AMENDMENT NO. 1
                                       ON
                                   FORM 10-K/A
                       SECURITIES AND EXCHANGE COMMISSION

                             Washington, D.C. 20549

[ X ]  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
       ACT OF 1934

For the fiscal year ended December 31, 1998

                                       OR

|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
    ACT OF 1934

For the transition period from ________________ to ________________.

Commission file number: 0-7261


                            CHAPARRAL RESOURCES, INC.
                            -------------------------
             (Exact name of registrant as specified in its charter)

          Colorado                                      84-0630863
-------------------------------             ------------------------------------
(State or other jurisdiction of             (I.R.S. Employer Identification No.)
 incorporation or organization)

                            2211 Norfolk, Suite 1150
                              Houston, Texas 77098
                              --------------------
                    (Address of principal executive offices)


Registrant's telephone number, including area code: (713) 807-7100

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

                          $0.10 Par Value Common Stock
                          ----------------------------
                                (Title of Class)

Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days.

                           YES  |X|                   NO  |_|

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

     As of March 31, 1999,  the aggregate  market value of  Registrant's  voting
stock held by nonaffiliates was $24,311,368.

     As of March 31, 1999,  Registrant had  58,588,790,  shares of its $0.10 par
value common stock issued and outstanding.

                                                                 Total Pages ___

                                                               Exhibit Index ___



<PAGE>


                                     PART I

ITEM 1. BUSINESS

Business
--------

     Chaparral Resources,  Inc. ("Company"),  incorporated under the laws of the
state of  Colorado  in  1972,  is an  independent  oil and gas  exploration  and
production company, based in Houston,  Texas. In June 1999, the Company plans to
move its corporate offices to Golden,  Colorado.  The Company currently owns all
of the  outstanding  common stock of Central Asian  Petroleum  Guernsey  Limited
("CAP-G") which has a 50% interest in Karakuduk-Munay,  Inc. ("KKM").  KKM holds
100% of the rights to develop the Karakuduk  Field in the Republic of Kazakhstan
("Kazakhstan").

     The  Company's  business  strategy  is to acquire  and  develop oil and gas
projects in emerging  markets,  specifically  targeting  fields with  previously
discovered reserves,  which either have never been placed on production or could
be  materially  enhanced with  efficient  management  and  technical  experience
provided by the Company.  The Karakuduk Field  ("Karakuduk  Field" or "Karakuduk
Project")  described below is the Company's first oil field to be acquired under
the Company's new corporate strategy.

     The Company has called for a special meeting of the Company's  shareholders
to approve proposals for  reincorporating the Company from the state of Colorado
to the state of  Delaware  and to effect a reverse  stock split in which one new
share of the  Company's  common stock would be exchanged  for every 60 shares of
common stock presently  outstanding.  The Company expects the special meeting to
occur in late April 1999.

Risks Inherent in Oil and Gas Exploration

     There  can be no  assurance  that  the  Company  will be able to  discover,
develop and produce  sufficient  reserves in the Karakuduk  Field, or elsewhere.
Further,  there can be no  assurance  that the Company will recover the expenses
incurred  when  it  explores  the  Karakuduk  Field  or  that  it  will  achieve
profitability. The odds against discovering commercially exploitable oil and gas
reserves  are  always   substantial  and  are  increased  as  a  result  of  the
concentration  of the  Company's  activities  in  areas  that  have not yet been
significantly  explored and where political or other unknown  developments could
adversely affect  commercialization.  The Company, through KKM, will be required
to perform  extensive  geological  and/or  seismic  surveys  on its  properties.
Depending on the results of the surveys, only subsequent drilling at substantial
cost  and  high  risk  can  determine  whether  commercial  development  of  the
properties  is  feasible.   Oil  and  gas  drilling  is  frequently   marked  by
unprofitable efforts,  including  unproductive wells,  productive wells which do
not produce  sufficient  amounts of reserves to return a profit,  and  developed
reserves  which  cannot be  marketed.  The Company will be subject to all of the
risks  inherent to drilling for and producing  oil and gas.  These risks include
blowouts,  cratering,  fires and accidents. Any of the risks could result in the
Company being liable for damages from loss of life and property.  The Company is
not fully insured against these risks. Many of these risks are not insurable.

Risks of Operations in Kazakhstan

     As a result of the Company's  interest in KKM and the Karakuduk  Field,  it
will be subject to certain risks  inherent in the ownership and  development  of
properties in Kazakhstan. The contracts that the Company has with the government
of  Kazakhstan  may be  arbitrarily  cancelled  or forced  into  re-negotiation.
Cancellation  or  re-negotiation  will or is  likely  to  adversely  affect  the
Company's  ability to  profitably  extract  oil from the  Karakuduk  Field.  The
government  of  Kazakhstan  may impose  royalty  increases,  tax  increases  and
retroactive tax claims against the Company.  These taxes would adversely  affect
the Company's ability to profitably extract oil from the Karakuduk Field because
of increased expenses. Expropriation, environmental controls, and other laws and
regulations may adversely affect the Company's interest in the Karakuduk Project
because of increased costs, inaccessibility or delays.

     Due to the fact that the Company  only  controls a 50% interest in KKM, the
Company must seek the approval of KKM's other two  shareholders,  KazakhOil  JSC
("KazakhOil"),  which is the  national  petroleum  company  for the  Republic of
Kazakhstan,  and a private  Kazakhstan  joint  stock  company,  before any major
actions are taken by KKM. If the Company is unable to obtain the approval of one
of KKM's remaining shareholders, the operations of KKM may come to a standstill,

                                       2

<PAGE>

which  could  result in the loss of KKM's  rights to  explore  and  develop  the
Karakuduk  Field.  There  are no  practical  mechanisms  in the  agreement  with
KazakhOil and the joint stock company to resolve any such stalemate.


     The Company's  operations  and  agreements are also governed by the laws of
Kazakhstan.  The Company may be subject to  arbitration  in Kazakhstan or to the
jurisdiction  of the courts in Kazakhstan.  The Company may not be successful in
subjecting  foreign persons to the  jurisdiction of courts in the United States.
The Company may be hindered or prevented  from enforcing its rights with respect
to a government agency, instrumentality or other government entity of Kazakhstan
because such entities may consider  themselves  immune from the  jurisdiction of
any court.

     KKM's  Kazakhstan  license for the  Karakuduk  Field  includes the right to
export oil produced and to establish and maintain bank accounts in U.S.  dollars
or other foreign  currency  outside of Kazakhstan.  The Kazakhstan  government's
agreement with KKM allows KKM to maintain its books and records in U.S. dollars,
but requires local Kazakh taxes be reported in tenge, the local Kazakh currency.
KKM's functional  currency is the U.S. dollar.  Because Kazakh law prohibits the
export of tenge,  any payment for oil sold in tenge will be used for the payment
of local  costs  and  expenses.  KKM  expects  that the  majority  of the oil it
produces will be exported and sold outside of  Kazakhstan  and that payment will
be in U.S.  dollars.  The  U.S.  dollars  will  be  deposited  in bank  accounts
established outside of Kazakhstan.

     The Company may encounter  unexpected  difficulties  in conducting  foreign
operations.  Although  management  of the Company  believes  that the recent and
continuing  political,  social and  economic  developments  in  Kazakhstan  have
created  opportunities  for foreign  investment,  uncertainty  exists  about the
status of Kazakhstan  law, the  stability of Kazakhstan  and the autonomy of the
parties involved with the Company in Kazakhstan.

Political Risk Insurance.

     The  Company has  applied  with  Overseas  Private  Investment  Corporation
("OPIC") for political  risk  insurance.  OPIC insurance can cover the following
political risks:

     o    Currency  Inconvertibility--deterioration of the investor's ability to
          convert  profits,  debt  service  and  other  remittances  from  local
          currency into U.S. dollars;

     o    Expropriation--loss   of   an   investment   due   to   expropriation,
          nationalization or confiscation by a foreign government;

     o    Political  Violence--loss of assets or income due to war,  revolution,
          insurrection  or  politically  motivated  civil strife,  terrorism and
          sabotage; and

     o    Interference  With   Operations--loss  of  assets  or  income  due  to
          cessation of operations lasting six months or more caused by political
          violence.

     The coverage  elections  for each  category of insurance  are computed on a
ceiling  and an active  amount.  The  coverage  ceiling  represents  the maximum
insurance  available for the insured  investment  and future  earnings  under an
insurance  contract.  The  premiums  for each  category  are  based on a maximum
insured amount  ("MIA"),  a current insured amount ("CIA") and a standby amount.
The MIA represents the maximum  insurance  available for the insured  investment
under an insurance contract.  The CIA represents the insurance actually in force
during the contract period.  The CIA cannot exceed the book value of the insured
assets physically in Kazakhstan.  The difference  between the CIA and the MIA is
the standby amount. There is a charge for standby coverage.

     The Company has applied with OPIC for all four  political risk coverages on
the Company's  investment in the Karakuduk  Field.  The Investment  Committee of
OPIC approved the Company's  Karakuduk  operations  for political risk insurance
coverage on  December  19,  1995.  The  Company  received an executed  Letter of
Commitment from OPIC on September 25, 1996,  binding  issuance of Political Risk
Insurance  for the  Karakuduk  Project.  Currently,  the  Company  has a standby
facility for which it has made eight equal  payments of $31,250 and two payments
of $15,625.  The Company expects to execute the actual  contract  offered to the
Company by OPIC on or before June 30, 1999.

                                       3

<PAGE>


     The  final  terms  of the  contract  must be  agreed  upon at the  time the
contract is executed.  The CIA will be equal to the book value of the  Company's
assets physically  located in Kazakhstan.  The MIA will equal the total coverage
available for current and future assets placed in Kazakhstan by the Company. The
MIA  directly  impacts  both the premiums  and  deductible  requirements  in the
contract.  Premiums  will be paid  quarterly.  The  Company  will  not  know the
specific  terms  of  the  contract  until  the  MIA  required  has  been  firmly
established.  In the event of a loss, the  reimbursement  by OPIC to the Company
will be limited to the Company's actual loss of physical property in Kazakhstan.
The maximum  reimbursement cannot exceed 90% of the MIA. The Company has delayed
execution of a final OPIC contract until the  substantial  costs of the premiums
are justified by the Company's investment in the Karakuduk Field.

     Under the terms of OPIC's  Expropriation  and Interference  with Operations
insurance  coverage,  the Company must be able to transfer to OPIC the shares of
beneficial  interests related to the insured  investment,  free and clear of all
encumbrances.  There are  certain  restrictions  on the  transfer  of shares and
assignment  of the  Company's  beneficial  interests in KKM. At such time as the
Company  obtains  coverage,  the  Company  will  seek a waiver  of the  transfer
restrictions  from the  shareholders  of KKM that  are not  affiliated  with the
Company.  While there is no assurance  the waiver will be obtained,  the Company
does not anticipate significant problems in obtaining the waiver, if required to
secure long- term financing for the benefit of KKM.

Markets

     There is substantial  uncertainty as to the future prices the Company could
obtain for any oil reserves  produced from the Karakuduk  Field.  It is possible
that, under the market conditions  prevailing in the future,  the production and
sale of oil from the  Karakuduk  Field  may not be  commercially  feasible.  The
availability  of ready markets and the price  obtained for oil produced  depends
upon numerous factors beyond the control of the Company.  The current market for
oil is  characterized  by instability,  which has caused  dramatic  declines and
increases in world oil prices in recent years.  There can be no assurance of any
price stability in the current, and future, oil and gas market.

     During 1998,  the oil  industry  experienced  major  declines in oil prices
worldwide.  The  Commonwealth of Independent  States ("CIS"),  and Kazakhstan in
particular, were impacted severely, with competition increasing dramatically for
limited pipeline capacity required to access the world oil market.  Furthermore,
instability  in the  economies  of Russia  and other  CIS  countries  led to the
devaluation of the ruble and weakening of other regional currencies. Competition
to sell oil on the world market, in exchange for more stable, western currencies
(i.e.  the U.S.  dollar),  drove oil  prices in the CIS down even  farther  than
declines in other markets.

     On March 7, 1998, KKM entered into a contract with the  export-import  firm
of Munay-Impex, a subsidiary of KazakhOil, to export up to 100,000 tons of crude
oil produced by KKM to both the CIS and other countries. KKM was to supply crude
oil to Munay-Impex in amounts of not less than five to 10 thousand  metric tons.
Munay-Impex,  acting as a broker,  would market KKM's crude oil  production  for
sale on either the local or export  market.  KKM produced a total of 11,103 tons
(81,052  barrels) of oil during 1998,  which has been stored as inventory in the
KazTransOil pipeline.  Due to existing market conditions,  however,  Munay-Impex
was unable to find a suitable  market to sell KKM's limited crude oil production
for an economical  return. As a result,  KKM did not sell any crude oil in 1998,
and allowed the  Munay-Impex  contract to  terminate on December 31, 1998 at the
end of the  contractual  term.  During December of 1998 and throughout the first
quarter of 1999,  KKM continued to attempt to sell it's crude oil  production at
acceptable economic terms, but was unsuccessful.

     On  March  30,  1999,  KKM  entered  into  a  contract  with  KazakhOil,  a
shareholder  of KKM, to export up to 19,000 tons of crude oil during April 1999.
Under the contract, KazakhOil guaranteed KKM the necessary transit quota to sell
to export markets  outside of Kazakhstan,  via the KazTransOil  pipeline.  As of
March 31, 1999, KKM had approximately 18,000 tons of crude oil production stored
in the  KazTransOil  pipeline,  and expects to achieve 19,000 tons of cumulative
production  in early April 1999.  KKM expects to sell the entire  19,000 tons of
oil during April, with payment expected in late April or May of 1999.

     KKM  anticipates  that  production   facilities  required  to  process  and
transport larger volumes of expected future  production from the Karakuduk Field
will be  completed  during  1999.  The  production  facilities  currently  under
construction  will  initially  allow up to 16,000  barrels  of oil per day to be
transported to the  KazTransOil  pipeline.  Until the production  facilities are
completed,  crude oil  production  is being placed into  storage  tanks and then
trucked  to the  pipeline.  The  number of crude  oil  trucks  operating  in the
Karakuduk  Field has been increased to facilitate 24 hours a day  transportation
to the pipeline, which allows increased production from existing wells.

                                       4

<PAGE>


     The  Company's  business  is  not  seasonal,  except  that  severe  weather
conditions  could  limit the  Company's  exploration  and  drilling  activities.
However, severe cold weather increases the demand for oil and natural gas, which
are used for heating purposes.

     See also "Item 2. Properties - The Karakuduk Field."

Competition

     Foreign  oil and gas  exploration  and the  acquisition  of  producing  and
undeveloped  properties is a highly  competitive  and speculative  business.  In
seeking suitable opportunities, the Company competes in all areas of the oil and
gas industry with a number of other  companies,  including large  multi-national
oil and gas companies and other  independent  operators  with greater  financial
resources and, in some cases, with more experience than the Company. The Company
does not hold a  significant  competitive  position in the oil and gas industry.
Such  competition may adversely  affect the Company's  ability to market its oil
and/or obtain a competitive  price for any oil sold. At this time, no prediction
can be made as to the effect  such  competition  will  ultimately  have upon the
Company.

     Even  considering the recent downturn in the oil and gas industry,  the CIS
is currently a primary focal point for  substantial  exploration and development
activities.  Within Kazakhstan, the Company competes with both major oil and gas
companies and independent  producers for, among other things,  rights to develop
available  oil  and  gas  properties,   access  to  limited  pipeline  capacity,
procurement  of  available   materials  and  resources,   and  hiring  qualified
international and local personnel.

Regulation

     General.   The  Company's  operations  may  be  subject  to  regulation  by
governments or other regulatory bodies governing the area in which the Company's
overseas  operations  are  located.  Regulations  govern such things as drilling
permits,  production  rates,  environmental  protection  and pollution  control,
royalty  rates  and  taxation  rates,   among  others.   These  regulations  may
substantially  increase the costs of doing business and sometimes may prevent or
delay the  starting  or  continuing  of any  given  exploration  or  development
project. Moreover,  regulations are subject to future changes by legislative and
administrative action and by judicial decisions,  which may adversely affect the
petroleum  industry  in general and the  Company in  particular.  At the present
time, it is impossible to predict the effect any current or future  proposals or
changes in existing laws or regulations  will have on the Company's  operations.
The  Company  believes  that it complies  with all  applicable  legislation  and
regulations in all material respects.

     KKM is subject to various taxes in Kazakhstan,  including,  but not limited
to, income tax, value added tax ("VAT"),  customs duties, excise taxes, property
taxes, payroll taxes, and excess profits tax. Furthermore,  payments made by KKM
to the Company or its subsidiaries may also be subject to additional withholding
tax depending upon the type of payment and the country of  incorporation  of the
recipient  of  the  payment.  Without  consideration  of  tax  treaty  benefits,
Kazakhstan  requires 15%  withholding  on payments for dividends and interest to
foreign persons.  Royalties and services are subject to a 20% withholding  rate,
as well.

     The Company and all its subsidiaries, other than CAP-G, are incorporated in
the United States and enjoy the tax benefits  provided by the tax treaty between
the United States and Kazakhstan. Under the U.S./Kazakhstan tax treaty currently
in effect,  withholding  rates are  substantially  reduced.  Generally,  the tax
treaty rates are 5% for dividends paid to 10% or greater  shareholders,  10% for
interest and royalties, and no withholding on payments for services as long as a
permanent residence has not been established by the foreign person.

     CAP-G is  incorporated  in the Isle of Guernsey,  which  currently does not
have a tax treaty  with  Kazakhstan.  Under  KKM's  license  with  Kazakhstan  ,
interest  payments made by KKM to CAP-G are not subject to withholding  tax. Any
dividends paid by KKM to CAP-G,  however, are currently subject to a withholding
tax rate of 15%. Currently, and for the foreseeable future, the Company does not
expect KKM to pay any income tax in  Kazakhstan  or to declare any dividends for
the benefit of its shareholders.

                                       5

<PAGE>


     Environmental. Based upon a study undertaken on behalf of the Company by an
unaffiliated party, the Company believes that its business operations  presently
meet all legally required environmental quality standards.  However,  compliance
with foreign laws and regulations, which have been enacted or adopted regulating
the discharge of materials  into the  environment  could have an adverse  effect
upon the Company, the extent of which the Company is unable to assess. As is the
case with other  companies  engaged in oil and gas  exploration,  production and
refining,  the  Company  faces  exposure  from  potential  claims  and  lawsuits
involving  environmental  matters.  These  matters may involve  alleged soil and
water contamination and air pollution.  Since inception the Company has not made
any material capital  expenditures for environmental  control facilities and has
no plans to do so.

     Devaluation  of Currency.  On April 5, 1999,  the government of Kazakhstan,
with the  approval of the  International  Monetary  Fund,  allowed the  national
currency of  Kazakhstan,  the tenge,  to float freely  against the U.S.  dollar.
Immediately  thereafter,  the official exchange rate declined from 87.5 tenge to
the U.S.  dollar to 142 tenge to the U.S.  dollar.  As of April  12,  1999,  the
exchange rate was approximately 115 tenge to the U.S. dollar. The devaluation of
the tenge significantly decreases the realizable value of tenge monetary assets,
but also decreases the financial obligation of tenge denominated liabilities.

     The instability  resulting from the tenge devaluation  creates  uncertainty
regarding  the future  business  climate  in  Kazakhstan  and for the  Company's
investment  in KKM. The Company,  however,  does  not expect a material  adverse
impact to its  operations.  The  majority  of KKM's  current  assets and current
liabilities are denominated in U.S. dollars and are unaffected.  While statutory
tax  reporting  is done in  tenge,  the  Kazakh  government  allows  revaluation
adjustments  to step-up  the tax basis in assets to offset the effects of Kazakh
deflation.  KKM  expects to utilize the  revaluation  adjustments  to  determine
taxable income or loss reported to the Kazakh tax authorities.

     Expected  revenue from KKM's  pending sale of crude oil is  denominated  in
U.S.  dollars,  although  final  settlement  is expected in tenge based upon the
exchange  rate on the  date of  payment.  KKM  expects  future  sales to be both
denominated and settled in U.S. dollars.

Employees

     As of March  31,1999,  the Company had eight  full-time  employees  and one
part-time employee. CAP-G operates through its officers and directors and had no
employees.  KKM had 161 employees and retains  independent  contractors on an as
needed basis through the Company's wholly owned subsidiary,  Road Runner Service
Company, Inc.

ITEM 2. PROPERTIES

Properties
----------

The Karakuduk Field

     The Karakuduk  Field is located in the Mangistau  Region of the Republic of
Kazakhstan.  KKM's  license to develop  the  Karakuduk  Field  covers an area of
approximately  16,922.5  acres  and has been  granted  to KKM for a period of 25
years.  The agreement  granting KKM the right to develop the Karakuduk Field was
approved by Kazakhstan's  Ministry of Energy and Natural Resources on August 30,
1995.

     The Karakuduk  Field is  geographically  located,  approximately  227 miles
northeast of the regional  capital city of Aktau, on the Ust-Yurt  Plateau.  The
closest  settlement  is the  Say-Utes  Railway  Station  approximately  51 miles
southeast of the field.  The ground  elevation  varies  between 590 and 656 feet
above sea level. The region has a dry, continental  climate,  with fewer than 10
inches of rainfall per year. Mean temperatures range from -25 degrees Fahrenheit
in January to 100 degrees  Fahrenheit  in July.  The  operating  environment  is
similar to that found in northern Arizona and New Mexico in the United States.

     The Karakuduk structure is an asymmetrical anticline located on the Aristan
Uplift in the North Ustyurt Basin.  Oil was discovered in the structure in 1972,
when  Kazakhstan  was a republic of the former Soviet  Union,  from Jurassic age
sediments between 8,500 and 10,000 feet. Twenty-two  exploratory and development
wells were drilled to delineate the field.  However, none of the wells were ever
placed on production. The productive area of the Karakuduk Field is 11,300

                                       6

<PAGE>

acres,  with a minimum  of seven  separate  productive  horizons  present in the
Jurassic  formation.  Oil has been recovered in tests from seven horizons within
the Jurassic  formation  with flow rates  ranging from 3 to 966 barrels per day.
The Company  estimates that drilling a maximum of 80 additional oil wells and 26
water  injection  wells may be  required to fully  develop  the field.  Peak oil
production  from the field is  expected to occur by 2002,  although  the time or
amount of development  or production  cannot  presently be assured.  The planned
development program for the Karakuduk Field will include a pressure  maintenance
operation  that the Company  believes  could  result in  additional  recoverable
reserves.

