries

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                             March 31, 1997 and 1996


NOTE A - SUMMARY OF ACCOUNTING POLICIES

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

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

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

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

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

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

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

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

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

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

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


                                       F-7




<PAGE>

                United States Exploration, Inc. and Subsidiaries

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                             March 31, 1997 and 1996


NOTE A - SUMMARY OF ACCOUNTING POLICIES - Continued

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

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

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

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

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

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

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

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

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

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

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

                                      F-8




<PAGE>

                United States Exploration, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                             March 31, 1997 and 1996


NOTE B - RELATED PARTY TRANSACTIONS

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

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

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

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

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

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

                                                    1997             1996
                                                    ----             ----

    Due from related parties
       USX-Argas 1996 Joint Venture              $        -       $    21,895
       Individual stockholders                         4,300            1,200
                                                 -----------      -----------

                                                 $     4,300      $    23,095
                                                 ===========      ===========

                                                    1997             1996
                                                    ----             ----

    Due to related parties
       Individual stockholder                    $    15,215     $         -
       T. L. Carroll (accrued compensation)               -           145,081
       USX-Argas 1996 Joint Venture                       -            18,798
       MCM Capital Management, Inc.                       -            10,548
       Individual stockholder                             -               938
       Argas, Inc.                                        -               561
                                                 ----------      ------------

                                                 $    15,215     $    175,926
                                                 ===========     ============


                                       F-9




<PAGE>

                United States Exploration, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                             March 31, 1997 and 1996


NOTE C - RESTRICTED CASH

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


NOTE D - INVESTMENT IN JOINT VENTURES

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

                                                    1997              1996
                                                    ----              ----

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

     Carrying value, end of year                $         -       $    325,139
                                                ===========       ============


NOTE E - OIL AND GAS PROPERTIES

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

                                                             March 31,
                                                  ------------------------------
                                                      1997              1996
                                                      ----              ----
     Capitalized costs
        Oil and gas properties                    $ 14,561,258      $ 12,468,395
        Accumulated depreciation, depletion,
         amortization and valuation allowance        4,924,731         4,260,361
                                                  ------------      ------------

            Net capitalized costs                 $  9,636,527      $  8,208,034
                                                  ============      ============

                                      F-10




<PAGE>

                United States Exploration, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                             March 31, 1997 and 1996


NOTE E - OIL AND GAS PROPERTIES - Continued
<TABLE>
<CAPTION>

                                                                      Year ended March 31,
                                                                ------------------------------
                                                                    1997               1996
                                                                    ----               ----

     Results of operations for producing activities
<S>                                                             <C>                <C>        
      Oil and gas sales                                         $  2,772,284       $ 1,399,195
      Production costs                                            (1,329,667)         (652,632)
      Depreciation, depletion and amortization                      (623,291)         (268,735)
      Full cost pool valuation allowance                             (41,432)               -
                                                                ------------       ----------

     Results of operations from producing activities
      (excluding overhead expenses)                             $    777,894       $   477,828
                                                                ============       ===========

     Amortization per equivalent physical unit
      (barrels) of production (excludes full cost
      pool valuation allowance)                                    $4.42             $2.98
                                                                   =====             =====
</TABLE>

     Costs incurred in oil and gas acquisition and development activities during
     the years ended March 31 are as follows:
<TABLE>
<CAPTION>

                                                                  1997              1996
                                                                  ----              ----

<S>                                                           <C>                <C>         
     Property acquisition costs                               $   1,981,830      $  5,438,061
     Development costs                                              111,386           160,625
                                                              -------------      ------------

                                                              $   2,093,216      $  5,598,686
                                                              =============      ============
</TABLE>

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









                                      F-11




<PAGE>


                United States Exploration, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                             March 31, 1997 and 1996


NOTE F - NATURAL GAS GATHERING SYSTEMS

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

                                              1997                  1996
                                              ----                  ----

   Peru-Hale                             $     1,132,108       $     1,132,108
   Southeast Kansas                              453,588               453,588
   Pacific Gas                                   480,431               480,431
   Independence                                  400,663                    -
   US Gas                                        269,757                    -
   Chautauqua                                    200,440                    -
   Havanna                                        53,735                    -
   Elgin                                          25,452                    -
   Cowley                                          8,484                    -
                                         ---------------       --------------

                                               3,024,658             2,066,127
   Less accumulated depreciation               1,329,264               796,906
                                         ---------------       ---------------

                                         $     1,695,394       $     1,269,221
                                         ===============       ===============


NOTE G - BUILDING AND EQUIPMENT

   Building and equipment consists of the following at March 31:

                                                  1997                1996
                                                  ----                ----

   Building                                    $    130,588       $    126,800
   Oil field equipment                            1,024,954          1,343,590
   Autos and trucks                                 133,631             76,677
   Office equipment                                  51,903             62,448
                                               ------------       ------------

                                                  1,341,076          1,609,515
   Less accumulated depreciation and
       valuation allowance                          862,127            589,606
                                               ------------       ------------

                                               $    478,949       $  1,019,909
                                               ============       ============




                                      F-12




<PAGE>


                United States Exploration, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                             March 31, 1997 and 1996


NOTE H - CRUDE OIL REFINERY

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

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


NOTE I - CONVERTIBLE DEBENTURES

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

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


NOTE J - PIPELINE LEASE

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


                                      F-13




<PAGE>

                United States Exploration, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                             March 31, 1997 and 1996

NOTE K - LONG-TERM DEBT

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

     Term note  payable  to a  bank  with  monthly
          interest only payments  through  January
          1,  1996  and   monthly   interest   and
          principal   payments  of  $141,000  from
          February 1, 1996 through July 1, 1997 at
          which time the balance of the  principal
          was due.  The note bore  interest at the
          bank's national rate (8.25% at March 31,
          1996) -  collateralized  by all  Company
          assets  and was  guaranteed  by  certain
          stockholders  of the  Company.  The note
          was repaid in full September 1996                       $6,612,545

     7%   note  payable  to a  bank  with  monthly
          payments of $599 through February 1998 -
          collateralized by a vehicle                                 12,255
                                                                  ----------  
                                                                   6,624,800
     Less current maturities                                       1,196,947
                                                                  ----------
                                                                  $5,427,853
                                                                  ==========


NOTE L - INCOME TAXES

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

                                                                   1997               1996
                                                                   ----               ----
       <S>                                                     <C>                <C>
       Deferred tax liabilities
       Purchase accounting adjustment - book basis of
          acquired assets greater than tax basis               
              Equipment                                        $    248,993       $    334,660
              Lease agreement                                       207,984            227,182
              Other                                                       -             30,782
       Oil and gas properties - tax depletion greater
          than full cost pool amortization                        2,195,993          2,107,440
       Depreciation on equipment                                     49,958             68,739
                                                               ------------       ------------

                                                                  2,702,928          2,768,803

     Deferred tax assets
       Net operating loss carryforwards                           2,934,053          3,266,493
       Provision for doubtful accounts                                    -             30,553
       Valuation allowance (natural gas stripping plant)             31,920             16,720
       Accrued compensation                                               -             67,992
       Other                                                         12,048             29,119
                                                                -----------       ------------

                                                                  2,978,021          3,410,877
       Less valuation allowance                                     275,093            642,074
                                                               ------------       ------------

                                                                  2,702,928          2,768,803
                                                               ------------       ------------

       Net deferred amount                                     $          -       $          -
                                                               ============       ============


                                       F-14

</TABLE>



<PAGE>


                United States Exploration, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                             March 31, 1997 and 1996


NOTE L - INCOME TAXES - Continued

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

     The  net   operating   loss   carryforwards   available  to  United  States
     Exploration,  Inc. for income tax  purposes are as follows.  The Company is
     limited in its use of net operating  loss  carry-forwards.  The Company may
     use,  in any one tax year,  up to  $507,000  of net  operating  losses from
     carry-forwards  expiring in years before 2009 and up to  $2,285,000  of net
     operating losses from  carry-forwards  expiring after 2008 for a maximum of
     $2,792,000 in any one year.