     The ability of the Company to realize the  carrying  value of its assets is
dependent on the Company  being able to extract and transport  hydrocarbons  and
finding appropriate markets for their sale.  Currently,  exports from Kazakhstan
are  dependent on limited  transport  routes and, in  particular,  access to the
Russian pipeline  system.  Domestic markets in Kazakhstan might not permit world
market prices to be obtained. Management believes, however, over the life of the
project, transportation restrictions will be alleviated and adequate prices will
be obtained for hydrocarbons  produced from the Karakuduk Field, for the Company
to fully recover the carrying value of its assets.

     The Karakuduk Field is approximately 18 miles north of the Mukat-Mangishlak
railroad, the Mangishlak-Astrakghan water pipeline, the Beyneu-Uzen high voltage
utility lines, and the Uzen-Atrau-Samara  oil and gas pipelines.  KKM, according
to its license  agreement  with  Kazakhstan,  has a priority use of the existing
pipeline  network.  In early 1998, KKM entered into a contract with  KazTransOil
JSC, the state-owned company  controlling the  Uzen-Atrau-Samara  pipeline.  The
contract grants KKM rights to use the pipeline for  transportation  of crude oil
to local and export  markets,  subject to transit quota  restrictions,  and as a
temporary  storage  facility  until the produced  hydrocarbons  are sold by KKM.
Currently, KKM is producing oil through field separators, into storage tanks and
then into crude oil trucks, for delivery to the pipeline.  As of March 31, 1999,
KKM had produced approximately 18,000 tons (131,000 barrels) of crude oil, which
has been stored in the KazTransOil pipeline.

     On March 30,  1999,  KKM  entered  into a contract  with  KazakhOil  JSC, a
shareholder  of KKM, to export up to 19,000 tons of crude oil during April 1999.
Under the contract, KazakhOil guaranteed KKM the necessary transit quota to sell
to export  markets  outside of Kazakhstan,  via the  KazTransOil  pipeline.  KKM
expects to achieve 19,000 tons of cumulative production in early April 1999. KKM
nominated 13,000 tons for sale in early April, and expects to sell the remaining
6,000 tons of oil in late April,  with payment  expected in late April or May of
1999.  KKM has no other  existing  contracts  for  sales  of  future  crude  oil
production.  Although the  management of the Company  believes  long-term  sales
contracts  for KKM's crude oil  production  will be available in the future,  at
terms  acceptable to KKM,  there is no assurance that any such  agreements  will
ever be obtained by KKM.

     Because of  uncertainties  surrounding  the  Karakuduk  Project,  no proved
reserves have been  attributed to the field as of March 31, 1999.  The crude oil
production stored in the KazTransOil pipeline throughout 1998 was not considered
commercially viable by the Company as of December 31, 1998, primarily due to the
depressed crude oil prices during the fall of 1998 and early spring of 1999. The
Karakuduk  Project  will  require  significant  development  costs for which the
financing is not complete.  There can be no assurances  that the project will be
adequately financed or that the field will be successfully developed.

     On December 31, 1998, the  government of Kazakhstan  approved KKM's request
to amend KKM's license to develop the Karakuduk Field. The license,  as amended,
requires the KKM to meet  expenditure  commitments  of $16.5 million by December
31, 1998 and $30 million by December 31, 1999.  Expenditure  commitments through
December  31, 1998  exceeded  the  commitment  requirement  of $16.5  million by
approximately  $480,000.  The  excess  is  applicable  against  the  expenditure
commitment  required as of December  31,  1999.  As of March 31,  1999,  KKM has
incurred  approximately  $3.5 million in expenses  against its 1999  expenditure
commitment.  Should the  license  terms not be adhered  to, the  license  may be
withdrawn by the government of Kazakhstan.

     The Company is responsible for providing 100% of the funding  necessary for
the  development  of the Karakuduk  Field,  which is not provided by third-party
sources.  KKM plans to meet its funding requirements through loans from CAP-G to
KKM,  and  through  proceeds  from  the  sale of oil  extracted  by KKM from the
Karakuduk Field. As of March 31, 1999, the Company has loaned CAP-G in excess of
$25  million to fund KKM's  current  operations.  The Company is  attempting  to
obtain project financing for either CAP G or KKM, which may reduce the amount of
loans from the Company to CAP-G.

                                       7

<PAGE>


     KKM first produced crude oil from the Karakuduk  Field in December 1997. At
present,  the oil is  transported  by truck to the export  pipeline at Say-Utes,
which is approximately 51 miles from the field. By the end of the second quarter
of 1999, it is anticipated that any oil produced will be transported by pipeline
from the field to the pipeline  terminal to be built at Railroad  Station No. 6,
which is approximately 18 miles from the Karakuduk Field. During 1998, KKM began
construction of an 18-mile pipeline from the field to the Station No. 6 pipeline
terminal,  capable of  transporting  up to 16,000  barrels of oil per day to the
KazTransOil  pipeline.  Once  construction  is  completed  on the  Station No. 6
terminal, allowing direct access into the export pipeline, KKM plans to complete
and bring on-line the 18-mile pipeline.

     Until the pipeline and related production  facilities are completed,  daily
crude oil production is being  processed,  placed into storage  tanks,  and then
trucked to the Say-Utes pipeline  terminal.  Production placed into the pipeline
is  considered  inventory of KKM until the  production  is sold. As of March 31,
1999, KKM had not recognized  any revenue from the sale of oil  production,  but
expects to complete a sale during April 1999.

     During 1998, KKM re-entered four of the original  twenty-two  wells drilled
in the Karakuduk  Field,  establishing  production from two wells.  KKM plans to
complete the other two workover  wells in the spring of 1999. KKM began drilling
the initial  exploratory  Well No. 101, on February 14, 1999,  and reached total
depth in early April.  KKM plans to complete  Well No. 101 during April 1999. If
Well No. 101 is successful,  KKM expects to bring  production  on-line in May of
1999.  KKM  also  plans  to drill 7 new  wells  before  December  31,  1999,  in
accordance with KKM's license obligation to the government of Kazakhstan.

     Additional  field  facilities are either in place or under  construction to
support the  development  and production of the wells to be drilled during 1999.
KKM has  constructed  a base camp with living  quarters for 150 men, a mini-camp
for the  drilling  contractor  and  other  service  company  personnel,  storage
facilities, processing facilities,  warehouses, a repair shop, and other related
support  facilities.  KKM has also completed a main road between the KazTransOil
pipeline  terminal  at the  Station  No. 6 and the field.  KKM is also  clearing
access roads and performing other required site preparation activities for other
planned drilling locations.

     Management  of  the  Company  believes  the  risk-to-reward  considerations
involved with the  development of the Karakuduk  Field are very positive and may
lead to substantial growth of the Company over the next several years.  However,
the Company can provide no assurances  that the Karakuduk Field will produce oil
in any  specific  amounts or that the  Company  will ever  realize a profit as a
result of the Company's interest in the field.

     KKM was  re-registered on July 24, 1997, with the government of Kazakhstan.
The  re-registration  was required as a result of new legislation in Kazakhstan.
The Company  believes that KKM is now in compliance with all Kazakhstan laws and
regulations  relating to the registration  requirements for legal entities.  The
current KKM shareholders' include CAP-G, KazakhOil, and a local Kazakhstan joint
stock company.  KazakhOil , the national  petroleum company of the government of
Kazakhstan holds a 40% ownership  interest in KKM. The private  Kazakhstan joint
stock company owns the remaining 10%.

     The permits and licenses  required to develop the Karakuduk Field have been
obtained.  However,  there is no assurance that any further permits or licenses,
if required,  will be obtained.  Also, because of uncertainties  surrounding the
project  and  lack of  proven  commercial  viability  of  crude  oil  production
extracted during 1998 and early 1999, no proved reserves have been attributed to
the Karakuduk Field. The project will require significant  development costs for
which the financing is not in place.  There can be no assurance that the project
will be financed or that the  Karakuduk  Field will be  successfully  developed.
Further,  the  Company  will face all of the risks  inherent  in  attempting  to
develop an oil and gas property in a foreign country.

     See also Item 7 - "Management's Discussion and Analysis of Financial
Condition and Results of Operations."

     Reserves. The Company claims no proved reserves as of December 31, 1998.

     As a result of the  Company  recently  reentering  a well in the  Karakuduk
Field and  because of the  Company's  future  drilling  plans for the  Karakuduk
Field,  the  Company  expects  to be able to  obtain a  reserve  report  for the
Karakuduk Field during 1999.

                                       8

<PAGE>


     Since  January 1, 1998,  the  Company has not filed with or included in any
reports to any other federal authority or agency any estimates of total,  proved
net oil or gas reserves.

     Net  Quantities  of Oil and Gas  Produced.  The  Company's  net oil and gas
production for each of the last three fiscal years and for the month of December
1996  (all of which  prior to 1997 was from  properties  located  in the  United
States) was as follows:
<TABLE>
<CAPTION>
                           Year ended                Year ended                Month of                Year ended
                       December 31, 1998          December 31, 1997         December 1996          November 30, 1996
                       -----------------          -----------------         -------------          -----------------
<S>                         <C>                             <C>                   <C>                   <C>
Oil (Bbls)                  81,052                Less than 1,000                -0-                    1,737

Gas (Mcf)                    -0-                        -0-                      -0-                   96,906


     KKM did not sell any oil during 1998. Oil  production  for 1998  represents
100% of KKm's 1998 production,  which was placed into the KazTransOil  pipeline.
While the Company,  through CAP-G, owns 50% of KKm, the Company will receive the
entire  economic  benefit  from the sale of KKM's  initial  production.  The net
proceeds to be received from the same of KKM's 1998  production  will be used to
partially  repay  CAP-G's  loan  to KKM and to fund  KKM's  ongoing  operations,
reducing CAP-G's funding commitment to do the same.

     The  average  sales  price per  barrel of oil and Mcf of gas,  and  average
production costs per barrel of oil equivalent  ("BOE")  excluding  depreciation,
depletion and amortization were as follows:

                                                         Average          Average           Average
    Year Ended        Month of        Year Ended       Sales Price      Sales Price       Production
   December 31,      December,       November 30,       Oil (Bbls)       Gas (Mcf)       Cost Per BOE
   ------------      ---------       ------------       ----------       ---------       ------------
       1998                                                 *                *                 *
       1997                                                 *                *                 *
                        1996                                *                *                 *
                                         1996             $17.53           $1.17             $2.07
</TABLE>

     The  above  table  represents  activities  related  only  to  oil  and  gas
production.

     *    The  Company  did not sell any  significant  quantities  of oil or gas
          during these periods. KKM did not sell any oil or gas during the years
          presented.

     Productive Wells and Acreage. As of December 31, 1998, KKM had interests in
one productive oil well, one shut-in  productive oil well, and no productive gas
wells. As of December 31, 1998, the Company had a net 50% beneficial interest in
KKM which holds a governmental  license to develop the Karakuduk Field, a 16,900
acre oil field in Kazakhstan  which was  discovered in 1972 with the drilling of
22 exploratory and development  wells by the former Soviet Union.  None of these
wells were produced commercially prior to 1998.

     On December 31, 1997,  KKM  delivered by truck to the pipeline oil that KKM
had  recovered  from  testing  Well No. 21, the first well KKM  reentered in the
Karakuduk  Field.  Well No. 21 tested on a sustained  flow of 526 barrels of oil
per day. The well was subsequently  shut-in until additional  facilities are put
in place to process and transport the combined daily production from Well No. 21
and Well No. 10. In February 1998, Well No. 10 was re-perforated and produced at
a  sustained  test flow rate of 1,450  barrels  of oil per day.  Well No. 10 was
placed on limited  production to fill storage  tanks and  transport  trucks that
deliver oil to the export  pipeline.  In March  1999,  KKM  acquired  additional
trucks  and  personnel  to  increase  the amount of daily  production  currently
deliverable  to the  pipeline  terminal.  KKM also  has  begun  preparations  to
workover Well Nos. 7 and 20 and, if the wells are productive, will place them on
production at such time as the field facility construction is completed.

                                       9

<PAGE>


     On February 14, 1999, KKM began drilling Well No. 101, reaching total depth
in early  April.  The well has not been  completed as of the filing date of this
report.

     Drilling  Activity.  During the last two fiscal  years ended  December  31,
1998,  the month of December  1996 and the fiscal year ended  November 30, 1996,
the Company did not participate in the drilling of any productive exploratory or
development  wells.  The Company did participate in the capital workover of four
previous drilled wells, which had never been placed on production.

     Present Activities. As of April 13, 1999, the Company was in the process of
drilling Well No. 101,  reopening Well No. 21,  previously  shut-in during 1998,
and  planning  the  reentry of Well No. 20. Well No. 10 is  currently  producing
approximately 1,200 barrels of oil per day.

     Offices.  On March 1, 1999, the Company announced that it is relocating its
principal  office from Houston,  Texas to Golden,  Colorado.  On this date,  the
Company  leased office space from a related party,  on 1010 Tenth Street,  Suite
100, Golden,  Colorado 80401. The offices consist of approximately  2,255 square
feet  and  will  be  leased  until  August  31,  1999  at  an  initial  rent  of
approximately  $4,000 per month,  and on a month to month basis  after that.  On
April 1, 1999,  the Company  assigned  its office space at 2211  Norfolk,  Suite
1150,  Houston,  Texas  77098 to an  unaffiliated  third  party.  The Company is
currently  subleasing  the  Houston  office  space on a month by month basis for
approximately  $5,000  per month.  The  Company  expects  the  relocation  to be
completed by the fall of 1999.

ITEM 3. LEGAL PROCEEDINGS

     The Company is not a party to any legal proceedings required to be reported
hereunder.

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

     No matter was submitted to a vote of the Company's  security holders during
the Company's fiscal quarter ended December 31, 1998.


                                    PART II

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

     The  Company's  $0.10 par value  common  stock is  currently  traded on the
Nasdaq Small-Cap  Market  ("Nasdaq") under the symbol CHAR. The Company has been
advised that the Company's  common stock is subject to being de-listed by Nasdaq
as a result of the common stock not meeting the minimum bid price  requirements.
The Company has  scheduled a hearing with Nasdaq for April 30, 1999,  to request
additional   time  to  satisfy   Nasdaq's   minimum   bid  price   requirements.
Additionally,  the Company  has  requested  a special  meeting of the  Company's
shareholder's in late April,  1999 to approve a reverse stock split in which one
new share of the  Company's  common stock would be exchanged for every 60 shares
of common stock presently outstanding.

     As of April 7, 1999, the Company had  approximately  2,022  shareholders of
record of its $0.10 par value  common  stock.  No dividend  has been paid on the
Company's  common  stock,  and  there  are  no  plans  to pay  dividends  in the
foreseeable future.

                                       10

<PAGE>


     The following  table shows the range of high,  low and closing sales prices
for each quarter during the Company's last two calendar years ended December 31,
1998  and  December  31,  1997,  as  reported  by the  National  Association  of
Securities Dealers, Inc.

                                       Price Range
                             ---------------------------------
  Fiscal Quarter Ended        High         Low       Closing
  --------------------        ----         ---       -------


March 31, 1997               1 3/16        3/4          7/8
June 30, 1997 *              1             3/4          13/16
September 30, 1997           1 1/4         11/16        1 5/32
December 31, 1997            3 3/32        1 1/16       2 1/2
March 31, 1998               2 25/32       2            2 7/16
June 30, 1998                2 1/2         1 1/2        1 11/16
September 30, 1998           2 1/2         3/4          1 9/32
December 31, 1998            1 3/4         11/32        11/32


     * On May 29, 1997, the Company changed its fiscal year end from November 30
to December 31.

     The following is  information  as to all  securities of the Company sold by
the  Company  since  October  1,  1998,  which  were not  registered  under  the
Securities Act of 1933, as amended ("Securities Act").

     On October 30, 1998, the Company issued warrants to purchase 200,000 shares
of the Company's common stock at an exercise price of $1.00 per share as part of
the  settlement  for a lawsuit  filed  against  the  Company  and  others in the
District  Court of Harris  County,  Texas,  by  Heartland,  Inc.  of Wichita and
Collins & McIlhenny,  Inc. on November 14,  1997.  The warrants are  exercisable
through  January 2, 1999.  The Company  issued the warrants in reliance upon the
exemption  from  registration  under  Section  4(2) of the  Securities  Act. The
recipients had available all material  information  concerning the Company.  The
warrant certificates bear an appropriate restrictive legend under the Securities
Act. No underwriter was involved in the transaction.

     During the quarter  ended  December 31, 1998,  the Company  granted  5-year
options to purchase 38,500 shares of the Company's common stock to employees of,
and  consultants  to, the Company.  The Company made the grants in reliance upon
the exemption from  registration  under Section 4(2) of the Securities Act. Such
persons had available to them all material  information  concerning the Company.
The options will have an  appropriate  restrictive  legend under the  Securities
Act. No underwriter was involved in the transaction.

     On December 31, 1998,  warrants to purchase  80,000 shares of the Company's
common  stock  were  exercised,  at a price of $0.25 per  share,  for a total of
$20,000.


                                       11


<PAGE>




ITEM 6. SELECTED FINANCIAL DATA

     The following is selected consolidated financial information concerning the
Company.  This  information  should be read in conjunction with the Consolidated
Financial Statements appearing elsewhere in this Annual Report on Form 10-K.
<TABLE>
<CAPTION>


                                  As of or for   As of or for
                                    the Year       the Year                              As of or for the Year Ended
                                     Ended          Ended        Month of               ----------------------------
                                   December 31,  December 31,    December       November 30,     November 30,  November 30,
                                      1998           1997          1996             1996            1995           1994
                                      ----           ----          ----             ----            ----           ----
<S>                                 <C>            <C>          <C>            <C>               <C>            <C>
Oil and gas sales (1)...........       --             --            --          $  147,000       $ 255,000      $ 374,000
Total revenues..................       --             --            --             147,000         255,000        374,000
Noncash write-down of oil an
 gas properties                        --             --            --             --              619,000        416,000
Net income (loss)...............   (4,266,000)    (2,603,000)    (130,000)     (2,416,000)       (704,000)      (474,000)
Net income (loss) per
  common share..................      (.09)             (.06)        (.00)           (.08)          (0.04)         (0.02)
Working capital.................    (287,000)       3,356,000            *         259,000         366,000        497,000
Total assets....................   34,324,000      23,519,000            *      14,498,000       5,595,000      2,388,000
Long-term obligations and
   redeemable preferred stock       5,060,000       4,710,000            *       1,491,000         461,000
Shareholders' equity............   27,579,000      18,578,000            *      12,114,000       4,920,000      2,035,000

Other Data
----------

Present value of proved reserves       --             --            --             --              427,000      1,084,000
Proved oil reserves (bbls)             --             --            --             --               66,185        111,690
Proved gas reserves (mcf)              --             --            --             --            3,062,417      3,294,730

</TABLE>



     (1)  In 1994, the Company made a strategic decision to pursue international
          oil and gas projects and, by early 1997,  had  completely  disposed of
          all domestic oil and gas properties.

     *    Not applicable due to one month short period ended December 31, 1996.


                                       12


<PAGE>


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


Liquidity and Capital Resources
-------------------------------

     During  1998,  the Company  raised  additional  capital to finance  CAP-G's
obligation  for the  development  of the  Karakuduk  Field and to satisfy  other
working capital needs of the Company.  Since January 1, 1998, the Company raised
$12,500,000  through the sale of common stock and $20,000  through the exercises
of common  stock  warrants.  The Company  also raised an  additional  $2,070,000
through  various loans to the Company,  of which $975,000 was  outstanding as of
December 31, 1998.  The Company's  material  capital and financing  transactions
during 1998 were as follows:

     On April 3, 1998, the Company sold 1,250,000 shares of the Company's common
stock for $2.00 per  share  for at total of  $2,500,000  to a private  investor.
Allen & Company,  Incorporated  acted as placement  agent in connection with the
sale of the  1,250,000  shares.  As a result,  Allen &  Company,  Incorporated's
warrants to purchase shares of the Company's common stock,  originally issued as
a commission in connection with the Redeemable  Preferred Stock sale on November
24, 1997, became  exercisable for an additional  100,000 shares. The warrants to
purchase  the  additional  100,000  shares  of the  Company's  common  stock are
exercisable through November 25, 2002, at an exercise price of $0.01 per share.

     On July 28 and July 29,  1998,  the Company  sold  6,666,667  shares of the
Company's  common  stock for $1.50  per  share  for at total of  $10,000,000  to
certain investors.  Issuance costs incurred were approximately  $50,000 and have
been  recorded as a reduction to the proceeds  received  from the sale.  Allen &
Company,  Incorporated  acted as placement  agent in connection with the sale of
the 6,666,667 shares. As a result, Allen & Company,  Incorporated's  warrants to
purchase  900,000  shares of the Company's  common stock,  originally  issued as
commission in connection  with the Redeemable  Preferred  Stock sale on November
24, 1997, became  exercisable for an additional  400,000 shares of the Company's
common stock. The 400,000 warrants are exercisable through November 25, 2002, at
an exercise price of $0.01 per share. As of December 31, 1998,  200,000 warrants
held by Allen & Company, Incorporated were unexercisable pending the performance
of future services.

     Due to the fact, the sales price of the 6,666,667  shares was below a price
of $2.00 per share,  the Company was  required  to issue an  additional  416,667
shares to the investor who purchased  1,250,000  shares of the Company's  common
stock for $2,500,000 in April 1998 in order to satisfy certain price  protection
agreements the Company has with such investor.

     On August 5, 1998,  the Company  retired two  outstanding  loans,  totaling
$1,000,000,  from two related parties: Allen & Company,  Incorporated ($900,000)
and John McMillian,  a director and current Chairman and Chief Executive Officer
of the Company ($100,000).  The Company borrowed the $1,000,000 on June 3, 1998,
subject  to a 7%  interest  rate.  The note was  payable in full,  plus  accrued
interest,  on the  earlier of 180 days from the funding of the loans or upon the
Company's  receipt  of a  minimum  of  $10,000,000  in  equity  investments.  In
conjunction  with the loans,  the Company issued warrants to purchase  1,000,000
shares of the Company's  common stock,  at an exercise price of $3.50 per share.
The Company  recorded the warrants at their fair market value of $367,000,  as a
discount of notes payable,  amortizable  over the life of the loans. On July 27,
1998, the Company received $10,000,000 in equity financing and repaid the loans,
recognizing an extraordinary loss on the extinguishment of debt of approximately
$236,000.

     On July 3, 1998, the Company borrowed $975,000 from the Chase Bank of Texas
("Chase").  The Company  subsequently amended the Chase note on December 3, 1998
and on  February  28,  1999.  Under  the  restructured  terms of the note  dated
February 28, 1999,  the loan accrues  interest at an  adjustable  prime rate, as
determined by Chase.  As of December 31, 1998,  the stated prime rate was 7.75%.
Principal  payments in the amount of $250,000,  plus accrued  interest,  are due
quarterly, beginning on August 31, 1999.

     The $975,000 loan is fully guaranteed with a stand-by letter of credit from
Whittier  Ventures,  LLC, an investor in the Company.  In return for issuing the
loan  guarantee,  the Company paid the  guarantor  $10,000  plus related  costs,
issued  warrants to purchase  20,000 shares of the Company's  common stock,  and
granted the  guarantor  a security  interest in the  Company's  common  stock of
Central Asian Petroleum (Guernsey) ("CAP-G").

                                       13

<PAGE>



     In the event of the Company's default on the $975,000 note, the guarantor's
security interest in the Company's common stock in CAP-G cannot be perfected for
at least 30 days after  notification  of such default.  In the event of default,
the Company may make full payment of any  outstanding  principal and interest on
the note plus any  additional  charges  incurred by the  guarantor to completely
remove any security interest held by the guarantor.

     The Company may seek to obtain  additional  capital  through debt or equity
offerings,  encumbering  properties,  entering into arrangements whereby certain
costs  of  development  will be  paid by  others  to  earn  an  interest  in the
properties,  or sale of a portion of the  Company's  interest  in the  Karakuduk
Field.  The present  environment  for financing the  acquisition  of oil and gas
properties or the ongoing  obligations  of an oil and gas business is uncertain,
due in part,  to the  instability  of oil and gas  prices in recent  years.  The
Company's  small size and the early stage of development of the Karakuduk  Field
may also increase the  difficulty in raising any financing that may be needed in
the future.  There can be no assurance  that the debt or equity  financing  that
might be required to fund the Company's operations and obligations in the future
will be available to the Company on economically acceptable terms if at all.

     During the first  quarter  of 1999,  the  Company  borrowed  an  additional
$3,800,000  from related  party  investors.  The notes are  repayable in full on
August 31, 1999 and accrue  interest at an 8% rate.  The financing was primarily
utilized to fund KKM's operations during the first quarter of 1999.

     The Company's financial statements have been presented on the basis that it
is a going  concern,  which  contemplates  the  realization  of  assets  and the
satisfaction  of liabilities  in the normal course of business.  The Company has
incurred  recurring  operating  losses  and has no  operating  assets  presently
generating cash to fund its operating and capital requirements. The Company does
not anticipate that its current cash reserves and cash flow from operations will
be sufficient to meet its capital requirements through fiscal 1999.

     As of December  31, 1998,  substantially  all of the  Company's  assets are
invested in the development of the Karakuduk  Field. The Karakuduk Field has not
produced  any  revenues as of December  31, 1998 and is not  expected to produce
revenues sufficient to meet KKM's cash needs during 1999. The development of the
Karakuduk  Field,  through KKM, will require  substantial  amounts of additional
capital.  KKM's revised  license with the government  required KKM to expend $10
million as of December  31, 1997 and another  $16.5  million as of December  31,
1998. Total expenditure commitments, from the commencement of operations through
December  31,  1998,  of  $26,500,000  have been  satisfied  by KKM.  KKM has an
additional  expenditure  commitment of $30 million for the year ending  December
31, 1999, of which KKM has spent approximately $3.5 million as of April 8, 1999.

     The 1999 expenditure commitment is expected to be spent primarily for KKM's
drilling operations and completion of the field facilities capable of sustaining
expected future production from the Karakuduk Field, along with general overhead
expenses. Without additional funding and significant revenues from oil sales, of
which there are no assurances, the Company will not be able to provide necessary
funds to KKM in order to satisfy these requirements.  As a result, the Company's
interest in the Karakuduk Field may be lost.

     The Company  received an  extension  to June 30,  1999,  from the  Overseas
Private Investment Corp. ("OPIC") for political risk insurance. OPIC granted the
Company a binding  executed  letter of  commitment  on September  25, 1996.  The
Company has a standby  facility for which it has made eight  payments of $31,250
and another two payments of $15,625. The Company expects to execute the contract
on or before June 30, 1999.

Year 2000 Issue


     The year 2000 issue is the result of computer  programs being written using
two digits rather than four to define the applicable  year. Any of the Company's
computer programs that have  date-sensitive  software may recognize a date using
"00" as the year 1900 rather than the year 2000.  This could  result in a system
failure or miscalculations causing disruptions of operations,  including,  among
other things, a temporary inability to process  transactions,  send invoices, or
engage in similar normal business activities.

     The Company has  addressed  the  availability  and  integrity  of financial
systems and the reliability of operational systems. The Company has specifically
reviewed  the  status  of  readiness  for the year 2000 for its  management  and
financial  reporting  systems in the U.S.  and in  Kazakhstan,  and believes the
systems  are year  2000  compliant.  The  Company  does not  expect to incur any
material  operating  expenses or be required to make  significant  investment in
computer system improvements to become year 2000 compliant.

                                       14

<PAGE>



     Third party  systems  that expose the Company to risk are  primarily  those
surrounding  the  Company's   equity   investee,   KKM.   Management  has  begun
communications  with KKM  regarding  their  readiness  for the year  2000 and is
currently assisting KKM to formalize an evaluation and assessment process.

     KKM has  completed a partial  assessment  and  currently  believes that the
computer  systems  it has in place are year 2000  compliant.  KKM has  initiated
formal  communication with all of its significant  suppliers and large customers
to  determine  the extent to which the  Company  is  vulnerable  to those  third
parties  failure to remediate their own year 2000 issues.  In particular,  it is
unclear  as to the  extent the Kazakh  government  and other  organizations  who
provide  significant  infrastructure  services  within the Kazakh  Republic have
addressed the year 2000 issue. Furthermore, the current crisis in Russia and the
CIS could adversely affect the ability of the government and such  organizations
to fund adequate Year 2000 compliance  programs.  There is no guarantee that the
systems of the government or of other organizations on which the Company and KKM
rely will be timely converted and will not have an adverse effect on the Company
and its systems.

     The most likely worst case  scenario the Company can foresee from a failure
of internal or  third-party  systems  would  include an  inability of vendors to
timely deliver required materials,  supplies, or services to the Karakuduk Field
necessary to conduct  drilling or other field  operations.  In order to mitigate
the possibility of timely delivery of critical  materials and supplies,  KKM can
fully stock materials to sustain drilling  operations over the transition period
from December 1999 through the first quarter of the 2000. At this time, KKM will
assess if any critical vendors are having  difficulties due to year 2000 issues.
KKM has an extensive selection of vendors for all types of materials and service
needs.  If certain  vendors  cannot  perform on a timely basis,  KKM will simply
utilize a different service provider.

     Furthermore,  a breakdown of the existing  KazTransOil pipeline required by
KKM to export oil outside of Kazakhstan would seriously delay or even halt KKM's
ability to sell oil. KKM  management has performed  physical  inspections of the
KazTransOil  pipeline  and do not foresee any problems  with placing  production
into the pipeline and properly recording the volumes  attributable to KKM. There
are no  assurances,  however,  that problems will not occur at different  points
along the  pipeline,  inside  or  outside  of  Kazakhstan,  including  points of
destination for the throughput.  Due to the limited  transportation  options for
marketing crude oil within Kazakhstan and the CIS, KKM will not be able to avoid
the negative consequences  associated with a breakdown in the export pipeline if
it should occur. The management of KKM, however, considers this likelihood to be
remote.

Results of  Operations  Year Ended  December  31,  1998  Compared  to Year Ended
December 31, 1997

     Interest income increased by $763,000 from the year ended December 31,
1997 due to increased financing of 100% of KKM's operations in Kazakhstan. As of
December 31, 1998, the Company held a 50% equity interest in KKM.

     General and  administrative  costs  increased by  $1,363,000  from the year
ended  December 31, 1997 due mainly to the  Company's  increase in  compensation
expense and legal fees.  Compensation  expense increased by $992,000,  primarily
due to stock based compensation granted to directors, employees, and consultants
of the  Company  during  1998  plus  amortization  of prior  year  equity  based
compensation.  Furthermore,  the Company's cash based compensation increased due
to the hiring of additional  personnel required for normal business  operations.
Legal fees  increased  $125,000,  primarily  relating to the Heartland  lawsuit,
which was  settled  on October  30,  1998.  The  Company's  equity  loss in KKM,
increased  $912,000 from the year ended December 31, 1997.  These  increases are
the result of KKM's increased operational activity in Kazakhstan.

     In 1998,  the  Company  settled a lawsuit  filed  against  the  Company  on
November  14, 1997,  for a total of $200,000  and  warrants to purchase  200,000
shares of the Company's common stock at an exercise price of $1.00,  exercisable
through  January 2, 1999. The warrants were recorded at the fair market value of
the warrants (approximately $34,000).

     In 1998,  the  Company  recognized  a  $236,000  extraordinary  loss on the
extinguishment  of long-term debt. The Company has debt  obligations of $940,000
outstanding as of December 31, 1998.

                                       15

<PAGE>



     Inflation.  The Company  cannot control prices in its oil and gas sales and
to the extent the Company is unable to pass on increases in operating  costs, it
may be affected by inflation.


Results of  Operations  Year Ended  December  31,  1997  Compared  to Year Ended
November 30, 1996

     As  mentioned  above,  during 1997 the Company  changed  from a fiscal year
ended November 30 to a fiscal year ended  December 31. The Company's  operations
during the fiscal year ended  December 31, 1997 and the month ended December 31,
1996, resulted in losses before  extraordinary  items, if any, of $2,389,000 and
$130,000, respectively, due to the Company's ongoing transition to international
exploration  and  production  operations.  The  Company's  operational  loss for
December  1996  consisted  of  miscellaneous  corporate  level  expenses  and is
immaterial to the overall operational results of the Company.

     Results for the fiscal year ended November 30, 1996 have also been restated
to reflect the equity method of accounting for the Company's  investment in KKM.
In 1996, the Company accounted for KKM using proportional  consolidation.  After
adoption of the equity method,  the Company's net loss for the fiscal year ended
November 30, 1996,  $2,416,000,  remained  unchanged from the amount  originally
reported.

     Oil and gas  revenues  and  production  costs  decreased  by  $147,000  and
$37,000,  respectively,  from the  year  ended  November  30,  1996,  due to the
disposition of all of the Company's  domestic oil and gas properties  during the
first quarter of 1997. Interest income increased by $267,000 from the year ended
November 30, 1996 due to  increased  financing  of 100% of KKM's  operations  in
Kazakhstan.  As of December 31, 1997, the Company held a 50% equity  interest in
KKM.

     General and administrative costs and interest expense increased by $186,000
and $208,000,  respectively, also due to KKM's increased operational activity in
Kazakhstan.  The Company's  equity loss in KKM,  however,  decreased by $139,000
from the year ended November 30, 1996 due to additional  capitalization of costs
directly  related to  development  of oil and gas  properties  held by KKM.  The
Company  recognized a $36,000  economic loss on the disposition of the Company's
domestic properties.

     In 1997,  the  Company  recognized  a  $214,000  extraordinary  loss on the
extinguishment  of long term  debt.  The  Company  did not have any  other  debt
obligations outstanding as of December 31, 1997.

     Inflation.  The Company  cannot control prices in its oil and gas sales and
to the extent the Company is unable to pass on increases in operating  costs, it
may be affected by inflation.


ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     Not Applicable.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     See Item 14(a) for a list of the Financial Statements and the supplementary
financial information included in this report following the signature page.

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

     Not Applicable.



                                       16


<PAGE>

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT


     As of March 31, 1999, the following  table sets forth the names and ages of
the current  directors  and  executive  officers of the Company,  the  principal
offices and  positions  with the  Company  held by each person and the date such
person  became a director or  executive  officer of the Company.  The  executive
officers  of the  Company  are  elected  annually  by the  board  of  directors.
Executive officers serve terms of one year or until their death,  resignation or
removal by the board of  directors.  The present term of office of each director
will expire at the next annual meeting of shareholders.  Each executive  officer
will hold office until his successor  duly is elected and  qualified,  until his
resignation  or until he is  removed  in the manner  provided  by the  Company's
Bylaws.

<TABLE>
<CAPTION>




Name of Director or Officer and                                             Principal Occupation
Position in the Company           Since         Age                     During the last Five Years
-----------------------           -----         ---                     --------------------------

<S>                                <C>          <C>        <C>
John G. McMillian                  1997         72          Mr.  McMillian  has served as the Chairman of the Board of the Company
Chairman                                                    since January 1999. From 1995 to 1997, Mr. McMillian  was retired. Mr.
                                                            McMillian  served  as the  Chairman,  President, and  Chief  Executive
                                                            Officer of  Allegheny &  Western  Energy  Corporation,  an oil and gas
                                                            company, from  1987 to 1995.  Mr. McMillian founded  Northwest  Energy
                                                            Company, a major supplier of natural gas, and  served as its  Chairman
                                                            and   Chief   Executive  Officer from 1973 to 1983. From 1986 to 1989,
                                                            Mr. McMillian was the owner, Chairman and Chief  Executive  Officer of
                                                            Burger Boat Company, a boat  manufacturing company. Mr. McMillian  has
                                                            served as a  director of  Excalibur  Technologies  and a member of its
                                                            Audit Committee since 1996.

Dr. Jack A. Krug                   1999         53          President  and Chief  Operating  Officer of the Company  since January
President and Chief                                         1999;  A  director,  Vice  President,   and  former  owner  of  Questa
Operating Officer                                           Engineering,  LLC,  prior  to  1999;  First  Deputy  Project  Manager,
                                                            LukOil-AIK,  an oil and gas joint venture in Russia, from October 1994
                                                            to December  1998;  First Deputy of Zhetaby Quest an oil and gas joint
                                                            venture in the Republic of Kazakhstan, from 1993 to November, 1994.


David A. Dahl                      1997         37          Mr. Dahl served as Secretary of the Company from August 1997 until May
                                                            1998. Currently, Mr. Dahl is the President of Whittier Energy Company,
                                                            an oil and gas exploration and production  company, a position that he
                                                            has held since  1997.  Since  1996,  Mr.  Dahl has also  served as the
                                                            President of Whittier  Ventures,  LLC, a private investment entity. In
                                                            addition,  since  1993,  Mr. Dahl is also Vice  President  of Whittier
                                                            Trust Company,  a private trust company. From  1990 to  1993, Mr. Dahl
                                                            was a Vice President of Merus Capital  Management, an investment firm.

                                                                17

<PAGE>



Name of Director or Officer and                                             Principal Occupation
Position in the Company           Since         Age                     During the last Five Years
-----------------------           -----         ---                     --------------------------

Ted Collins,  Jr.                  1997         60          Since  1988,  Mr.  Collins has been the  President  of Collins & Ware,
                                                            Inc.,  an  independent  oil and gas  company.  From 1982 to 1988,  Mr.
                                                            Collins  was the  President  of Enron  Oil & Gas  Co.,  an oil and gas
                                                            company.  Beginning  in  1969  and  until  1982,  Mr.  Collins  was an
                                                            Executive  Vice  President and director of American  Quasar  Petroleum
                                                            Co., an oil and gas company.  Mr.  Collins also serves on the Board of
                                                            Directors of Hanover Compression  Company,  MidCoast Energy Resources,
                                                            Inc. and Queen Sand Resources, Inc.

Richard L. Grant                   1998         44          Mr. Grant is the  President of Cabot LNG  Corporation,  an importer of
                                                            liquefied  natural gas, a position he has held since  September  1988.
                                                            Mr. Grant served in various capacities at Mountaineer Gas Company, the
                                                            largest natural gas distribution  company in West Virginia,  including
                                                            President,  from  September  1988 to August 1998,  and Executive  Vice
                                                            President  and General  Counsel,  from 1986 to 1988.  Mr. Grant was an
                                                            engineer for and  legal counsel  with The  Cincinnati  Gas &  Electric
                                                            Company, from 1980 to 1986.

James A. Jeffs                     1999         46          Since 1994,  Mr.  Jeffs has served as Managing  Director and the Chief
                                                            Investment  Officer  for The  Whittier  Trust  Company,  a  trust  and
                                                            investment  management company, and as a director of M-D International
                                                            Petroleum, Inc., a private oil and gas company. From 1993 to 1994, Mr.
                                                            Jeffs was a Senior Vice  President  of Union Bank of  California.  Mr.
                                                            Jeffs  was  the  Chief  Investment   Officer  for  Northern  Trust  of
                                                            California,  N.A., a trust and investment management company from 1992
                                                            to 1993.  Mr. Jeffs was the President of TSA  Capital  Management,  an
                                                            investment  management  company,  and   Chief   Executive  Officer and
                                                            Senior  Vice  President  of Trust  Services  of  America,  a trust and
                                                            investment management company from 1988 to 1992.

Arlo G. Sorensen                   1996         58          Chief  Financial  Officer  and  Principal  Accounting  Officer  of the
                                                            Company  from March 1997 to June 1998;  Treasurer  of the Company from
                                                            February 1997 to February 1998; Trustee of M.H. Whittier  Corporation,
                                                            a private investment entity,  since 1985;  Chairman of the Board and a
                                                            director of Whittier Trust Company since 1988.


Michael B. Young                   1998         30          Treasurer  &  Controller  of  the  Company  since  February  1998  and
Treasurer and Controller                                    Principal Accounting Officer  of the  Company  since  June  1998;  Tax
                                                            Manager in the oil & gas  tax  practice  of  Arthur  Andersen  LLP, an
                                                            accounting  firm,  from June 1991 to February 1998.

                                                                18

<PAGE>


Name of Director or Officer and                                             Principal Occupation
Position in the Company           Since         Age                     During the last Five Years
-----------------------           -----         ---                     --------------------------

Alan D. Berlin                     1997         58          A partner of Aitken Irvin Lewin Berlin Vrooman & Cohn, LLP since 1995.
Secretary                                                   Engaged in the  private  practice  of law for over five years prior to
                                                            joining Aitken Irvin Lewin Berlin Vrooman & Cohn LLP; Secretary of the
                                                            Company  from  January  1996 to August  1997 and from June 1998 to the
                                                            present;  President of the  International  Division of Belco Petroleum
                                                            Corp.  from 1985 to 1987 and held various other  positions  with Belco
                                                            Petroleum Corp. from 1977 to 1985; Currently a director of Belco Oil &
                                                            Gas Corp.

</TABLE>

     Except as  indicated  in the above  table,  no director of the Company is a
director of an entity that has its securities  registered pursuant to Section 12
of the Securities Exchange Act of 1934.

     In connection with the Company's acquisition of all of the stock of Central
Asian Petroleum  (Delaware),  Inc. ("CAP-D") in 1995, the former shareholders of
CAP-D were granted  certain  rights to nominate  directors of their choosing for
election  to the  Company's  board  of  directors.  In  June  1998,  the  former
shareholders  of CAP-D  agreed  to  relinquish  their  rights  to  future  board
representation in exchange for the accelerated  release from escrow of 1,250,000
shares of the Company's common stock issued to the CAP-D shareholders as part of
the Company's  acquisition of 100% of CAP-D's  stock.  As part of the agreement,
the escrowed  shares will be released  upon the earlier of  production  reaching
2,500  barrels  of oil per day for a period  of sixty  days or when the  Company
obtains  "full project  financing,"  neither which have occurred as of April 15,
1999. The Company recorded the issuance of the escrowed shares in 1995.

     In connection with borrowings in August 1996, the Company agreed to add two
directors  selected by two of the  lenders,  Whittier  Ventures LLC and Whittier
Energy Company (collectively "Whittiers").  In connection with the transactions,
James A. Jeffs resigned from the Company's board of directors. At the request of
the Whittiers,  on December 2, 1996, Arlo G. Sorensen  replaced Mr. Jeffs on the
Company's board of directors and on January 3, 1997, David A. Dahl was appointed
to the Company's  board of directors.  The Whittiers will have the right to have
their two  representatives  nominated  for  directors  of the Company  until the
Whittiers no longer have any  investment in the Company.  In January  1999,  Mr.
Jeffs was re-appointed as a director of the Company, in addition to Mr. Dahl and
Mr. Sorensen.

     There are no other  arrangements  or  understandings  between any executive
officer  and any  director  or other  person  pursuant  to which any  person was
selected as a director or an executive officer.

     SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

     Based  solely  upon  a  review  of the  Forms  3 and 4 and  any  amendments
furnished to the Company  during the  Company's  fiscal year ended  December 31,
1998, and Form 5 and any amendments furnished to the Company with respect to the
same fiscal year,  during the Company's fiscal year ended December 31, 1998, the
Company believes that its directors,  officers,  and greater than 10% beneficial
owners  complied with all applicable  filing  requirements,  except that (i) Mr.
Young failed to file, on a timely basis, a report  representing  one transaction
in which Mr. Young  received  options to acquire shares of common stock and (ii)
Mr. Dahl, through his beneficial  ownership of shares owned by Whitter Ventures,
LLC,  failed  to  file  one  report,  on  a  timely  basis,  representing  three
transactions  pursuant  to which  Whitter  Ventures,  LLC  received  warrants to
purchase shares of common stock.