        Expiration
           dates
        ----------
           2003                                           $      361,000
           2004                                                2,545,000
           2005                                                1,300,000
           2006                                                  293,000
           2007                                                  448,000
           2008                                                   37,000
           2009                                                1,765,000
           2010                                                  537,000
           2011                                                  435,000
                                                          --------------

                                                          $    7,721,000
                                                          ==============


NOTE M - MAJOR CUSTOMERS

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


NOTE N - STOCK OPTION PLANS

     Effective  January 13, 1989, the Company  adopted an Incentive Stock Option
     Plan  (the  Plan) and  reserved  a total of  1,000,000  common  shares  for
     issuance  pursuant to the Plan.  As of March 31,  1997,  there were 841,900
     options available for issuance.  The Plan, designed as an incentive for key
     employees,  is administered by the  compensation  committee of the Board of
     Directors,  which  selects  optionees and  determines  the number of common
     shares  subject to each  option.  The Plan  provides  that no option may be
     granted at an exercise  price less than the fair market value of the common
     shares of the Company on the date of grant. Unless otherwise specified, the
     options  expire  five  years  from date of grant  and may not be  exercised
     during the initial one-year period from date of grant. Thereafter,  options
     may be exercised in whole or in part,  depending on terms of the particular
     option.


                                      F-15




<PAGE>

                United States Exploration, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                             March 31, 1997 and 1996


NOTE N - STOCK OPTION PLANS - Continued

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

     A summary of the  Company's two stock option plans as of March 31, 1997 and
     1996 and changes during the years ending on those dates is presented below:

<TABLE>
<CAPTION>

                                                                               
                                                                                 Weighted
                                                       Shares                    average
                                           --------------------------------      exercise
                                            The Plan                NQSOP          price
                                            --------                -----        ---------

<S>                     <C>                   <C>                  <C>            <C>  
     Outstanding at April 1, 1995               262,800              917,700        $1.49
        Granted                                       -            1,667,800         1.29
        Exercised                                     -             (390,000)         .73
        Canceled                                      -             (650,000)        2.35
                                           ------------       --------------

     Outstanding at March 31, 1996              262,800            1,545,500         1.16
        Exercised                              (148,900)            (866,800)         .66
        Canceled                               (113,900)            (475,000)        2.00
                                           ------------       --------------

     Outstanding at March 31, 1997                    -              203,700         1.28
                                           ============       ==============
</TABLE>


     All  options  outstanding  at March 31,  1997 were  exercisable  and can be
     summarized as follows:

                                      Exercise           Remaining
               Shares                  price               life
               ------                  -----             ---------

              130,000                 $   .55             5 months
               30,000                    2.00             7 years
                3,700                    2.50             6 years
               40,000                    3.00             6 years
              -------

              203,700
              =======


                                      F-16




<PAGE>


                United States Exploration, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                             March 31, 1997 and 1996


NOTE O - PREFERRED STOCK

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

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


NOTE P - LOSS PER COMMON SHARE

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


NOTE Q - SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>

                                                                      1997              1996
                                                                      ----              ----
      <S>                                                         <C>                <C>   

     Noncash investing and financing activities
         Conversion of 354,000 shares of preferred
          stock and accrued dividends into 827,254
          shares of common stock                                   $ 1,960,000       $        -
         2,000,000 Series C Debentures with principal
          value of $430,621 and accrued interest of
          $69,379 converted to 2,000,000 shares of
          common stock                                                       -          500,000
         Liabilities assumed in connection with acquisitions           346,291          112,763
         Accounts receivable exchanged for
          interest in joint venture                                          -           94,237
         Transfer of accrued salary to paid in capital                 160,000                -

     Cash paid during the year
         Interest                                                      353,788          320,759


                                              F-17

</TABLE>



<PAGE>

                United States Exploration, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                             March 31, 1997 and 1996


NOTE R - ACQUISITIONS

     Effective October 1,1996,  the Company acquired 100% of the common stock of
     US  Gas  Gathering,  Inc.  for  total  consideration  of  $549,000.  US Gas
     Gathering,  Inc.  owns  oil and gas  leases  and  owns a 50%  interest  and
     operates a gas gathering system.  The Company also acquired during November
     and December  1996 oil and gas leases  located in the State of Oklahoma for
     cash  consideration  of $1,481,000.  The leases and US Gas Gathering,  Inc.
     were  purchased  from  the  Company's  president  and  another  significant
     stockholder.