                                       19


<PAGE>


ITEM 11. EXECUTIVE COMPENSATION

     In May 1997,  the Company  changed its fiscal year end from  November 30 to
December 31. The following table shows all cash compensation paid by the Company
for  services  rendered  during the fiscal  years  ended  December  31, 1998 and
December 31, 1997,  during the month of December 1996 and during the fiscal year
ended  November 30, 1996 to Howard Karren  (there were no executive  officers of
the Company whose annual salary and bonus  exceeded  $100,000  during the fiscal
year ended December 31, 1998).
<TABLE>
<CAPTION>
                                            Summary Compensation Table
                                                                                                               Long-Term
                                                                                                             Compensation
                                                                                Annual Compensation              Awards
                                                                                -------------------              ------
                                Year       Year                 Year                              Other
                               Ended      Ended                 Ended                             Annual     Securities    All Other
    Name and                  December   December   Month of   November                          Compen-     Underlying     Compens-
 Principal Position              31,        31,     December      30,    Salary ($)  Bonus($)   sation ($)   Options (#)  sation ($)
-------------------           --------   --------   --------   --------  ----------  --------   ----------   ----------- -----------

<S>                              <C>      <C>       <C>        <C>        <C>         <C>        <C>         <C>           <C>
Howard Karren                    1998                                        --         --          --            --          --
Chief Executive Officer and
President from January                     1997                              --         --          --         1,025,000      --
and February 1997,
respectively,                                         1996                   --         --          --            --          --
to January 1999                                                  1996        --         --      $175,000(1)       --          --

                                                                 1995        --         --          --            --          --
</TABLE>

(1)  In connection  with Howard  Karren  becoming a Director and Chairman of the
     Company,  subject to a certain  contingency  which was  satisfied  in April
     1996,  the  Company  agreed  to  issue  350,000  shares  of  the  Company's
     restricted common stock to Howard Karren, a director of the Company, or his
     designees.  The $175,000  represents the market value of the 350,000 shares
     on April 5, 1996, the date the contingency was satisfied.

     On January 11, 1999, the Company entered into an employment  agreement with
Dr. Jack A. Krug  pursuant to which Dr. Krug was employed as the  President  and
Chief Operating Officer of the Company.  The employment  agreement has a term of
three  years  and is  automatically  extended  for  successive  one  year  terms
thereafter  unless  either  the  Company or Dr.  Krug  elects to  terminate  the
agreement.  Under the terms of the  employment  agreement,  the Company pays Dr.
Krug a salary of $250,000 and has agreed to grant Dr. Krug 200,000 shares of the
Company's  common  stock for each year,  up to a maximum of five  years,  of Dr.
Krug's  services under the agreement.  The first stock grant was made on January
15, 1999. Each subsequent grant is to be made on each subsequent January 15.

                        Option Grants in Last Fiscal Year

     The Company did not grant any options to Howard Karren, the former Chairman
and Chief Executive  Officer of the Company,  during the year ended December 31,
1998.

                          Fiscal Year-End Option Values

     The following table sets forth information  concerning  unexercised options
held by Howard Karren on December 31, 1998:

<TABLE>
<CAPTION>
                                        Number of Securities
                                       Underlying Unexercised                    Value of Unexercised
                                           Options as of                        In-the-Money Options at
                                        December 31, 1998(#)                      December 31, 1998($)
                                   ---------------------------------          --------------------------
Name                               Exercisable/        Unexercisable          Exercisable/ Unexercisable
----                               ------------        -------------          --------------------------
<S>                                <C>                   <C>                   <C>                <C>
Howard Karren..............        1,025,000               - 0 -               $    -0-         - 0 -
</TABLE>

(1)  The value was determined by multiplying the number of shares underlying the
     warrants by the difference  between the exercise price and the closing sale
     price of the Company's common stock on December 31, 1998.

                                       20

<PAGE>


Compensation of Directors

     On July 17, 1997, the shareholders of the Company approved a 1997 Incentive
Stock Plan pursuant to which all non-employee directors were to receive an award
of 250 shares of common  stock of the Company  for each  meeting of the board of
directors  attended by such director.  The directors have waived their rights to
receive  shares for the meetings in 1997 and 1998.  Also on July 17,  1997,  the
shareholders approved a 1997 Non-Employee  Directors' Stock Option Plan pursuant
to which  each year each non-  employee  director  was to  receive  an option to
purchase 25,000 shares of common stock of the Company.  The only options granted
were  granted  effective  July 17, 1997 and relate to a total of 200,000  shares
that were  exercisable  at a price of  $0.828125  per  share.  Both  plans  were
terminated in June 1998.

     On January 23, 1998,  the Board of  Directors  of the Company  granted each
director of the Company  10,000 shares of the  Company's  common stock for their
service to the Company.  There were no other standard or other  arrangements for
the  compensation of the Company's  directors in effect for the Company's fiscal
year ended December 31, 1998.

                                       21


<PAGE>




ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.


     The following table sets forth as of April 7, 1999, the number of shares of
the Company's  outstanding  $0.10 par value common stock  beneficially  owned by
each of the Company's  current  directors and the Company's  executive  officers
named in Item 11, sets forth the number of shares of the  Company's  outstanding
common stock  beneficially  owned by all of the Company's  current directors and
executive  officers as a group, sets forth the number of shares of the Company's
outstanding  common stock owned by each person who owned of record, or was known
to own beneficially,  more than 5% of the Company's outstanding shares of common
stock and sets forth the number of shares of the  Company's  outstanding  common
stock  owned by Howard  Karren.  The  address for all  directors  and  executive
officers of the Company is 2211 Norfolk, Suite 1150, Houston, Texas 77098-4096.
<TABLE>
<CAPTION>

                                                                             Amount and Nature          Percent of
                                                                             of Beneficial               Common
Name of Beneficial Owner                       Position                       Ownership (1)              Stock (1)
------------------------                       --------                       -------------              ---------

<S>                                                                          <C>                          <C>
Allen & Company Incorporated                        --                       11,222,387 (2)               18.31%
711 Fifth Avenue
New York, New York  10022

Cascade Investment, LLC                             --                        3,333,333                    5.69%
2365 Carillon Point
Kirkland, WA 98033

Whittier Ventures, LLC                              --                        3,373,556 (3)                5.73%
1600 Huntington Drive
South Pasadena, California 91030

Jack A. Krug                              President and Chief Operating         200,000 (4)                   *
                                          Officer

John G. McMillian                         Chairman of the Board,                460,000 (5)                   *
                                          Director, and Chief Executive
                                          Officer

David A. Dahl                             Director                            5,679,803 (6)                8.84%

Ted Collins, Jr.                          Director                               60,000                       *

James Jeffs                               Director                            2,568,247(7)                 4.38%

Arlo G. Sorensen                          Director                               96,242 (8)                   *

Richard L. Grant                          Director                                     -0-                    *

Howard Karren                             Former President and Chief          1,195,000 (9)                 2.00%
                                          Executive Officer


All Current Directors and Executive                                           9,079,292 (10)                15.03%
Officers as a Group (nine persons)

</TABLE>

*    Represents less than 1% of the shares of the common stock outstanding.

                                       22

<PAGE>




(1)  Beneficial  ownership  of the  common  stock has been  determined  for this
     purpose in accordance with Rule 13d-3 under the Securities  Exchange Act of
     1934, as amended ("Exchange Act"), under which a person is deemed to be the
     beneficial  owner of  securities if he or she has or shares voting power or
     investment  power  with  respect  to such  securities  or has the  right to
     acquire beneficial ownership within 60 days.

(2)  Includes 2,697,720 shares underlying  warrants to purchase shares of common
     stock.  The number of warrants  reflected  includes  225,000  warrants that
     Allen & Company  Incorporated ("ACI") acquired and holds for the benefit of
     certain of its  officers,  directors and  employees.  ACI is a wholly owned
     subsidiary of Allen Holding Inc.  ("AHI"),  and,  consequently,  AHI may be
     deemed to beneficially own the shares  beneficially  owned by ACI. Does not
     include certain shares owned directly by certain  officers and stockholders
     of AHI and ACI  with  respect  to  which  AHI and ACI  disclaim  beneficial
     ownership.  Certain  officers and stockholders of AHI and ACI may be deemed
     to  beneficially  own  certain  shares of the common  stock  reported to be
     beneficially owned directly by AHI and ACI.

(3)  Includes 282,500 shares underlying currently exercisable warrants.

(4)  Does not include  800,000  shares  that vest  annually at a rate of 200,000
     shares on January 15th of each year. If Dr. Krug's  employment  terminates,
     the stock award will be prorated as to that year.

(5)  Includes 25,000 shares underlying a currently exercisable option and 25,000
     shares underlying a currently exercisable warrant.

(6)  Includes 75,000 shares underlying  currently  exercisable  options owned by
     Mr. Dahl,  3,091,056 shares  beneficially  owned by Whittier  Ventures LLC,
     282,500 shares underlying currently exercisable warrants beneficially owned
     by Whittier  Ventures LLC, 349,185 shares owned by Whittier Energy Company,
     87,500 shares underlying  currently  exercisable warrants owned by Whittier
     Energy  Company,  1,285,192  shares  beneficially  owned by Whittier  Trust
     Company, 9,370 shares owned by Whittier Opportunity Fund and 500,000 shares
     underlying  currently  exercisable  options  owned by Whittier  Opportunity
     Fund.   Although  Mr.  Dahl  has  no  pecuniary   interest  in  the  shares
     beneficially  owned by Whittier  Ventures  LLC,  Whittier  Energy  Company,
     Whittier  Trust Company or Whittier  Opportunity  Fund, as the President of
     Whittier Ventures LLC and Whittier Energy Company, as the Vice President of
     Whittier Trust Company,  and as a Manager of Whittier Opportunity Fund, Mr.
     Dahl has voting power and investment  power over such shares and, thus, may
     be deemed to beneficially own such shares.

(7)  Includes  349,185 shares owned by Whittier  Energy  Company,  87,500 shares
     underlying currently  exercisable options owned by Whittier Energy Company,
     1,285,192 shares beneficially owned by Whittier Trust Company, 9,370 shares
     owned by Whittier  Opportunity Fund and 500,000 shares underlying currently
     exercisable options owned by Whittier  Opportunity Fund. Although Mr. Jeffs
     has no  pecuniary  interest  in the shares  beneficially  owned by Whittier
     Energy Company,  Whittier Trust Company and Whittier  Opportunity  Fund, as
     Vice President of Whittier Energy Company, Vice President of Whittier Trust
     Company and a Manager of Whittier  Opportunity  Fund,  Mr. Jeffs has voting
     power and  investment  power over such shares and,  thus,  may be deemed to
     beneficially own such shares. Does not include 235,000 shares subject to an
     escrow  agreement  which  provides that such shares will be released to Mr.
     Jeffs if the Company's oil and gas interests attain  specified  performance
     levels.

(8)  Includes 75,000 shares underlying currently  exercisable options and 11,242
     shares  owned by  Whittier  1982 Oil Trust for  which Mr.  Sorensen  is the
     trustee and has voting and investment power over such shares.  Mr. Sorensen
     is a director of Whittier  Ventures LLC and Whittier  Energy  Company.  Mr.
     Sorensen  disclaims  beneficial  ownership  of the shares that are owned by
     Whittier Ventures LLC and Whittier Energy Company.

(9)  Includes 1,025,000 shares underlying  currently  exercisable  options.  Mr.
     Karren is no longer employed by the Company.

                                       23

<PAGE>


(10) Includes  the shares as  described  in notes (4)  through  (8) above.  Also
     includes (i) 20,000  shares owned by Michael B. Young,  the  Treasurer  and
     Controller  of  the  Company,   and  70,000  shares  underlying   presently
     exercisable options owned by Mr. Young, and (ii) 10,000 shares owned by Mr.
     Berlin,  the  Secretary  of the  Company,  and 25,000  shares  underlying a
     presently  exercisable option owned by Mr. Berlin. Does not include a grant
     for 20,000  shares that will vest with respect to 10,000  shares on each of
     January 30, 2000 and 2001, if Mr. Young is still employed by the Company on
     those  dates.  The  shares  will vest  earlier if Mr.  Young is  terminated
     without due cause or if the  Company is  acquired  or merges  with  another
     entity.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS


     Aitken Irvin Lewin Berlin Vrooman & Cohn,  LLP, a law firm in which Alan D.
Berlin,  who is currently the Secretary of the Company and who was a director of
the Company from March 1997 to May 1998, is a partner,  provides  legal services
to the  Company  for which the law firm  charges  the  Company  an amount not in
excess of the law firm's  normal  billing  rates.  The total amount of fees that
were paid by the Company to the law firm during the Company's  fiscal year ended
December 31, 1998 did not exceed 5 of the law firm's gross  revenues for the law
firm's last full fiscal year. The Company believes that the fees paid to the law
firm were reasonable for the services rendered.

     Allen & Company Incorporated,  which acted as placement agent in connection
with the sale of the Company's  Series A Preferred  Stock in November  1997, was
paid a fee in the form of warrants to purchase  900,000  shares of common  stock
that were  exercisable  through November 25, 2002, at an exercise price of $0.01
per share.  In March  1999,  the  Company  and Allen & Company  entered  into an
agreement  pursuant to which Allen & Company  would retain  warrants to purchase
700,000 of the original 900,000 shares of common stock;  provided,  however, the
exercise of such warrants is subject to several  conditions.  In  particular,  a
warrant to purchase one share of common stock is deemed exercisable for each $25
of additional  capital  arranged by Allen & Company for the Company on or before
November 25, 1999.  Allen & Company arranged for $2.5 million and $10 million of
additional   capital  for  the  Company   during   April  1998  and  July  1998,
respectively;  consequently,  warrants to purchase 500,000 of the 700,000 shares
of common stock are currently exercisable.

     The Company  borrowed  $900,000  from Allen & Company and $100,000 from Mr.
McMillian in June 1998, at an interest rate of 7% per annum.  In connection with
such  loans,  the  Company  issued to (i) Allen & Company  warrants  to purchase
975,000  shares of common  stock and (ii) Mr.  McMillian  warrants  to  purchase
25,000 shares of common stock. The warrants expire on November 25, 2002 and have
an exercise  price of $3.50 per share.  The Company  recorded  such  warrants at
their fair value of  $367,000 at the time of issuance as a discount of the loans
to be amortized over the life of the loans. The loans were repaid, together with
interest, in August 1998.

     In July 1998,  Whittier Ventures,  LLC provided a stand-by letter of credit
as  collateral  for a $975,000  loan from the Chase Bank of Texas,  N.A.  to the
Company.  In return for issuing the loan  guarantee,  the Company paid  Whittier
$10,000 plus related costs,  issued warrants to purchase 20,000 shares of common
stock at $0.01 per share,  and granted  Whittier a security  interest in capital
stock of Central  Asian  Petroleum  (Guernsey)  ("CAP-G"),  a subsidiary  of the
Company.  In March 1999,  Whittier loaned the Company,  in two transactions,  an
aggregate of $1.0 million at an interest rate of 8% per annum. The loans are due
and payable on or before  August 31,  1999.  If the Company  issues  convertible
securities within one year from the date of each of the notes,  Whittier has the
right to exchange the  outstanding  balance of the loans,  together with accrued
and unpaid interest, for such convertible securities.  The amount of convertible
securities  issuable to  Whittier is  determined  by  dividing  the  outstanding
principal  balance of the loans,  together with accrued but unpaid interest,  by
the issue price of the convertible securities.

     Allen  &  Company  loaned,  at an  interest  rate of 8% per  annum,  to the
Company, in three transactions, an aggregate of $700,000 in January 1999 and, in
three  transactions,  an aggregate of $1,050,000 in February  1999.  The Company
issued  a  promissory  note  during  March  1998  in  the  principal  amount  of
$2,769,978.08 to Allen & Company,  representing an additional $1,000,000 loan to
the Company by Allen & Company and retiring the January and February loans.  The
promissory  note bears  interest at a rate of 8% per annum and matures on August
31, 1999. The  promissory  note is secured in the same manner and is convertible
on the same  terms  and  conditions  as the July  1998  loan by  Whitter  to the
Company.

                                       24

<PAGE>


     The  Company  borrowed  $75,000  in May 1998 and  $20,000 in July 1998 from
Howard Karren. The loans from Mr. Karren were repaid in July 1998, together with
interest at an interest rate of 8% per annum.

     In January 1998,  the Board  granted each director  10,000 shares of common
stock for their service as a director.

     The Company granted  Michael B. Young, in connection with the  commencement
of his  employment  with the Company in February 1998, (i) a five year option to
purchase  50,000 shares of common stock at an exercise  price of $2.25 per share
and (ii)  40,000  shares of common  stock that,  subject to certain  conditions,
vested as to 10,000  shares on each of January 30, 1998 and 1999,  and will vest
as to 10,000 shares on each of January 30, 2000, and 2001.


                                   PART IV


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

     (a)(1) Financial Statements.
            ---------------------

         Table of Contents

         Chaparral Resources, Inc.
         -------------------------
         Report of Independent Auditors....................................  33
         Consolidated Balance Sheets-As of December
           31, 1998 and December 31, 1997 .................................  34
         Consolidated Statements of Operations-Years ended
            December 31, 1998,  December 31, 1997, November 30,
            1996 and the month ended December 31,1996......................  36
         Consolidated Statements of Cash Flows-Years ended
            December 31, 1998, December 31, 1997, November 30,
           1996 and the month ended December 31, 1996......................  37
         Consolidated Statement of Changes in Stockholders' Equity-
            Year ended December 31, 1998, Thirteen months ended
            December 31, 1997 and the year ended November 30, 1996.........  40
         Notes to Consolidated Financial Statements........................  41
         Supplemental Information - Disclosures About Oil
            and Gas producing Activities - Unaudited.......................  59

         Karakuduk-Munay, Inc.
         Report of Independent Auditors ...................................  63
         Balance Sheets-As of December 31, 1998 and 1997 ..................  64
         Statements of Expenses and Accumulated Deficit-
           Years ended December 31, 1998, 1997 and 1996....................  65
         Statements of Cash Flows-Years ended December 31,
           1998, 1997 and 1996 ............................................  66
         Statements of Shareholders' Deficit...............................  67
         Notes to the Financial Statements ................................  68

         (a)(2)  Financial Statement Schedules.
                 ------------------------------

     All  schedules for which a provision is made in the  applicable  accounting
regulations of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable and, therefore, have been omitted.

         (b)  Current Reports on Form 8-K.
              ----------------------------

     The Company  did not file any  Current  Reports on Form 8-K during the last
fiscal quarter ended December 31, 1998.

                                       25

<PAGE>

     (c) Exhibits


No.               Description and Method of Filing
---               --------------------------------

2.1            Stock  Acquisition  Agreement  and Plan of  Reorganization  dated
               April  12,  1995  between  Chaparral  Resources,  Inc.,  and  the
               Shareholders of Central Asian  Petroleum,  Inc.,  incorporated by
               reference  to Exhibit 2.1 to the  Company's  Quarterly  Report on
               Form 10-Q for the quarter ended May 31, 1995.

2.2            Escrow   Agreement   dated  April  12,  1995  between   Chaparral
               Resources,  Inc., the  Shareholders  of Central Asian  Petroleum,
               Inc. and Barry W. Spector,  incorporated  by reference to Exhibit
               2.2 to the  Company's  Quarterly  Report  on  Form  10-Q  for the
               quarter ended May 31, 1995.

2.3            Amendment   to   Stock   Acquisition   Agreement   and   Plan  of
               Reorganization  dated March 10, 1996 between Chaparral Resources,
               Inc.,  and the  Shareholders  of Central Asian  Petroleum,  Inc.,
               incorporated by reference to the Company's Registration Statement
               No. 333-7779.

3.1            Restated  Articles of  Incorporation + Amendments dated September
               25,  1976,  incorporated  by  reference  to  Exhibit  3.1  to the
               Company's  Annual  Report on Form 10-K for the fiscal  year ended
               November 30, 1993.

3.2            Articles of Amendment to the Restated Articles of Incorporation +
               Amendments  dated April 21,  1988,  incorporated  by reference to
               Exhibit 3.2 to the  Company's  Annual Report on Form 10-K for the
               fiscal year ended November 30, 1993.

3.3            Articles of Amendment to the Restated Articles of Incorporation +
               Amendments  dated April 12,  1994,  incorporated  by reference to
               Exhibit 3.3 to the  Company's  Annual Report on Form 10-K for the
               fiscal year ended December 31, 1997.

3.4            Articles of Amendment to the Restated Articles of Incorporation +
               Amendments  dated June 21,  1995,  incorporated  by  reference to
               Exhibit B to the Company's  Quarterly Report on Form 10-Q for the
               quarter ended May 31, 1995.

3.5            Articles of Amendment to the Restated Articles of Incorporation +
               Amendments dated July 17, 1996,  incorporated by reference to the
               Company's Registration Statement No. 333-7779.

3.6            Articles of Amendment to the Restated Articles of Incorporation +
               Amendments dated November 25, 1997,  incorporated by reference to
               Exhibit  3.1 to the  Company's  Current  Report on Form 8-K dated
               October 31, 1997.

3.7            Bylaws,  as amended  through  October 31, 1997,  incorporated  by
               reference to Exhibit 3(ii) to the Company's  Quarterly  Report on
               Form 10-Q for the quarter ended September 30, 1997.

10.1           Chaparral  Resources,  Inc. 1989 Stock Warrant Plan effective May
               1,  1989,  incorporated  by  reference  to  Exhibit  10.3  to the
               Company's  Annual  Report on Form 10-K for the fiscal  year ended
               November 30, 1993.

10.2           Warrant  Certificate  entitling Allen & Company to purchase up to
               1,022,000  shares of Common Stock of Chaparral  Resources,  Inc.,
               incorporated  by  reference  to  Exhibit  10.1  to the  Company's
               Current Report on Form 8-K dated April 1, 1996.

10.3          Amendments  to Chaparral  Resources,  Inc.  Stock  Warrant  Plan,
               incorporated  by  reference  to  Exhibit  10.16 to the  Company's
               Annual Report on Form 10-K for the fiscal year ended November 30,
               1996.

                                       26

<PAGE>

Exhibit No.    Description and Method of Filing
-----------    --------------------------------

10.4           Agreement dated August 30, 1995 for  Exploration  Development and
               Production of Oil in Karakuduk  Oil Field in Mangistan  Oblast of
               the  Republic  of  Kazakhstan  between  Ministry  of Oil  and Gas
               Industries of the Republic of Kazakhstan for and on Behalf of the
               Government of the Republic of Kazakhstan  and Joint Stock Company
               of Closed Type  Karakuduk  Munay Joint Venture,  incorporated  by
               reference to Exhibit 10.17 to the Company's Annual Report on Form
               10-K for the fiscal year ended Novembe

10.5           License for the Right to Use the  Subsurface  in the  Republic of
               Kazakhstan,  incorporated  by reference  to Exhibit  10.18 to the
               Company's  Annual  Report on Form 10-K for the fiscal  year ended
               November 30, 1996.

10.6           Subscription  Agreement  dated April 22, 1997  between  Chaparral
               Resources,   Inc.  and  Victory  Ventures  LLC,  incorporated  by
               reference to Exhibit 10.1 to the  Company's  Quarterly  Report on
               Form 10-Q for the quarter ended June 30, 1997.

10.7           Warrant  Certificate  dated December 31, 1997  entitling  Victory
               Ventures LLC to purchase up to  4,615,385  shares of Common Stock
               of  Chaparral  Resources,  Inc.,  incorporated  by  reference  to
               Exhibit 10.2 to the Company's  Quarterly  Report on Form 10-Q for
               the quarter ended June 30, 1997.

10.8           Form of Warrant  issued to Black  Diamond  Partners  LP, Clint D.
               Carlson, John A. Schneider, Victory Ventures LLC, Whittier Energy
               Company and Whittier  Ventures LLC in connection  with loans made
               by them to  Chaparral  Resources,  Inc. in November  and December
               1996 and to Black Diamond Partners LP, Clint D. Carlson,  Wittier
               Energy  Company  and  Whittier  Ventures  LLC  in  July  1997  in
               connection  with the same loans,  incorporated  by  reference  to
               Exhibit 10.3 to the Company's Quarterly Report quarter ended June
               30, 1997.

10.9           Chaparral Resources, Inc. 1997 Incentive Stock Plan, incorporated
               by reference to Exhibit 10.4 to the Company's Quarterly Report on
               Form 10-Q for the quarter ended June 30, 1997.

10.10          Amendment to Common Stock  Purchase  Warrant  dated  December 31,
               1997 entitling  Victory  Ventures LLC to purchase up to 4,615,385
               shares of Common Stock of Chaparral Resources, Inc., incorporated
               by reference to Exhibit 10.1 to the Company's Quarterly Report on
               Form 10-Q for the quarter ended September 30, 1997.

10.11          Amendment  dated  September 11, 1997, to License for Right to Use
               the  Subsurface in the Republic of  Kazakhstan,  incorporated  by
               reference to Exhibit 10.2 to the  Company's  Quarterly  Report on
               Form 10-Q for the quarter ended September 30, 1997.

10.12          Warrant  Certificate  entitling Allen & Company,  Incorporated to
               purchase  up to  900,000  shares  of  Common  Stock of  Chaparral
               Resources, Inc., incorporated by reference to Exhibit 10.1 to the
               Company's Current Report on Form 8-K/A dated October 31, 1997.

10.13          Form  of   Subscription   Agreement   dated  November  21,  1997,
               incorporated  by  reference  to  Exhibit  10.19 to the  Company's
               Current Report on Form 8-K dated October 31, 1997.

10.14          Letter  dated  February  4, 1998,  from the Company to Michael B.
               Young,   incorporated  by  reference  to  Exhibit  10.29  to  the
               Company's  Annual  Report on Form 10-K for the fiscal  year ended
               December 31, 1997.

10.15          Release and Understanding  with H. Guntekin Koksal,  incorporated
               by reference to Exhibit 10.30 to the  Company's  Annual Report on
               Form 10-K for the fiscal year ended December 31, 1997.

                                       27

<PAGE>
Exhibit No.    Description and Method of Filing
-----------    --------------------------------

10.16          Termination  Agreement  dated March 6, 1998 with  Exeter  Finance
               Group,   incorporated  by  reference  to  Exhibit  10.31  to  the
               Company's  Annual  Report on Form 10-K for the fiscal  year ended
               December 31, 1997.

10.17          Agreement dated March 7, 1998, with Munay-Imp ex, incorporated by
               reference to Exhibit 10.32 to the Company's Annual Report on Form
               10-K for the fiscal year ended December 31, 1997.

10.18          Agreement dated March 31, 1998, effective as of November 4, 1997,
               between   the   Company   and  Allen  &  Company,   Incorporated,
               incorporated  by  reference  to  Exhibit  10.33 to the  Company's
               Annual Report on Form 10-K for the fiscal year ended December 31,
               1997.

10.19          Subscription  Agreement  dated April 1, 1998  between the Company
               and Network Fund III, Ltd.,  incorporated by reference to Exhibit
               10.1 to the Company's  Current  Report on Form 8-K dated April 3,
               1998.

10.20          Form of  Subscription  Agreement  between the Company and certain
               investors,  incorporated  by  reference  to  Exhibit  10.1 to the
               Company's Current Report on Form 8-K dated July 28, 1998.

10.21          Subordinated  Loan Agreement dated as of June 4, 1997 between the
               Company  and  Allen  &  Company,  Incorporated,  incorporated  by
               reference to Exhibit 10.1 to the  Company's  Quarterly  Report on
               Form 10-Q for the quarter ended June 30, 1998.

10.22          Warrants  issued  to Allen &  Company,  Incorporated  and John G.
               McMillian,  incorporated  by  reference  to  Exhibit  10.2 to the
               Company's  Quarterly  Report on Form 10-Q for the  quarter  ended
               June 30, 1998.

10.23          Loan  agreements  between the Company and Howard Karren dated May
               27,  1998  and  July  1,  1998,  respectively,   incorporated  by
               reference to Exhibit 10.3 to the  Company's  Quarterly  Report on
               Form 10-Q for the quarter ended June 30, 1998.

10.24          1998 Incentive and Nonstatutory Stock Option Plan

10.25          Amendment to License for the Right to Use the  Subsurface  in the
               Republic of Kazakhstan, dated December 31, 1998.

10.26          Credit Support and Pledge Agreement  between  Whittier  Ventures,
               LLC  and   Chaparral   Resources,   Inc.   dated  July  2,  1998,
               incorporated  by  reference  to  Exhibit  10.1  to the  Company's
               Quarterly Report on Form 10-Q for the quarter ended September 30,
               1998.

10.27          Warrants  issued  to  Whittier  Ventures,  LLC,  incorporated  by
               reference to Exhibit 10.2 to the  Company's  Quarterly  Report on
               Form 10-Q for the quarter ended September 30, 1998.

10.28          Settlement  Agreement  and  Release  between  Heartland,  Inc. of
               Wichita and Collins & McIlhenny,  Inc. and  Chaparral  Resources,
               Inc.,  Howard  Karren,  Whittier Trust Company and James A. Jeffs
               dated October 30, 1998, incorporated by reference to Exhibit 10.3
               to the  Company's  Quarterly  Report on Form 10-Q for the quarter
               ended September 30, 1998.

10.29          Warrants  issued to  Heartland,  Inc.  of Wichita  and  Collins &
               McIlhenny,  Inc.,  as  joint  tenants  and  to  Don  M.  Kennedy,
               incorporated  by  reference  to  Exhibit  10.4  to the  Company's
               Quarterly Report on Form 10-Q for the quarter ended September 30,
               1998.

10.30          Loan Agreement between Challenger Oil Services, PLC and Chaparral
               Resources,   Inc.  dated  September  10,  1998,  incorporated  by
               reference to Exhibit 10.5 to the  Company's  Quarterly  Report on
               Form 10-Q for the quarter ended September 30, 1998.

                                       28

<PAGE>
Exhibit No.    Description and Method of Filing
-----------    --------------------------------

10.31          Promissory  Note  between   Challenger  Oil  Services,   PLC  and
               Chaparral Resources,  Inc. dated September 10, 1998, incorporated
               by reference to Exhibit 10.6 to the Company's Quarterly Report on
               Form 10-Q for the quarter ended September 30, 1998.

10.32          International Daywork Drilling Contract - Land between Challenger
               Oil Services, PLC and Karakuduk-Mu nay, Inc., dated April 7, 1998

10.33          Amendment No. 1 to the International  Daywork Drilling Contract -
               Land between  Challenger Oil Services,  PLC and  Karakuduk-Munay,
               Inc., dated April 7, 1998.

10.34          Amendment No. 2 to the International  Daywork Drilling Contract -
               Land between  Challenger Oil Services,  PLC and  Karakuduk-Munay,
               Inc., dated March 17, 1999.

10.35          Letter Agreement dated March 17, 1999,  between  Karakuduk-Munay,
               Inc. and Challenger Oil Services, PLC.

10.36          Letter  Agreement and Restated  Amendment No. 1 to Loan Agreement
               and Promissory Note dated March 18, 1999,  between Challenger Oil
               Services, PLC and the Company.

21             Subsidiaries  of the  Registrant,  incorporated  by  reference to
               Exhibit 21 to the  Company's  Annual  Report on Form 10-K for the
               fiscal year ended December 31, 1997.

23.1           Consent of Ernst & Young LLP.

23.2           Consent of Ernst & Young Kazakhstan

27             Financial Data Schedule



                                       29


<PAGE>

                                   SIGNATURES

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

                            CHAPARRAL RESOURCES, INC.,
                            a Colorado corporation




                            By       /s/ Dr. Jack A. Krug
                                     -------------------------------------------
                                     Dr. Jack A. Krug
                                     President and Chief Operating Officer




                            By       /s/ Michael B. Young
                                     -------------------------------------------
                                     Michael B. Young, Treasurer, Controller,
                                             and Principal Accounting Officer



Dated April 14, 1999

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

Date                  Name and Title                   Signature
----                  --------------                   ---------



April 14, 1999        Ted Collins, Jr., Director        /s/ Ted Collins, Jr.
                                                        ------------------------

April 14, 1999        David A. Dahl, Director           /s/ David A. Dahl
                                                        ------------------------

April 14, 1999        James A. Jeffs, Director          /s/ James A. Jeffs
                                                        ------------------------

April 14, 1999        Richard L. Grant, Director        /s/ Richard L. Grant
                                                        ------------------------

April 14, 1999        John G. McMillian, Director       /s/ John G. McMillian
                                                        ------------------------

April 14, 1999        Arlo G. Sorensen Director         /s/ Arlo G. Sorensen
                                                        ------------------------





April 14, 1999                                   *By    /s/ Dr. Jack A. Krug
                                                        ------------------------
                                                        Dr. Jack A. Krug,
                                                        Attorney-in-Fact




                                       30


<PAGE>
                        Consolidated Financial Statements

                            Chaparral Resources, Inc.


                               Years ended December 31, 1998, December 31, 1997,
               and November 30, 1996 and the One Month Period ended December 31,
                                       1996 with Reports of Independent Auditors




                                       31

<PAGE>



                                    CHAPARRAL
                            CHAPARRAL RESOURCES, INC.

                        Consolidated Financial Statements








                                    Contents

Chaparral Resources, Inc.

Report of Independent Auditors ............................................33

Audited Consolidated Financial Statements

Consolidated Balance Sheets ...............................................34
Consolidated Statements of Operations......................................36
Consolidated Statements of Cash Flows......................................37
Consolidated Statements of Changes in Stockholders' Equity.................40
Notes to Consolidated Financial Statements.................................41


Supplemental Information - Disclosures About Oil and Gas
   Producing Activities - Unaudited........................................59

Karakuduk-Munay, Inc.

Report of Independent Auditors.............................................63

Audited Financial Statements

Balance Sheets.............................................................64
Statements of Operations...................................................65
Statements of Cash Flows...................................................66
Statements of Shareholders' Deficit........................................67
Notes to Financial Statements..............................................68





                                       32

<PAGE>






                         Report of Independent Auditors


The Board of Directors and Stockholders
Chaparral Resources, Inc.

We have  audited  the  accompanying  consolidated  balance  sheets of  Chaparral
Resources,  Inc. as of December  31, 1998 and 1997 and the related  consolidated
statements of  operations,  cash flows and changes in  stockholders'  equity for
each of the two years then ended and for the one month period ended December 31,
1996 and the year ended November 30, 1996.  These  financial  statements are the
responsibility of the Company's management.  Our responsibility is to express an
opinion on these financial statements based on our audit.

We  conducted  our  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  Chaparral
Resources,  Inc. as of December 31, 1998 and 1997, and the consolidated  results
of its  operations  and its cash  flows for the two years then ended and for the
one month period ended  December 31, 1996 and the year ended November 30, 1996 ,
in conformity with generally accepted accounting principles.

The accompanying  financial  statements have been prepared  assuming the Company
will  continue  as a going  concern.  As  discussed  in Note 2 to the  financial
statements,  the  Company has  incurred  recurring  operating  losses and has no
operating  assets which are presently  generating cash to fund its operating and
capital requirements.  The Company requires significant  additional financing to
meet its financial  commitments  and  requirements  through  calendar year 1999.
These conditions raise substantial doubt about the Company's ability to continue
as a going  concern.  Management's  plans in  regard to these  matters  are also
described in Note 2. The financial  statements do not include any adjustments to
reflect the possible future effects on the  recoverability and classification of
assets or the amounts and classification of liabilities that may result from the
outcome of this uncertainty.


                                                 /S/ ERNST & YOUNG LLP

Houston, Texas
April 8, 1999


                                       33

<PAGE>
<TABLE>
<CAPTION>


                                             CHAPARRAL RESOURCES, INC.

                                            CONSOLIDATED BALANCE SHEETS





                                                                           December 31            December 31
                                                                              1998                   1997
                                                                         ------------------------------------
<S>                                                                      <C>                     <C>
Assets
Current assets:
   Cash and cash equivalents                                             $    121,000            $  3,423,000
   Restricted cash (Note 3)                                                   756,000                    --
   Accounts receivable                                                         25,000                 102,000
   Prepaid expenses                                                            76,000                  62,000
   Current portion of note receivable (Note 4)                                420,000                    --
                                                                         ------------------------------------
   Total current assets                                                     1,398,000               3,587,000

   Note receivable (Note 4)                                                   589,000                    --

   Oil and gas properties and investments - full cost method
       Republic of Kazakhstan (Karakuduk Field)--
       Not subject to depletion (Notes 5 and 6):                           32,261,000              19,922,000

Furniture, fixtures and equipment                                              93,000                  13,000
Less accumulated depreciation                                                 (17,000)                 (3,000)
                                                                         ------------------------------------
                                                                               76,000                  10,000
                                                                         ------------------------------------

Total assets                                                             $ 34,324,000            $ 23,519,000
                                                                         ====================================

See accompanying notes

                                                         34



<PAGE>


                                             CHAPARRAL RESOURCES, INC.

                                            CONSOLIDATED BALANCE SHEETS







                                                                       December 31           December 31
                                                                          1998                   1997
                                                                       ---------------------------------
Liabilities and stockholders' equity
Current liabilities:
   Trade accounts payable                                              $ 223,000              $  177,000
   Accrued liabilities:
        Accrued compensation                                             418,000
       Accrued other                                                     104,000                  54,000
   Current portion of note payable, net of discount (Note 7)             940,000                    --
                                                                       ---------------------------------
Total current liabilities                                              1,685,000                 231,000

Accrued compensation (Note 13)                                           210,000                 210,000
Redeemable preferred stock (Note 10)- cumulative, convertible,
     Series A, 50,000 issued and outstanding,
     at stated value, $5.00 cumulative annual
     dividend, $5,250,000 redemption value                             4,850,000               4,500,000
Stock Subscription - 0 shares subscribed at
      December 31, 1998 175,000 shares subscribed
      (25,000 Series A; 75,000 Series B;
      75,000 Series C) at December 31, 1997                                 --                      --
Stockholders' equity (Note 8):
   Common stock - authorized, 100,000,000 shares
     at December 31, 1998 and December 31, 1997, of
     $.10 par value; issued and outstanding,
     58,378,790 and 49,720,456 shares at
     December 31, 1998 and December 31, 1997                           5,837,000               4,971,000
   Capital in excess of par value                                     41,774,000              30,340,000
   Unearned portion of restricted stock awards                           (56,000)               (109,000)
   Preferred stock - 1,000,000 shares authorized,
     225,000 shares  designated of
     Series A, B, and C as per above                                        --                      --
   Stock subscription receivable (Note 10)                              (506,000)             (1,770,000)
   Accumulated deficit                                               (19,470,000)            (14,854,000)
                                                                    ------------------------------------
Total stockholders' equity                                            27,579,000              18,578,000
                                                                    -------------------------------------
Total liabilities and stockholders' equity                          $ 34,324,000            $ 23,519,000
                                                                    ====================================

See accompanying notes.





                                                            35
</TABLE>

<PAGE>
<TABLE>
<CAPTION>


                                             CHAPARRAL RESOURCES, INC.

                                       CONSOLIDATED STATEMENTS OF OPERATIONS






                                                     Year Ended         Year Ended         Month Ended         Year Ended
                                                     December 31        December 31        December 31         November 30
                                                        1998                 1997              1996               1996
                                                     ---------------------------------------------------------------------
Revenue:
<S>                                                  <C>                <C>                <C>                <C>
 Oil and gas sales                                   $       --         $       --         $       --         $    147,000

Costs and expenses:
 Production costs                                            --                 --                 --               37,000
 Depreciation and depletion                                14,000              7,000               --                3,000
 General and administrative                             3,017,000          1,654,000            118,000          1,468,000
                                                    ----------------------------------------------------------------------
                                                        3,031,000          1,661,000            118,000          1,508,000
                                                    ----------------------------------------------------------------------

Loss from operations                                   (3,031,000)        (1,661,000)          (118,000)        (1,361,000)

Other income (expense):
 Interest income                                        1,184,000            421,000              4,000            154,000
 Interest expense                                        (205,000)          (298,000)           (17,000)           (90,000)
   Equity in loss from investment (Note 5,             (1,744,000)          (832,000)              --             (971,000)
       Note 6, and Note 19)
   Legal settlement (Note 9)                             (234,000)              --                 --                 --
 Other, net                                                  --              (19,000)             1,000             89,000
                                                     ---------------------------------------------------------------------
                                                         (999,000)          (728,000)           (12,000)          (818,000)
                                                     ---------------------------------------------------------------------

Loss before extraordinary item                         (4,030,000)        (2,389,000)          (130,000)        (2,179,000)

Extraordinary loss on extinguishment of
     long-term debt                                      (236,000)          (214,000)              --             (237,000)
                                                     ---------------------------------------------------------------------

Net loss                                             $ (4,266,000)      $ (2,603,000)      $   (130,000)      $ (2,416,000)
                                                     =====================================================================

Basic and diluted earnings per share:
Net loss per share before extraordinary item         $       (.08)      $       (.05)      $       --         $       (.07)
Extraordinary loss per share                         $       (.01)      $       (.01)      $       --         $       (.01)
Loss per share                                       $       (.09)      $       (.06)      $       --         $       (.08)
Weighted average number of shares
 outstanding                                           53,908,649         41,561,432         37,526,517         32,081,382


See accompanying notes


                                                              36
<

<PAGE>


                                             CHAPARRAL RESOURCES, INC.

                                       CONSOLIDATED STATEMENTS OF CASHFLOWS






                                                        Year ended      Year ended        Month Ended        Year Ended
                                                        December 31     December 31       December 31        November 30
                                                           1998             1997              1996              1996
                                                      -----------------------------------------------------------------
 Cash flows from operating activities
 Net loss                                             $(4,266,000)      $(2,603,000)      $  (130,000)      $(2,416,000)
 Adjustments to reconcile net loss to
   net cash used in operating
  Activities:
   Equity loss from investment                          1,744,000           832,000              --             971,000
   Depreciation and depletion                              14,000             7,000              --               4,000
   Loss on the sale of oil and gas properties                --               3,000            (3,000)             --
   Bad debt expense                                        29,000            37,000              --                --
   Write-down of oil and gas properties                      --              30,000              --                --
   Stock issued for services and bonuses                  600,000            78,000              --                --
   Stock options issued for services and bonuses          113,000           117,000              --                --
   Warrants issued for legal settlement                    34,000              --                --                --
   Amortization of note discount                          154,000           198,000              --                --
   Loss on extinguishment of debt                         236,000           214,000              --             237,000
   Changes in assets and liabilities:
     (Increase) decrease in:
              Accounts receivable                          48,000          (129,000)           51,000            25,000
              Prepaid expenses                            (14,000)          (59,000)             --              10,000
              Note receivable                          (1,009,000)             --                --                --
              Other                                          --              95,000              --                --
     Increase (decrease) in:
              Accounts payable                             46,000           177,000           (44,000)          108,000
              Accrued liabilities other                    50,000            19,000           (19,000)         (317,000)
              Accrued compensation                        418,000              --                --             385,000
                                                      -----------------------------------------------------------------

Net cash used in operating activities                 $(1,803,000)      $  (984,000)      $  (145,000)      $  (993,000)



                                                                     37

<PAGE>


                                             CHAPARRAL RESOURCES, INC.

                                 CONSOLIDATED STATEMENTS OF CASHFLOWS (CONTINUED)






Cash flows from investing activities

Additions to property and equipment             $    (80,000)   $     (6,000)   $       --      $       --
Investment in and advances to foreign oil and
   gas properties                                (14,083,000)     (6,504,000)        (17,000)     (6,936,000)
Proceeds from sale of interest in oil and gas
   properties - domestic                                --           282,000            --           161,000
Increase in other assets                                --              --              --           (74,000)
                                                ------------    ------------    ------------    ------------
     Net cash used in investing activities       (14,163,000)     (6,228,000)        (17,000)     (6,849,000)


Cash flows from financing activities

Net proceeds from notes payable                 $  2,045,000    $    300,000    $    500,000    $  1,650,000
Restricted cash                                     (756,000)           --              --              --
Payable for CAP-G shares                                --          (744,000)           --              --
Repayment of note payable                         (1,095,000)       (450,000)       (200,000)       (750,000)
Proceeds from warrant exercise                        20,000       3,309,000            --           316,000
Net proceeds from redeemable preferred stock
   issuance                                             --         5,000,000            --              --
Net proceeds from private placement               12,450,000       2,300,000            --         6,907,000
                                                ------------    ------------    ------------    ------------
Net cash provided by financing activities         12,664,000       9,715,000         300,000       8,123,000
                                                ------------    ------------    ------------    ------------

Net increase in cash and cash equivalents         (3,302,000)      2,503,000         138,000         281,000
Cash and cash equivalents at beginning
    of period                                      3,423,000         920,000         782,000         501,000
                                                ------------    ------------    ------------    ------------
Cash and cash equivalents at end of period      $    121,000    $  3,423,000    $    920,000    $    782,000
                                                ============    ============    ============    ============


                                                 38

<PAGE>


                                             CHAPARRAL RESOURCES, INC.