     The Company purchased,  effective October 1, 1996, 100% of the common stock
     of Argas, Inc. for $160,000. See Note B for additional information.

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

                                                    Year ended March 31,
                                                -----------------------------
                                                  1997                1996
                                                  ----                ----

     Revenue                                    $5,026,915         $3,412,861
     Net loss                                       35,445            621,829
     Loss per common share                             .12                .15

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

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





                                      F-18




<PAGE>


                United States Exploration, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                             March 31, 1997 and 1996


NOTE S -  IMPAIRMENT OF ASSETS

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

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


NOTE T - FOURTH QUARTER ADJUSTMENTS

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


NOTE U - OIL AND GAS INFORMATION (UNAUDITED)

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



                                      F-19




<PAGE>

                United States Exploration, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                             March 31, 1997 and 1996


NOTE U - OIL AND GAS INFORMATION (UNAUDITED) - Continued
<TABLE>
<CAPTION>

                                                           1997                           1996
                                                --------------------------      -----------------------
                                                    Oil             Gas            Oil            Gas
                                                   (bbls)          (mmcf)         (bbls)         (mmcf)
                                                   ------          ------         ------         ------

   <S>                                            <C>              <C>          <C>              <C>    
   Proved developed and undeveloped
      reserves, beginning of year                 1,797,319         9,500           82,032        6,448

   Revisions of previous estimates               (1,085,609)       (3,180)           2,037          902
   Production                                       (88,114)         (318)         (59,177)        (186)
   Purchase of minerals in place                    168,834         3,706        1,772,427        2,336
                                                -----------      --------       ----------       ------

   Proved developed and undeveloped
      reserves, end of year                         792,430         9,708        1,797,319        9,500
                                                ===========      ========       ==========       ======

   Proved developed reserves
      Beginning of year                             668,532         4,324           69,347        1,988
                                                ===========      ========       ==========       ======

      End of year                                   647,870         6,377          688,532        4,324
                                                ===========      ========       ==========       ======
</TABLE>


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

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

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



                                      F-20




<PAGE>

                United States Exploration, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                             March 31, 1997 and 1996

NOTE U - OIL AND GAS INFORMATION (UNAUDITED) - Continued

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

<TABLE>
<CAPTION>


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

                                                                 1997               1996
                                                                 ----               ----

<S>                                                         <C>                <C>            
    Future cash inflows                                     $  27,126,992      $    50,680,390
    Future production and development costs                   (12,374,014)         (16,310,051)
                                                            -------------      ---------------

    Future net cash flows before income taxes                  14,752,978           34,370,339
    Future income taxes                                          (367,425)          (6,771,724)
                                                            -------------      ---------------

    Future net cash flows                                      14,385,553           27,598,615
    10% annual discount for estimated timing of
      cash flows                                               (4,848,224)         (11,254,017)
                                                            -------------      ---------------

    Standardized measure of discounted future
      net cash flows                                        $   9,537,329      $    16,344,598
                                                            =============      ===============


                             CHANGES IN STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET
                                CASH FLOWS RELATING TO PROVED RESERVES (UNAUDITED)

                                                                  1997                   1996
                                                                  ----                   ----

     Amount at beginning of year                            $   16,344,598        $   2,612,411

    Sales and transfers of oil and gas production,
      net of production costs                                   (1,442,617)            (746,563)
    Development costs incurred                                     111,386              160,625
    Revisions of previous quantity estimates, net
      of changes in previous estimates of develop-
      ment and production costs and timing revisions           (11,855,103)            (177,833)
    Purchase of minerals in place                                2,390,684           14,666,467
    Accretion of discount                                          560,286            1,169,783
    Net changes in prices and production costs                     168,571            2,018,430
    Net change in income taxes                                   3,259,524           (3,358,722)
                                                            --------------        -------------

                                                                (6,807,269)          13,732,187
                                                            --------------        -------------

    Amount at end of year                                   $    9,537,329        $  16,344,598
                                                            ==============        =============

</TABLE>


                                               F-21




<PAGE>

                United States Exploration, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                             March 31, 1997 and 1996


NOTE V - FAIR VALUE OF FINANCIAL INSTRUMENTS

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

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

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






                                      F-22