                                 CONSOLIDATED STATEMENTS OF CASHFLOWS (CONTINUED)






Supplemental cash flow disclosure

     Interest paid                                         $   58,000       $   53,000       $   17,000       $   36,000

Supplemental schedule of noncash
Investing and financing activities

   Common stock issued for acquisition
       of CAP-G                                            $     --         $1,000,000       $     --         $1,833,000
   Accounts payable--CAP-G shares                                --               --               --            744,000
   Discount recognized for note issued
    with detachable stock warrants                            146,000           74,250           93,750          290,000
   Warrants issued for common stock in
       conjunction with subscription and issuance
       of preferred stock                                        --          2,270,000             --               --
   Common stock issued for accrued
       compensation                                              --            175,000             --               --

   Common stock issued upon:
   Conversion of debentures                                      --          1,500,000             --            264,000
   Conversion of accrued interest                                --             50,000             --               --




See accompanying notes.



                                                           39
</TABLE>

<PAGE>
<TABLE>
<CAPTION>


                                                     CHAPARRAL RESOURCES, INC.

                                     CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY




                                          Common Stock         Capital in      Stock        Unearned
                                     ---------------------   Excess of Par  Subscription   Restricted     Accumulated
                                      Shares       Amount         Value      Receivable   Stock Awards     Deficit         Total
                                     ---------------------------------------------------------------------------------------------

<S>                                  <C>          <C>          <C>            <C>         <C>             <C>            <C>
Balance at November 30, 1995         20,484,192   2,048,000    12,577,000        --             --       (9,705,000)     4,920,000
Warrants exercised for
    capital stock                       857,325      86,000       230,000        --             --             --          316,000
Conversion of debentures for
   capital stock                        600,000      60,000       204,000        --             --             --          264,000
Investment in affiliate               1,585,000     159,000     1,674,000        --             --             --        1,833,000
Capital stock issued in
   private placement                 14,000,000   1,400,000     5,507,000        --             --             --        6,907,000
Debt issuance costs-stock
   warrants issued                         --          --         290,000        --             --             --          290,000
Net loss                                   --          --            --          --             --       (2,416,000)    (2,416,000)
                                     ---------------------------------------------------------------------------------------------
Balance at November 30, 1996         37,526,517   3,753,000    20,482,000        --             --      (12,121,000)    12,114,000
Warrants exercised for capital
  stock                               5,648,077     564,000     2,745,000        --             --             --        3,309,000
Conversion of debentures for
   capital stock                      2,169,732     216,000     1,333,000        --             --             --        1,549,000
Capital stock issued for services        87,669       9,000        69,000        --             --             --           78,000
Stock options issued for services          --          --         227,000        --         (109,000)          --          118,000
Capital stock issued for accrued
    compensation                        350,000      35,000       140,000        --             --             --          175,000
Capital stock issued for
  investment in affiliate               400,000      40,000       960,000        --             --             --        1,000,000
Capital stock issued in private
   placement                          3,538,461     354,000     1,946,000        --             --             --        2,300,000
Debt issuance costs--stock
  warrants issued                          --          --         168,000        --             --             --          168,000
Preferred stock issuance and
    related common stock warrants          --          --       2,270,000  (1,770,000)          --             --          500,000
Net loss                                   --          --            --          --             --       (2,733,000)    (2,733,000)
                                     ---------------------------------------------------------------------------------------------
Balance at December 31, 1997         49,720,456   4,971,000    30,340,000  (1,770,000)      (109,000)   (14,854,000)    18,578,000
Warrants exercised for capital
  stock                                  80,000       8,000        12,000        --             --             --           20,000
Conversion of debentures for
   capital stock                           --          --            --          --             --             --             --
Capital stock issued for services       245,000      25,000       620,000        --          (45,000)          --          600,000
Stock options issued for service           --          --          34,000        --          (34,000)          --             --
Stock options expired                      --          --         (19,000)       --           17,000           --           (2,000)
Amortization of restricted stock
   awards                                  --          --            --          --          115,000           --          115,000
Capital stock issued in private
   placement                          8,333,334     833,000    11,617,000        --             --             --       12,450,000
Legal Settlement
   warrants issued                         --          --          34,000        --             --             --           34,000
Debt issuance costs--stock
  warrants issued                          --          --         400,000        --             --             --          400,000
Preferred stock issuance and
    related common stock warrants          --          --      (1,264,000)  1,264,000           --             --             --
Cumulative dividend Series A
    Redeemable Preferred Stock             --          --            --          --             --         (250,000)      (250,000)
Discount accretion on redeemable
   preferred stock                         --          --            --          --             --         (100,000)      (100,000)
Net loss                                   --          --            --          --             --       (4,266,000)    (4,266,000)
                                     ---------------------------------------------------------------------------------------------
Balance at December 31, 1998         58,378,790   5,837,000    41,774,000    (506,000)       (56,000)   (19,470,000)    27,579,000
                                     =============================================================================================


See accompanying notes.


                                                         40
</TABLE>

<PAGE>

                           CHAPARRAL RESOURCES, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



1. Summary of Significant Accounting Policies and Organization

Organization, Principles of Consolidation, and Basis of Presentation

Chaparral  Resources,  Inc. was incorporated in the state of Colorado on January
13, 1972,  principally to engage in the exploration,  development and production
of oil and gas  properties.  During  1998,  Chaparral  Resources,  Inc.  focused
substantially  all of its  efforts on the  exploration  and  development  of the
Karakuduk Field, located in the central Asian Republic of Kazakhstan.

The  consolidated   financial  statements  include  the  accounts  of  Chaparral
Resources,  Inc.  and its  100%  owned  subsidiaries,  Central  Asian  Petroleum
(Guernsey) Limited ("CAP-G"), Road Runner Services Company ("RRSC"), and Central
Asian Petroleum, Inc. (Delaware). Hereinafter, Chaparral Resources, Inc. and its
wholly-owned  subsidiaries  are collectively  referred to as "the Company".  All
significant intercompany transactions have been eliminated.

In  order  to  unite  the  reporting  period  of the  Company  with  that of its
subsidiaries,  the fiscal  year of the  Company  was  changed  to a December  31
year-end from the previous November 30 year-end.  This change took effect on May
29, 1997. As a result of this change,  a statement of operations  and cash flows
for the year ended  November 30, 1996 and the month ended December 31, 1996, are
presented.

In 1995, the Company's ownership in CAP-G increased from 25% to 45%. The Company
acquired  an  additional  45%  interest in CAP-G in 1996.  In 1997,  the Company
concluded  the  acquisition  of the  remaining  10% minority  interest in CAP-G,
increasing its total ownership to 100%.

CAP-G owns a 50% interest in Karakuduk-Munay,  Inc.. ("KKM"), a Kazakhstan joint
stock  company,  which is a  participant  in an agreement  for the  exploration,
development  and  production of oil in the Karakuduk  Field.  The Company shares
control of KKM through  participation on the Board and accordingly  accounts for
its investment using the equity method.

On February 1, 1997, KKM was informed that a Kazakhstan  Presidential  Edict had
been issued announcing the liquidation of Munaygaz, the government-owned company
which held a 20% interest in KKM. As a result of this  action,  KKM was required
to re-register as required by Kazakh regulations.  KKM was re-registered on July
24, 1997,  with the government of Kazakhstan.  The Company  believes that KKM is
now in  compliance  with all laws and  regulations  related to the  registration
requirements  relating to Kazakhstan legal entities.  The  re-registered  KKM is
owned jointly by CAP-G (50%),  KazakhOil  (40%) and a private  Kazakhstan  joint
stock company (10%).  KazakhOil,  the national  petroleum company of Kazakhstan,
represents the majority of the ownership  interest in KKM held by the Kazakhstan
government.

Cash and Cash Equivalents

Cash  equivalents  are defined as highly liquid  investments  purchased  with an
original maturity of three months or less.

Oil and Gas Property and Equipment

The Company and KKM use the full cost method of accounting for their oil and gas
properties.  All  costs  incurred  directly  associated  with  the  acquisition,
exploration  and  development of oil and gas properties are  capitalized in cost
pools for each country in which the Company  operates.  The  limitation  on such
capitalized  costs is  determined  in  accordance  with rules  specified  by the
Securities  and Exchange  Commission.  Capitalized  costs are depleted using the
units of production method based on proven reserves.

                                       41



<PAGE>


                           CHAPARRAL RESOURCES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


1. Summary of Significant Accounting Policies and Organization (Continued)

Sales of Proved Oil and Gas Property

Sales of oil and gas properties,  whether or not being amortized currently,  are
accounted  for as  adjustments  of  capitalized  costs,  with  no  gain  or loss
recognized unless such adjustments  significantly alter the relationship between
capitalized  costs and proved reserves of oil and gas. A significant  alteration
would not  ordinarily be expected to occur for sales  involving less than 25% of
the reserve  quantities of a given cost center. If gain or loss is recognized on
such a sale,  total  capitalized  costs  within the cost  center  are  allocated
between  the  reserves  sold and  reserves  retained  on the same  basis used to
compute amortization,  unless there are substantial economic differences between
the properties  sold and those  retained,  in which case  capitalized  costs are
allocated on the basis of the relative fair values of the properties.

Oil and Gas Properties Not Subject to Depletion

Costs  associated  with  acquisition  and evaluation of unproved  properties are
excluded  from the  amortization  computation  until it is  determined if proved
reserves can be attributed to the properties.  These unevaluated  properties are
assessed  annually for possible  impairment and the amount impaired,  if any, is
added to the  amortization  base.  Costs of exploratory dry holes and geological
and  geophysical  costs  not  directly  associated  with  specific   unevaluated
properties are added to the amortization base as incurred.

Revenue Recognition

Revenues and their  related  costs are  recognized  upon  delivery of commercial
quantities of oil and gas  production,  in accordance with the accrual method of
accounting.  Losses, if any, are provided for in the period in which the loss is
determined to occur.

Depreciation of Other Property and Equipment

Furniture, fixtures and equipment are recorded at cost and are depreciated using
the straight-line  method over estimated useful lives, which range from three to
ten years.

Income Taxes

The Company  accounts  for income  taxes under the  provisions  of  Statement of
Financial  Accounting  Standards ("SFAS") No. 109,  Accounting for Income Taxes,
which require that taxes be provided on the liability  method based upon the tax
rate at which  items of income and  expense  are  expected  to be settled in the
Company's tax return.

Loss Per Common Share

Basic loss per common share is calculated by dividing net loss,  after deducting
preferred  stock  dividends,  by the  aggregate of the weighted  average  shares
outstanding  during the period.  Diluted  loss per common  share  considers  the
dilutive  effect of the  average  number of common  stock  equivalents  that are
outstanding during the period.


                                       42
<PAGE>


                            CHAPARRAL RESOURCES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)





1. Summary of Significant Accounting Policies and Organization (Continued)

Loss Per Common Share (Continued)

Diluted loss per share is not presented  because the exercise of 3,483,500 stock
options and 4,554,500 warrants are antidilutive.  In addition, the effect of the
conversion of the convertible  preferred  stock into 2,335,178  shares of common
stock is also antidilutive.

The following  table sets forth the computation of the numerator for purposes of
determining basic and diluted loss per share.
<TABLE>
<CAPTION>


                                                     Year ended         Year ended         Month Ended        Year Ended
                                                     December 31        December 31        December 31        November 30
                                                       1998                1997               1996              1996
                                                    --------------------------------------------------------------------
<S>                                                 <C>                <C>                <C>                <C>
Loss before extraordinary item                      ($4,030,000)       ($2,389,000)       ($  130,000)       ($2,179,000)
Cumulative annual dividend
    Series A Redeemable Preferred Stock                (250,000)              --                 --                 --
Discount accretion
   Series A Redeemable Preferred Stock                 (100,000)              --                 --                 --
                                                    --------------------------------------------------------------------
Numerator for basic and diluted loss per share      ($4,380,000)       ($2,389,000)       ($  130,000)       ($2,179,000)
                                                    ===========        ===========        ===========        ===========

</TABLE>

Stock Based Compensation

The  Company   follows  the  method  of  accounting  for  employee  stock  based
compensation  plans  prescribed by APB No. 25, which is allowed by SFAS No. 123,
Accounting  for  Stock-Based  Compensation.  In accordance  with APB No. 25, the
Company has not recognized  compensation expense for stock options in situations
where  the  exercise  price  of the  options  equals  the  market  price  of the
underlying stock on the date of grant, otherwise known as the measurement date.

New Accounting Standards

In February 1998, the Financial  Accounting Standards Board ("FASB") issued SFAS
No.  132,  Employers'   Disclosures  about  Pensions  and  Other  Postretirement
Benefits,   which  revises  employers'   disclosures  about  pension  and  other
postretirement  benefit plans. It does not change the measurement or recognition
of those plans. The Company adopted SFAS 132 during 1998. The impact of SFAS 132
on the Company's  reporting of pension and other post retirement benefits is not
material.

In  June  1998,  the  FASB  issued  SFAS  No.  133,  Accounting  for  Derivative
Instruments and Hedging  Activities.  This standard provides a comprehensive and
consistent  standard for the  recognition  and  measurement of  derivatives  and
hedging  activities.  This statement is effective for years beginning after June
15, 1999.  As of December  31,  1998,  the Company has not adopted SFAS 133. The
Company is evaluating  SFAS 133 and intends to adopt the statement no later than
January 1, 2000. The impact of SFAS 133 on the Company's  financial position and
results of operations is not expected to be material.

Fair Value of Financial Instruments

All of the Company's financial instruments, including cash and cash equivalents,
trade receivables,  notes receivable,  and notes payable, have fair values which
approximate  their  recorded  values as they are either  short-term in nature or
carry interest rates which approximate market rates.


                                       43

<PAGE>


                            CHAPARRAL RESOURCES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)





1. Summary of Significant Accounting Policies and Organization (Continued)

Use of Estimates

The preparation of financial  statements in conformity  with generally  accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities,  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.

Risks and Uncertainties

The ability of KKM to realize the  carrying  value of its assets is dependent on
being able to extract,  transport and market  hydrocarbons.  Currently,  exports
from the  Republic of  Kazakhstan  are  restricted  since they are  dependent on
limited  transport  routes and, in  particular,  access to the Russian  pipeline
system.  Domestic  markets in the  Republic of  Kazakhstan  might not  currently
permit world market prices to be obtained.  Management believes,  however,  that
over the life of the project, transportation restrictions will be alleviated and
prices will be achievable for  hydrocarbons  extracted to allow full recovery of
the carrying value of its assets.

2. Going Concern

The Company's financial statements have been presented on the basis that it is a
going concern, which contemplates the realization of assets and the satisfaction
of  liabilities  in the normal  course of  business.  As of December  31,  1998,
substantially all of the Company's assets are invested in the development of the
Karakuduk Field, an oil field in the central Asian Republic of Kazakhstan, which
will require significant additional funding.

The Company has incurred recurring  operating losses and has no operating assets
presently  generating cash to fund its operating and capital  requirements.  The
Company's  current  cash  reserves  and cash  flow from  operations  will not be
sufficient to meet the expenditure requirements required of KKM by its operating
license through 1999.  Should the Company not meet its expenditure  requirements
under the license agreement to develop the Karakuduk Field, the Company's rights
under the agreement can be terminated  (see Note 16). The Company  believes that
additional  financing  will be available;  however,  there is no assurance  that
additional financing will be available, or if available, that it is timely or on
terms  favorable to the Company.  The Company's  continued  existence as a going
concern is dependent  upon the success of future KKM  operations,  which are, in
the near term,  dependent on the  successful  financing and  development  of the
Karakuduk Field, of which there is no assurance.

These conditions raise substantial doubt about the Company's ability to continue
as a going concern.  The financial  statements do not include any adjustments to
reflect the possible future effects on the  recoverability and classification of
assets or the amounts and classification of liabilities that may result from the
outcome of this uncertainty.

3. Restricted Cash

As of December 31, 1998,  the Company held  $756,000 cash on hand, as collateral
for loans made by a financial institution to KKM for the acquisition of tangible
equipment used in the Karakuduk Field.


                                       44
<PAGE>


                            CHAPARRAL RESOURCES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)





4. Notes Receivable

As of  December  31,  1998,  the  Company  has an  outstanding  $1,009,000  note
receivable,  dated  September 10, 1998, from a third-party  drilling  contractor
(Contractor). The note consists of $1,000,000 in cash advances from the Company,
plus accrued interest, used by the Contractor to ready a drilling rig for use in
Kazakhstan.

Under the original terms of the note, the principal  balance was to be repaid in
twelve  monthly  payments  of  approximately  $84,000,  plus  accrued  interest,
beginning on the date the first payment is made to the Contractor by KKM for use
of the drilling rig.

On March 17,  1999,  the  Company  amended  the terms of the note to extend  the
repayment  period from twelve to twenty four  months,  beginning  with the first
payment to the Contractor for services provided to KKM. The Company will receive
principal  payments of approximately  $42,000 per month,  plus accrued interest,
through February 2001. As of December 31, 1998, the Company recorded $420,000 as
the  current  portion  of note  receivable,  reflecting  management's  estimated
repayment to be received during 1999.

5. Acquisition of CAP-G

As of December 31, 1998, the Company owns 100% of the  outstanding  common stock
of CAP-G. This wholly-owned subsidiary was acquired on a step basis. The Company
acquired  45% of the  outstanding  stock of CAP-G prior to December 1, 1995.  In
January and February 1996, the Company entered into agreements to acquire, for a
total of $5,850,000 cash and 1,785,000 shares of the Company's restricted common
stock, the remaining 55% of the outstanding stock of CAP-G.

The Company consummated the purchase of 25% of the outstanding stock of CAP-G in
April  1996 by  paying  $2,000,000  in cash and  issuing  685,000  shares of the
Company's common stock. The Company acquired an additional 5% of the outstanding
common stock of CAP-G in April 1996 for $250,000 cash.

To acquire an  additional  15% of the  outstanding  common  stock of CAP-G,  the
Company  agreed  to pay  $1,975,000  in cash and  issue  900,000  shares  of the
Company's  common stock.  This purchase was  consummated on March 11, 1996, when
the Company paid  $750,000 in cash and issued  900,000  shares of the  Company's
common stock.  The remaining  cash balance of $1,225,000 for the purchase was to
be paid in four quarterly  equal payments of $306,250  between June 11, 1996 and
March 11,  1997.  The first  payment  of  $306,250  was paid in June 1996 and an
additional  $175,000 was paid in September 1996. The agreement was  subsequently
revised so that the Company  paid  $200,000 in December  1996 and the  remaining
balance of $543,750 in a series of payments in 1997.

Finally, in 1997 the Company exercised an option to acquire the remaining 10% of
the  outstanding  common  stock of CAP-G.  The Company  paid  $1,625,000  (which
includes $800,000 of loans the Company previously made to GAP-G on behalf of the
prior owner of the 10%  interest)  and issued  400,000  shares of common  stock,
which includes an additional 200,000 shares above the original agreed amount.

On September 17, 1997,  the Company  granted an option to an investor  entitling
the investor to acquire 5% of the issued and  outstanding  shares of CAP-G on or
before October 31, 1997. Upon the closing of this  agreement,  the investor paid
the Company $450,000 of the $1.5 million purchase price,  with the remaining due
on or before  September 30, 1997. The option  agreement  expired and the Company
was not  required to return the  deposit.  The Company has recorded the $450,000
deposit  as a  reduction  in the oil  and  gas  properties  and  investments  in
Kazakhstan.

The  acquisition  costs  exceeding the underlying net assets at the time of each
acquisition  of CAP-G  common  stock have been added to Oil and Gas  Investments
reflected on the balance sheet. The equity in losses for 1997 and 1996 have been
recorded at the full 50% interest due to the earlier  agreements  to acquire the
remaining shares in CAP-G and the Company financing 100% of CAP-G's operations.


                                       45
<PAGE>

                           CHAPARRAL RESOURCES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


6. Oil and Gas Investments

All costs  capitalized  related to the Karakuduk license are included in oil and
gas properties not subject to depletion.  Certain license  acquisition costs and
geological and geophysical expenditures incurred by the Company but not rebilled
to KKM have been capitalized.  Certain overhead costs and general administrative
costs have been expensed as incurred by KKM.

Costs capitalized to Oil and Gas Investments consist of:

                                                   December 31,     December 31,
                                                      1998             1997
                                                  -----------------------------

Oil and Gas Investments:
  Investments in KKM common stock                 $    100,000     $    100,000
  Advances to and interest due from KKM             23,380,000        9,820,000
  Acquisition costs                                 10,613,000       10,613,000
  Other capitalizable costs                          1,715,000        1,192,000
                                                  -----------------------------
Total gross oil and gas investments                 35,808,000       21,725,000
  Less: equity losses                               (3,547,000)      (1,803,000)
                                                  -----------------------------
Total oil and gas investment                      $ 32,261,000     $ 19,922,000
                                                  =============================

The condensed financial statements of KKM are as follows:


                                                   December 31,     December 31,
                                                      1998             1997
                                                  ------------------------------
Condensed Balance Sheet
  Current Assets                                  $    730,000     $    796,000
  Non-Current Assets (primarily oil
     and gas properties,
     full cost method)                              19,130,000        7,975,000
  Current Liabilities
    Current Loan Payable to Related Party            3,000,000             --
    Other Current Liabilities                        3,205,000        2,767,000
  Non-Current Liabilities
    Loan Payable to Related Party                   20,380,000        9,820,000
    Other Non-Current Liabilities                      578,000             --
  Common stock                                         200,000          200,000
  Accumulated Deficit                                7,503,000        4,016,000

Condensed Income Statement
  Revenues                                        $       --       $       --
  Cost and Expenses                                  3,488,000        1,665,000
  Net Loss                                        $  3,488,000     $  1,665,000


The Karakuduk  Field is still in a preliminary  stage of development by KKM. The
estimated future  development  expenditures in order to ascertain the quantities
of proved  reserves  attributable to the Karakuduk  Field are  significant.  All
costs  incurred  related  to the  workover  program  have  been  capitalized  as
exploration costs to oil and gas properties not subject to depletion.

While the future  ability of the Company to export  hydrocarbons  and  therefore
realize world market  prices is uncertain  under  current  restricted  transport
options in the Republic of Kazakhstan, management believes that over the life of
the project as a whole, future cash flows justify the carrying amount of the oil
and gas  properties.  No  impairment  provision  has  been  reflected  in  these
financial statements.

                                       46

<PAGE>

                           CHAPARRAL RESOURCES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)



7. Notes Payable

On December 3, 1998,  the Company  restructured a $975,000 loan that the Company
borrowed on July 3, 1998, from the Chase Bank of Texas ("Chase").  Under the new
terms,  the note accrues  interest at an adjustable prime rate, as determined by
Chase.  As of  December  31,  1998 the stated  prime  rate was 7.75%.  Principal
payments in the amount of $250,000,  plus accrued  interest,  are due quarterly,
beginning on February 28, 1999.

The $975,000 loan is fully  guaranteed  with a stand-by letter of credit from an
investor in the Company.  In return for issuing the loan guarantee,  the Company
paid the  guarantor  $10,000 plus  related  costs,  issued  warrants to purchase
20,000  shares of the  Company's  common  stock  (See Note 8), and  granted  the
guarantor a security  interest in the  Company's  common stock of Central  Asian
Petroleum (Guernsey) ("CAP-G").

In the event of the  Company's  default on the $975,000  note,  the  guarantor's
security interest in the Company's common stock in CAP-G cannot be perfected for
at least 30 days after  notification  of such default.  In the event of default,
the Company may make full payment of any  outstanding  principal and interest on
the note plus any  additional  charges  incurred by the  guarantor to completely
remove any security interest held by the guarantor.

8. Common Stock

1989 Stock Warrant Plan

During  1989,  the Board of  Directors  approved  a stock  warrant  plan for key
employees and directors.  The Company  reserved  1,175,000  shares of its common
stock for issuance  under the plan.  The warrants  must be granted and exercised
within a 10-year period ending April 30, 1999. Immediately following approval of
the plan by the Board of Directors,  warrants for 1,175,000  shares were granted
with an exercise  price of $.28 per share.  Warrants for 100,000,  225,000,  and
100,000 shares were exercised for values of $28,000, $63,000, and $28,000 during
1997, 1996, and 1995, respectively.

1997 Incentive Stock Plan

On July 17, 1997, the  shareholders  of the Company  approved the 1997 Incentive
Stock Plan  pursuant to which up to  1,000,000  shares of the  Company's  common
stock may be granted to  directors  and  employees  of, or  consultants  to, the
Company.  On June 26, 1998, the  shareholders  of the Company  repealed the 1997
Incentive  Stock Plan and approved the 1998  Incentive  and  Nonstatutory  Stock
Option Plan, described below. No options were granted under this plan.

1997 Non-employee Directors' Stock Option Plan

On July 17, 1997, the  shareholders  approved the 1997  Non-employee  Directors'
Stock Option Plan,  which  authorized  granting 25,000 options  annually to each
non-employee  director  in office or  elected to the Board of  Directors  of the
Company, as of the date of the annual meeting of the Company's shareholders.  On
June 26, 1998, the  shareholders of the Company  repealed the 1997  Non-employee
Directors'  Stock Option Plan and approved the 1998  Incentive and  Nonstatutory
Stock Option Plan, described below. As of June 26, 1998, the date of termination
of the plan,  options for 200,000 shares with an exercise price of $.83 had been
issued to non-employee directors.

                                       47

<PAGE>


                           CHAPARRAL RESOURCES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


8. Common Stock (Continued)

1998 Incentive and Nonstatutory Stock Option Plan

On June 26, 1998, the shareholders  approved the 1998 Incentive and Nonstatutory
Stock Option Plan (the  "Plan"),  pursuant to which up to  3,000,000  options to
acquire  the  Company's  common  stock may be  granted to  officers,  directors,
employees, or consultants of the Company and its subsidiaries. The stock options
granted under the Plan may be either  incentive  stock  options or  nonstatutory
stock options.  The Plan has an effective  term of ten years,  commencing on May
20, 1998. The Company did not grant any options under the Plan during 1998.

Non-Qualified Stock Options

During 1997, the Company granted five year non-qualified options, generally with
vesting  periods of one year,  to purchase  2,885,000  restricted  shares of the
Company's common stock to various directors of, and consultants to, the Company.
Options  relating to 1,442,500  shares have an exercise  price of $.75 per share
and options  relating to  1,442,500  shares have an exercise  price of $1.50 per
share.

The Company issued various five-year,  non-qualified stock options to employees,
consultants  and  directors  of the Company  during  1997.  The Company  granted
options to purchase 126,000 shares of the Company's common stock, at an exercise
price of $.75. The Company granted options to purchase another 131,000 shares of
the Company's  common stock, at an exercise price of $1.50 a share.  The Company
has  recorded  the fair  value of these  stock  options  at the date of grant at
$227,000.

During 1998, the Company  granted  five-year  non-qualified  options to purchase
297,500  shares of the  Company's  common  stock to  various  employees  of, and
consultants to, the Company at various  exercise prices ranging between $.72 and
$2.43  per  share.  The  Company  recorded  the  stock  options  granted  to the
consultants at their fair value of $34,000 on the date of grant.

During 1998,  156,000 options to purchase the Company's  common stock granted to
various  employees of, and consultants to, the Company expired.  The options had
exercise prices ranging between $.75 and $2.43 per share.

Common Stock Offerings and Common Stock Warrant Issuances

During 1993,  the Company  sold a total of 2,685,750  shares of common stock and
issued  1,342,875  warrants to purchase  common stock with an exercise  price of
$.40. An additional 105,540 warrants to acquire shares of common stock were paid
as commission.  Prior to 1995, 650,625 of these warrants were exercised.  During
1995,  165,375 of these  warrants  were  exercised for the purchase of shares of
common  stock.  The exercise  price was $.40 per share,  for a total of $66,000.
During 1996,  632,325 of these  warrants were  exercised at an exercise price of
$.40 per share, for a total of $252,930.  All warrants issued in connection with
the 1993 private placement have been exercised.

During  December  1995 and January 1996,  the Company  borrowed  $1,050,000.  In
connection to the loans,  the Company issued 780,000 warrants to purchase common
stock at an exercise price of $0.25. During 1998, 80,000 warrants were exercised
at a price of  $0.25  for a total of  $20,000.  On  October  30,  1998,  200,000
warrants to purchase the  Company's  common stock at an exercise  price of $0.25
expired.

During  1996,  the Company sold  14,000,000  shares of common stock in a private
placement  at a price  of  $.50  per  share.  In  connection  with  the  private
placement,  the Company  issued  warrants to  purchase  1,022,000  shares of the
Company's common stock for a total of $10.00 to the sales agent as a commission.

                                       48

<PAGE>


                           CHAPARRAL RESOURCES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


8. Common Stock (Continued)

In April 1996,  private investors  converted  promissory notes totaling $300,000
into 600,000 shares of the Company's  common stock at a conversion price of $.50
per share.

During  1997,  the Company  entered  into an  agreement  to allow the Company to
acquire M-D, International Petroleum ("MDI"), a private company. Accordingly, on
January 8, 1997 the  Company  agreed to issue  180,000  shares of the  Company's
common stock having a value of $90,000 to the potential  joint venture  partner.
Simultaneously,  the  principal  stockholders  of MDI put 180,000  shares of the
Company's  common  stock into  escrow.  These  shares  would be  returned to the
Company if the Company did not acquire MDI by July 7, 1997. Under the agreement,
the Company was to acquire a 5% joint venture  interest for the  development  of
certain  natural  gas fields in  Uzbekistan.  The  agreement  of the  Company to
acquire MDI was contingent upon the potential joint venture partner successfully
obtaining rights to develop the natural gas fields in Uzbekistan.  As of July 7,
1997,  the agreement  with  Uzbekistan to develop the natural gas fields had not
been  obtained.  Consequently,  the  agreement by the Company to acquire MDI was
nullified and the escrowed shares were returned to the Company and retired.

During February 1997, the Company  entered into a severance  agreement with Paul
V.  Hoovler,  a former  Chief  Executive  Officer and  President of the Company,
pursuant to which Mr. Hoovler  received  warrants to purchase  100,000 shares of
the Company's  common stock at an exercise  price of $.85 per share and warrants
to purchase 100,000 shares of the Company's common stock at an exercise price of
$1.25 per share.

During 1997, the Company sold 3,076,923 shares of the Company's common stock for
$.65 per share for a total of  $2,000,000 to a private  investor.  In connection
with the  transaction,  the  Company  also  issued a warrant to the  investor to
purchase up to an additional  4,615,385 shares of the Company's common stock for
$3,000,000 or $.65 per share. The warrant was to expire on December 31, 1997. In
October and November 1997, the private  investor  exercised  warrants to acquire
4,615,385 shares of the Company's common stock. The same party exercised another
warrant for 125,000  shares of the  Company's  common  stock  exercisable  at an
exercise price of $0.25 per share. In April 1997, a private investor converted a
$500,000  promissory note (plus $2,000 of accrued  interest) that had previously
been issued by the Company into 772,991 shares of the Company's  common stock at
a conversion price of $.65 per share.

On October 28, 1997, 423,076 shares of the Company's common stock were issued to
a private  investor by way of a  "cashless"  exercise of a warrant as allowed by
the warrant.  This warrant was  originally  exercisable  for 500,000 shares at a
conversion price of $.25 per share.

In November  1997, a private  investor  converted a $1,000,000  promissory  note
(plus  $48,000 of  accrued  interest)  that  previously  had been  issued by the
Company  into  1,396,741  shares of the  Company's  common stock at a conversion
price of $.75 per share.

During 1997, the Company issued 87,669 shares of the Company's common stock to a
consultant in lieu of $78,000 of accrued fees that had not been paid.

As  further  described  in Note 13, The  Company  issued  350,000  shares of the
Company's  restricted common stock to Mr. Howard Karren,  former Chairman of the
Board of Directors of the  Company,  as payment of $175,000 for services  during
1996. The Company recorded accrued  compensation of $175,000 in 1996, and issued
the common stock in 1997.

In December 1997,  the Company  exercised an option to acquire the remaining 10%
of the outstanding shares of CAP-G (Note 3). As part of the  consideration,  the
Company issued 400,000 shares valued at $1,000,000.

During 1997, the Company sold 461,538  shares of the Company's  common stock for
$.65 per share for a total of $300,000 to a private investor. In connection with
the transaction, the Company also issued warrants to the investor to purchase up
to an additional  461,538  shares of the Company's  common stock for $300,000 or
$.65 per share.  The  private  investor  exercised  a portion of the  warrant on
December  31,  1997,  and  received a total of 384,616  shares of the  Company's
common stock. The remaining warrants expired on the same day.


                                       49

<PAGE>

                           CHAPARRAL RESOURCES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


8. Common Stock (Continued)

On January 23, 1998, the Company,  granted 90,000 shares of the Company's common
stock  to the  directors  of the  Company  and  granted  185,000  shares  of the
Company's common stock to various employees of, and consultants to, the Company,
of which  30,000  shares  will vest  with  respect  to 10,000  shares on each of
January 30, 1999, 2000, and 2001. As a result of these transactions, the Company
recognized $600,000 in 1998 compensation expense. An additional $45,000 relating
to the non-vested  stock grants will be amortized over the vesting period of the
grants.

On April 3, 1998,  the Company sold  1,250,000  shares of the  Company's  common
stock for $2.00 per  share  for at total of  $2,500,000  to a private  investor.
Allen & Company,  Incorporated  acted as placement  agent in connection with the
sale of the  1,250,000  shares.  As a result,  Allen &  Company,  Incorporated's
warrants to purchase shares of the Company's common stock,  originally issued as
a commission in connection with the Redeemable  Preferred Stock sale on November
24, 1997 (See Note 10), became exercisable for an additional 100,000 shares. The
warrants to purchase the additional 100,000 shares of the Company's common stock
are  exercisable  through  November 25, 2002, at an exercise  price of $0.01 per
share.

In connection  with the $1,000,000 loan referred to in Note 12, on June 4, 1998,
the Company issued warrants to purchase 1,000,000 shares of the Company's common
stock to two related  parties,  one of which is a director of the  Company.  The
warrants are  exercisable  through  November 25, 2002,  at an exercise  price of
$3.50 per share.  The Company  recorded  the fair market  value of the  warrants
($367,000) as a discount of notes payable,  amortizable as interest expense over
the life of the loan.  The fair market value of the warrants was estimated as of
June 4, 1998,  using the  Black-Scholes  option pricing model with the following
weighted average assumptions:  risk free interest rates of 5.53%, dividend yield
of 0%,  volatility  factors of the expected market price of the Company's common
stock of .593,  and a weighted  average life  expectancy  of the warrants of 4.5
years.

On July 3, 1998, as discussed in Note 7, the Company issued warrants to purchase
20,000  shares of the  Company's  common stock at an exercise  price of $.01 per
share. The Company recorded the fair market value of the warrants (approximately
$32,000)  plus the  related  loan costs,  as a discount of notes  payable and is
being  amortized as additional  interest  expense over the life of the loan. The
fair market value of the warrants was determined using the Black-Scholes  option
pricing  model,  with the  following  weighted  average  assumptions:  risk free
interest rate 5.53%,  dividend yield of 0%, volatility  factors of the Company's
common stock of .644, and a weighted  average life expectancy of the warrants of
5 years.

On July 28 and July 29, 1998, the Company sold 6,666,667 shares of the Company's
common  stock  for  $1.50  per  share  for at total of  $10,000,000  to  certain
investors.  Issuance  cost  incurred  were  approximately  $50,000  and has been
recorded as a reduction to the proceeds received from the sale. Allen & Company,
Incorporated  acted  as  placement  agent  in  connection  with  the sale of the
6,666,667  shares.  As a result,  Allen & Company,  Incorporated's  warrants  to
purchase  900,000  shares of the Company's  common stock,  originally  issued as
commission in connection  with the Redeemable  Preferred  Stock sale on November
24, 1997, became  exercisable for an additional  400,000 shares of the Company's
common stock. The 400,000 warrants are exercisable through November 25, 2002, at
an exercise price of $0.01 per share. As of December 31, 1998,  200,000 warrants
held by Allen & Company were  unexercisable  pending the  performance  of future
services.

Due to the fact,  the sales price of the  6,666,667  shares was below a price of
$2.00 per share, the Company was required to issue an additional  416,667 shares
to the investor who purchased 1,250,000 shares of the Company's common stock for
$2,500,000 in April 1998 in order to satisfy certain price protection agreements
the Company has with such investor.

On October 30, 1998, the Company issued  warrants to purchase  200,000 shares of
the Company's  common stock at an exercise price of $1.00,  exercisable  through
January 02, 1999,  to settle the lawsuit filed against the Company by Heartland,
Inc. of Wichita and Collins & McIlhenny,  Inc. on November 14, 1997. The Company
recorded legal settlement expense of $34,000,  equal to the fair market value of
the  warrants  issued on the date of grant.  On January  03,  1999,  the 200,000
warrants expired. See Note 9.

                                       50

<PAGE>



                           CHAPARRAL RESOURCES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


8. Common Stock (Continued)

SFAS 123 Disclosure

SFAS 123 requires that pro forma  information  regarding net income and earnings
per share be determined  as if the Company had accounted for its employee  stock
option  under the fair value  method as defined in that  Statement  for  options
granted or modified  after  December 31, 1994.  SFAS 123 requires  disclosure of
option plans for the previous three years, but since 1997 was the first year for
stock option issuances to meet the new requirement, weighted average assumptions
are calculated only for 1997 and 1998. The fair value for applicable options was
estimated at the date of grant using the Black-Scholes option pricing model with
the following weighted average assumptions for 1997 and 1998: risk free interest
rates of 5.53%;  dividend yield of 0%; volatility factors of the expected market
price of the  Company's  common  stock  between  0.528 and 1.07;  and a weighted
average life expectancy of the options of 4.9 years

The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded  options which have no vesting  restrictions  and are fully
transferable.  In addition,  option valuation models require the input of highly
subjective  assumptions  including the expected stock price volatility.  Because
the  Company's  employee  stock  options  have   characteristics   significantly
different from those of traded  options,  and because  changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion,  the  existing  models do not  necessarily  provide a  reliable  single
measure of the fair value of its employee stock options.

For purposes of pro forma  disclosures,  the estimated fair value of the options
is amortized to expense over the option's  vesting  period.  The  Company's  pro
forma information follows:
                                       Year ended     Year ended    Month ended
                                       December 31,   December 31,  December 31,
                                          1998            1997          1996
                                       ----------------------------------------

Net Loss under APB 25                  (4,616,000)    (2,603,000)      (130,000)

Effect of FASB 123                       (190,000)      (525,000)          --
                                       -----------------------------------------

Pro forma Net Loss                     (4,806,000)    (3,128,000)      (130,000)
                                       ========================================

Pro forma Basic and Diluted
Earnings per Share                     $    (0.09)    $    (0.08)    $     --



                                       51

<PAGE>


                            CHAPARRAL RESOURCES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)





8. Common Stock (Continued)

A summary of the Company's stock option activity and related information for the
periods ended follows:

<TABLE>
<CAPTION>


                                                 Shares                  Weighted            Weighted
                                                  Under              Average Exercise         Average
                                                 Option                   Price             Fair Value
                                               -------------------------------------------------------
<S>                                            <C>                      <C>                 <C>
Unexercised options outstanding -
      November 30, 1996                             --                       --
Options Granted                                3,342,000                $   1.11            $   0.59
Options Exercised                                   --                       --
Options Cancelled                                   --                       --
                                               -----------------------------------------------------
Unexercised options outstanding -
      December 31, 1997                        3,342,000                $   1.11
Options Granted                                  297,500                $   1.63            $   1.09
Options Exercised                                   --                       --
Options Cancelled                               (156,000)               $   1.54
                                               -----------------------------------------------------
Unexercised options outstanding -
      December 31, 1998                        3,483,500                $   1.13

Price range $0.72-$1.00
      (weighted-average contractual
       life of 4.2 years)                      1,817,000                $   0.76
Price range $1.34-$2.43
      (weighted-average contractual
       life of 3.7 years)                      1,666,500                $   1.53

Exercisable options
      November 30, 1996                             --                      --
      December 31, 1997                          200,000                $   0.83
      December 31, 1998                        3,297,000                $   1.11




                                       52
</TABLE>

<PAGE>


                            CHAPARRAL RESOURCES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)




8. Common Stock (Continued)

The following table  summarizes all common stock purchase  warrant  activity for
the year ended December 31, 1998:
<TABLE>
<CAPTION>
                                           Number of                     Exercise
                                            Stock                         Price
                                           Warrants                       Range
                                          --------------------------------------------

<S>                                       <C>                     <C>            <C>
Outstanding, November 30, 1995            2,407,325               $       0.25 - $0.40
Granted                                   1,439,500               $    0.00001 - $0.40
Exercised                                  (857,325)              $       0.25 - $0.40
                                          --------------------------------------------
Outstanding, November 30, 1996            2,989,500               $    0.00001 - $0.28
Granted                                   6,426,923               $       0.01 - $1.25
Exercised                                (5,648,077)              $       0.25 - $0.65
Expired                                    (153,846)              $       0.25 - $0.65
                                          --------------------------------------------
Outstanding, December 31, 1997            3,614,500               $    0.00001 - $1.25
Granted                                   1,220,000               $        .01 - $3.50
Exercised                                   (80,000)              $                .40
Expired                                    (200,000)              $                .25
                                          --------------------------------------------
Outstanding, December 31, 1998            4,554,500               $    0.00001 - $3.50
                                          ============================================
</TABLE>

The following  table  summarizes  the price ranges of all common stock  purchase
warrants outstanding as of December 31, 1998:

               Stock Warrants Outstanding as of December 31, 1998
               --------------------------------------------------
                   Number of Warrants           Exercise Price
                   -------------------------------------------
                      1,000,000                      $3.50
                        200,000                      $1.00
                        100,000                      $0.85
                        100,000                      $1.25
                        750,000                      $0.28
                        462,500                      $0.25
                        920,000                      $0.01
                      1,022,000                      $.00001
                      --------------------------------------

                      4,554,500           $0.00001 - $3.50


9. Legal Settlement

On October 30, 1998,  the Company  settled the lawsuit filed against the Company
and others in the District Court of Harris County, Texas, by Heartland,  Inc. of
Wichita and Collins &  McIlhenny,  Inc. on  November  14,  1997,  for a total of
$200,000 and warrants to purchase  200,000 shares of the Company's  common stock
at an exercise price of $1.00, exercisable through January 02, 1999. The lawsuit
was dismissed with prejudice for all defendants  involved.  The Company believes
the lawsuit was without merit,  but a settlement was reached to avoid  incurring
additional  legal  costs.  The Company  recorded  the fair  market  value of the
warrants using the Black-Scholes  option pricing model. On January 03, 1999, the
200,000 warrants expired.

10. Redeemable Preferred Stock and Related Common Stock Warrants

On  November  24,  1997,  the  Company  entered  into a  Subscription  Agreement
("Agreement")  with an unaffiliated  investor to purchase  225,000 shares of the
Company's designated Series A, B, and C Redeemable Preferred Stock, for $100 per
share. As of December 31, 1997, the investor had purchased  50,000 shares of the
Company's Series A Redeemable Preferred Stock for $5,000,000. In March 1998, the
Company  and  the  investor  mutually  released  each  other  from  any  further
obligations. The Company is not required to issue any additional preferred stock
under the  Agreement  and the investor has no obligation to provide funds to the
Company in exchange for such stock.

                                       53

<PAGE>

                            CHAPARRAL RESOURCES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


10. Redeemable Preferred Stock and Related Common Stock Warrants (Continued)

The Series A Redeemable  Preferred  Stock is convertible  and accrues an annual,
cumulative dividend of $5 per share. The dividends are payable  semi-annually on
May 31 and November 30, as declared by the Company's  Board of Directors.  As of
December  31,  1998,  dividends  in arrears  relating to the Series A Redeemable
Preferred Stock were $250,000.  The Company  increased the carrying value of the
Series A  Redeemable  Preferred  Stock by  $250,000  by  accreting  this  amount
directly to accumulated deficit.

The number of shares of common stock  issuable upon  conversion of each share of
Series A  Redeemable  Preferred  Stock is  determined  by  dividing  $100 by the
conversion price of the preferred stock. As of December 31, 1997, the conversion
price was $2.25 per share. The conversion price is subject to recalculation  if,
and when, the Company issues additional common stock or common stock equivalents
to obtain additional  equity or debt financing.  During 1998, the Company issued
common  stock and  common  stock  warrants  in both  equity  and debt  financing
transactions.  Adjusted  for  these  transactions,  the  conversion  price as of
December 31, 1998 was $2.14 per share  (rounded),  equivalent  to 46.7 shares of
common stock for each share of Series A Redeemable Preferred Stock.

The Series A Redeemable  Preferred Stock has voting privileges  identical to the
Company's  common stock. The total number of votes allowed to the holders of the
Series A Redeemable  Preferred  Stock is equal to the number of shares of common
stock the Series A Redeemable  Preferred  Stock could be  converted  into on the
specific date of record.  As of December 31, 1998, the 50,000 shares of Series A
Redeemable  Preferred  Stock were  convertible  into 2,335,178  shares of common
stock.

The Series A Redeemable Preferred Stock has preferential liquidation rights over
the Company's  common stock.  In the event of  liquidation or dissolution of the
Company,  any assets  available for  distribution to the Company's  shareholders
will first be  distributed  to the holders of the Series A Redeemable  Preferred
Stock up to each redeemable preferred share's liquidation value. The liquidation
value equals $100 per share, plus all unpaid dividends in arrears.

The Series A Redeemable  Preferred  Stock is subject to  mandatory  redemptions,
beginning  on November  30,  2002.  As of December  31,  1998,  the  schedule of
redemptions of the stated value, plus any unpaid dividends, is as follows:

                    Year                           Amount
                    ---------------------------------------
                    1999                                  -
                    2000                                  -
                    2001                                  -
                    2002                         $1,750,000
                    2003 and Thereafter          $3,500,000
                                                 ----------

                    Total                        $5,250,000
                    =======================================

 On November 24, 1997,  the Company  also  designated  Series B and C Redeemable
Preferred Stock,  authorizing  75,000 shares for each class of preferred.  As of
December 31, 1998,  none of the Series B or Series C Redeemable  Preferred Stock
was issued or  outstanding.  The  conversion  price of the  Series B  Redeemable
Preferred  Stock is $3.00  per share and the  conversion  price of the  Series C
Redeemable  Preferred  Stock is $4.25  per  share  and the  conversion  price is
subject to change in a manner similar to the Series A. Except for the conversion
price,  the terms and  conditions  of both the Series B and Series C  Redeemable
Preferred  Stock are  similar  in nature to the  Series A  Redeemable  Preferred
Stock.

                                       54

<PAGE>
                            CHAPARRAL RESOURCES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)



10. Redeemable Preferred Stock and Related Common Stock Warrants (Continued)

Allen & Company,  Incorporated ("Allen & Company"), a significant shareholder of
the Company, acted as placement agent in connection with the Agreement.  Allen &
Company elected to receive its fees in the form of warrants to purchase  900,000
shares  of the  Company's  common  stock  that were all  originally  exercisable
through  November 25, 2002, at an exercise price of $.01 per share. The warrants
were recorded at their fair value. Out of the 900,000 warrants issued to Allen &
Company,  200,000 directly relate to the issuance of 50,000 shares of the Series
A Preferred  Stock.  The 200,000  warrants  were  recorded as issuance  costs of
$500,000,  reducing the $5,000,000  proceeds from Series A Preferred  Stock. The
remaining  700,000   warrants,   discussed  below,  were  recorded  as  a  stock
subscription  receivable.  The basis difference of $500,000 upon issuance of the
Series A Redeemable  Preferred Stock is accreted directly to accumulated deficit
for the period through the redemption date.  During 1998, the Company  increased
the  carrying  value of the Series A Redeemable  Preferred  Stock by $100,000 to
reflect the current year accretion.

In an  agreement  dated  March 31,  1998,  the  Company  agreed to allow Allen &
Company to retain,  subject to certain  performance  criteria,  the  warrants to
purchase   700,000  shares  of  the  Company's   common  stock  related  to  the
subscriptions  not  received  under the  original  terms of the  Agreement.  The
unearned portion of the warrants is presented as a $1,770,000 stock subscription
receivable as of December 31, 1997.

The unearned  warrants to purchase  700,000 shares of the Company's common stock
held by Allen & Company  are  fully  restricted  from  exercise  unless  Allen &
Company assists the Company in raising additional capital on acceptable terms to
the Company's Board of Directors.  For each $25 of additional  capital raised, a
warrant  to  purchase  one  share of common  stock is  deemed  earned by Allen &
Company.

During  1998,  Allen & Company  assisted  the  Company in raising an  additional
$12,500,000 in equity capital. As a result,  500,000 of the 700,000 warrants are
no longer restricted.  As of December 31, 1998, the remaining 200,000 restricted
warrants are presented as a $506,000  stock  subscription  receivable in equity.
If,  before  November 25, 1999,  Allen & Company  fails to assist the Company in
raising an additional $5,000,000 in capital under acceptable terms, the unearned
portion of the warrants will expire.

11. Income Taxes

The following is a summary of the provision for income taxes:
<TABLE>
<CAPTION>
                                                                                      One Month
                                          Year Ended           Year Ended               Ended           Year Ended
                                          December 31,         December 31,          December 31,       November 30,
                                             1998                 1997                  1996                1996
                                         --------------------------------------------------------------------------
<S>                                      <C>                  <C>                  <C>                   <C>
Income taxes (benefit) computed
  at federal statutory rate              $(1,493,000)         $  (910,000)             (46,000)         $  (762,000)
Other                                        121,000              (60,000)              (3,000)             (86,000)
Change in asset valuation
  Allowance                                1,372,000              970,000               49,000              848,000
                                         --------------------------------------------------------------------------
Income taxes                             $      --            $      --            $      --            $      --
                                         ==========================================================================

The components of the Company's deferred tax assets and liabilities under FASB No. 109 are as follows:

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

Deferred tax assets:
  Net operating loss carryforwards       $ 6,807,000             $ 5,812,000             $ 4,958,000
  Full cost pool capitalization                 --                      --                   267,000
  Valuation allowance                     (6,807,000)             (5,812,000)             (5,225,000)
                                         -----------------------------------------------------------

Deferred tax assets                      $      --               $      --               $      --
                                         ===========================================================


                                       55
</TABLE>

<PAGE>

                           CHAPARRAL RESOURCES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)



11. Income Taxes (Continued)

The Company did not record any  deferred  tax assets or income tax  benefits for
net operating loss  carryforwards  as the future  realization of the related tax
benefits is not considered likely as of December 31, 1998.

At December 31, 1998, the Company has tax loss  carryforwards for federal income
tax purposes of  approximately  $11,456,000  available to offset future  taxable
income.  These carryforwards will expire at various times between 1999 and 2013.
During the two years ended December 31, 1998 and 1997, respectively, the Company
has issued a significant number of shares of common stock,  stock warrants,  and
preferred stock in private equity and debt financing  transactions.  The Company
is continuing to negotiate  for  additional  capital,  which,  if obtained,  may
require  additional  shares of stock to be issued.  The changes in ownership may
significantly  restrict  the  use of net  operating  loss  carryforwards  by the
Company.  As of December 31, 1998,  unused  statutory  depletion  carryforwards,
which have unlimited duration, are approximately $567,000. The unused investment
tax credit  carryover  was  approximately  $86,000 as of  December  31, 1998 and
expires  through 2000. The loss  carryforward at December 31, 1998 for financial
reporting  purposes is approximately  $18,167,000,  consisting of $13,212,000 in
domestic  and  $4,954,000  in  foreign  loss  carryforwards,  respectively.  The
difference between the loss carryforward for financial  reporting and income tax
purposes  results  principally  from the difference in book and tax basis of oil
and gas properties and organizational costs related to foreign activities.

12. Related Party Transactions

The Company paid a director $24,000 during 1995 for public relations  consulting
services.

During 1996, the Company paid a basic consulting fee of  approximately  $500,000
to MDI, of which the stockholders  included two former directors and one current
director  of the  Company,  for  assistance  in seeking  means for  meeting  the
Company's funding obligation for the Karakuduk Project. During 1997, the Company
paid an additional  $180,000 to MDI, but  terminated  the agreement in the first
quarter of 1997.

The Company leased office space under a non-cancelable  operating  lease,  which
expired on March 31, 1997 from a related  party.  Beginning  April 1, 1997,  the
Company leased office space at a rate of  approximately  $2,000 per month.  This
lease expired in November 1997, was renewed and then later canceled. In February
1998, the Company signed a new lease with an unrelated  party.  Rent expense was
$37,000 for 1997,  $46,000 for 1996, and $36,000 for 1995. The Company  believes
these rental expenses were at an arms length basis.

On July 31, 1998, the Company retired two outstanding  loans,  totaling $95,000,
from Howard  Karren,  the former  Chairman  and Chief  Executive  Officer of the
Company.  The  Company  borrowed  $75,000 on May 27,  1998 and 20,000 on July 1,
1998. The notes were paid during 1998.

On  August  5,  1998,  the  Company  retired  two  outstanding  loans,  totaling
$1,000,000,  from two related parties: Allen & Company,  Incorporated ($900,000)
and John  McMillian,  the current  Chairman and Chief  Executive  Officer of the
Company ($100,000). The Company borrowed the $1,000,000 on June 3, 1998, subject
to a 7% interest rate. The note was payable in full, plus accrued  interest,  on
the  earlier  of 180 days from the  funding  of the loans or upon the  Company's
receipt of a minimum of $10,000,000 in equity  investments.  In conjunction with
the loans,  the Company  issued  warrants to  purchase  1,000,000  shares of the
Company's  common stock,  at an exercise  price of $3.50 per share.  The Company
recorded the  warrants at their fair market value of $367,000,  as a discount of
notes  payable,  amortizable  over the life of the loans.  On July 27, 1998, the
Company  received   $10,000,000  in  equity  financing  and  repaid  the  loans,
recognizing an extraordinary loss on the extinguishment of debt of approximately
236,000.

                                       56

<PAGE>
                            CHAPARRAL RESOURCES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)



13. Accrued Compensation

On August 19, 1996,  the  Company's  Board of  Directors  awarded a former Chief
Executive  Officer  and a former Vice  President  of the  Company  cash  bonuses
totaling  $210,000 as  recognition  for past and present  services to be used to
exercise  certain  warrants  granted in connection with the Company's 1989 Stock
Warrant  Plan.  These  bonuses will not become  payable until the earlier of (i)
completion  of a sale or  farmout  by the  Company  of all or a  portion  of its
interest in the  Karakuduk  Project,  or (ii) the date when the Company  makes a
public  disclosure  of a sale or farmout of the Karakuduk  Project.  The Company
does not  expect any events to occur in the near  future,  therefore,  the bonus
payable is considered long-term in nature.

In connection  with the  appointment of Mr. Howard Karren as the Chairman of the
Board of  Directors of the Company in 1996,  the Company  agreed to issue to Mr.
Karren  350,000 shares of restricted  common stock of the Company.  In 1996, the
Company  recorded  accrued  compensation  for this  transaction in the amount of
$175,000. During 1997, the common stock was issued.

14. Operating leases

The  Company  has  a  noncancelable   operating  lease  for  office  facilities.
Approximate future minimum annual lease payments under the lease are as follows:

                  1999                          $  95,000
                  2000                             99,000
                  2001                            104,000
                  2002                            106,000
                  2003                             26,000
                  ---------------------------------------
                  Total                          $430,000
                                                 ========

The Company's rental expense for 1998, 1997, and 1996 was approximately $87,000,
$37,000, and $46,000 respectively.

15. Defined Contribution Plans

The Company  adopted a 401(k) plan covering all full-time  employees,  effective
January 1, 1991. The plan was terminated as of December 31, 1997.

16. Commitments and Contingencies

Under the terms of the license  agreement,  approved by the  Ministry of Oil and
Gas Industries of the Republic of Kazakhstan,  granting KKM the right to develop
the Karakuduk  Field,  KKM has committed to minimum  expenditures of $30 million
for the year ended December 31, 1999. The Company has excess  expenditures  from
1998 of $480,000, which will be applied against the 1999 commitment. The Company
has no other expenditure  commitments under the license after December 31, 1999.
The license, as amended, also establishes a minimum work program,  requiring the
Company to drill 8 new wells before December 31, 1999.

17. Extraordinary Losses

During 1997, the Company  retired several notes payable  totaling  $1,850,000 As
additional  consideration  for  these  notes,  the  Company  issued  to the note
holders,  warrants to purchase  462,500 shares of the Company's  common stock at
$.25 per share,  exercisable  at any time,  but no later than November 30, 1999.
The notes were discounted by $290,000, the estimated fair value of the warrants,
with the discount being amortized over the life of the notes.



                                       57
<PAGE>


                            CHAPARRAL RESOURCES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)



17. Extraordinary Losses (Continued)

If the notes were still outstanding on May 31, 1997, the Company agreed to issue
185,000 warrants as additional consideration to the holders. Furthermore, if the
notes were still  outstanding  on November 30, 1997, the Company agreed to issue
370,000  warrants  as  additional  consideration  to the  holders.  Under  these
provisions,  the Company issued  125,000 of the 185,000  warrants due to the May
31, 1997  deadline and none due to the November 30, 1997  deadline.  The Company
recorded  debt issuance  costs of $168,000 for the  estimated  fair value of the
additional warrants issued, to be amortized over the life of the notes. On dates
between May 1997 and November 1997 the notes were repaid by the Company at their
face value. The Company recorded an extraordinary loss on extinguishment of debt
of approximately $214,000.

On  August  5,  1998,  the  Company  retired  two  outstanding  loans,  totaling
$1,000,000,  from two related parties: Allen & Company,  Incorporated ($900,000)
and John McMillian,  a director of the Company ($100,000).  The Company borrowed
the  $1,000,000  on June 3, 1998,  subject to a 7% interest  rate.  The note was
payable in full,  plus  accrued  interest,  on the  earlier of 180 days from the
funding of the loans or upon the Company's  receipt of a minimum of  $10,000,000
in equity  investments.  In  conjunction  with the  loans,  the  Company  issued
warrants to purchase  1,000,000  shares of the  Company's  common  stock,  at an
exercise  price of $3.50 per share.  The Company  recorded the warrants at their
fair market value of $367,000, as a discount of notes payable,  amortizable over
the life of the loans.  On July 27, 1998,  the Company  received  $10,000,000 in
equity financing and repaid the loans,  recognizing an extraordinary loss on the
extinguishment of debt of approximately $236,000.

18. Subsequent Events

On January 15, 1999, the Company granted 1,000,000 shares of common stock to the
Company's  President and Chief Operating Officer,  Dr. Jack Krug, as part of his
employment contract with the Company.  Of the 1,000,000 shares granted,  200,000
vested  immediately.  The remaining 800,000 shares vest ratably over four years,
on the anniversary date of grant.

On February  28,  1999,  the terms  relating to the note  between  Chase and the
Company were amended.  The $250,000  principal  payment that was due on February
28, 1999 was deferred. Under the revised terms, the Company is required to begin
making installments in August 1999.

From January 01, 1999 to March 31, 1999, the Company has borrowed  approximately
$3,800,000 from certain shareholders of the Company, repayable by the Company on
or before August 31, 1999. The loans are subject to an 8% annual interest rate.

Effective  March 1,  1999,  the  Company  announced  that it is  relocating  its
principal office from Houston,  Texas to Golden,  Colorado.  The Company expects
the relocation to be completed by the fall of 1999. Effective April 1, 1999, the
Company assigned its operating  lease,  disclosed in Note 14, to an unaffiliated
third party.

On April 8,  1999,  the  Board of  Directors  has  recommended  for  shareholder
approval,  a 60 to 1 reverse stock split.  Management  is  anticipated a vote on
this  matter in a special  meeting of the  Company's  shareholders,  expected to
occur in late April 1999.

19. Karakuduk-Munay, Inc. Financial Statements

Due to the  significance  of the  Company's  equity  investee,  the  Company has
attached  audited  financial  statements  for KKM.  Reflected  in the  financial
statements  are  management  fees  of  $1,980,000,   $1,020,000,   $85,000,  and
$1,020,000,  that have been  charged by the Company to KKM for the years  ending
December 31, 1998,  December 31, 1997,  and the month period ended  December 31,
1996,  and the year ended  November  30, 1996  respectively.  These  amounts are
exclusive of any local  withholding tax, which may be accrued by KKM. Also, (for
the same periods) the financial  statements include interest on the note payable
to the  Company  from KKM in the  amounts  $1,043,565,  $389,624,  $20,102,  and
$117,431.


                                       58

<PAGE>


                            CHAPARRAL RESOURCES, INC.

            SUPPLEMENTAL INFORMATION - DISCLOSURES ABOUT OIL AND GAS
                         PRODUCING ACTIVITIES-UNAUDITED




The following  supplemental  information regarding the oil and gas activities of
the Company is presented pursuant to the disclosure requirements  promulgated by
the  Securities and Exchange  Commission  and Statement of Financial  Accounting
Standards ("SFAS") No. 69, Disclosures About Oil and Gas Producing Activities.

The Company  entered  into an  agreement  effective  January 1, 1997 to sell its
domestic oil and gas properties. Accordingly, the Company's domestic oil and gas
properties were classified as oil and gas properties under an agreement for sale
at November 30, 1996 and no disclosures for proved reserves or future cash flows
have been made at November 30, 1996. The properties were sold in accordance with
the above agreement. Due to the uncertainties surrounding the development of the
Karakuduk Field,  along with the limited amount of production  established as of
December 31, 1998,  no proved  reserves have been  attributed to the field.  The
Company  acquired no  additional  producing  properties in 1998.  Therefore,  no
disclosures  for proved reserves or future cash flows have been made at December
31, 1998.  Acquisition and exploratory  costs incurred  related to the Company's
interest in the Karakuduk Field,  however,  are disclosed below. The exploration
costs reflect the entire exploratory costs incurred by the Company and KKM.

The following estimates of reserve quantities and related  standardized  measure
of discounted  net cash flow are estimates  only,  and do not purport to reflect
realizable values or fair market values of the Company's  reserves.  The Company
emphasizes that reserve estimates are inherently imprecise and that estimates of
new  discoveries  are more  imprecise  than  producing  oil and gas  properties.
Additionally,  the price of oil has been very  volatile and downward  changes in
prices can significantly  affect  quantities that are economically  recoverable.
Accordingly,  these  estimates  are  expected  to change  as future  information
becomes  available  and the changes  may be  significant.  All of the  Company's
proved reserves were located in the United States.

Proved  reserves  are  estimated  reserves  of crude  oil and  natural  gas that
geological and engineering  data  demonstrate  with  reasonable  certainty to be
recoverable in future years from known  reservoirs  under existing  economic and
operating  conditions.  Proved  developed  reserves  are  those  expected  to be
recovered through existing wells, equipment and operating methods.

The  standardized  measure of  discounted  future net cash flows is  computed by
applying  year-end  prices of oil and gas (with  consideration  of price changes
only to the extent provided by contractual arrangements) to the estimated future
production of proved oil and gas reserves,  less estimated  future  expenditures
(based on year-end  costs) to be incurred in developing and producing the proved
reserves,  less estimated  future income tax expenses.  The estimated future net
cash  flows  are  then  discounted  using a rate of 10% a year  to  reflect  the
estimated timing of the future cash flows.


                                       59
<PAGE>
<TABLE>
<CAPTION>


                            CHAPARRAL RESOURCES, INC.

            SUPPLEMENTAL INFORMATION - DISCLOSURES ABOUT OIL AND GAS
                         PRODUCING ACTIVITIES-UNAUDITED



                                       Proved Oil and Gas Reserve Quantities
                                          (All Within the United States)


                                                                      Oil                      Gas
                                                                    Reserves                 reserves
                                                                     (bbls.)                  (Mcf.)
                                                                    ---------------------------------

<S>                                                                 <C>                    <C>
Balance November 30, 1995                                            66,185                 3,062,417
Revisions of previous estimates                                     (58,749)                   18,703
Sales of reserves                                                      (531)                  (34,417)
Extensions, discoveries and other additions                             267                     6,638
Production                                                           (1,737)                  (96,906)
Transfer to oil and gas properties under agreement
   For sale                                                          (5,435)               (2,956,435)
Balance November 30, 1996                                              --                        --
Revisions of previous estimates                                        --                        --
Sales of reserves                                                      --                        --
Extensions, discoveries and other additions                            --                        --
Production                                                             --                        --
Balance December 31, 1997                                              --                        --
Revisions of previous estimates                                        --                        --
Sales of reserves                                                      --                        --
Extensions, discoveries and other additions                            --                        --
Production                                                             --                        --
                                                                     ----------------------------------
Balance December 31, 1998                                              --                        --
                                                                     ==================================



                          Capitalized Costs Relating to Oil and Gas Producing Activities

                                                            December 31,         December 31,        November 30,
                                                               1998                 1997                1996
                                                            ----------------------------------------------------

Unproved oil and gas properties in the Republic of
        Kazakhstan                                           $22,696,000         $15,934,000         $12,091,000
Proved oil and gas properties                                       --                  --                  --
                                                             ---------------------------------------------------

                                                             $22,296,000         $15,934,000         $12,091,000
                                                             ---------------------------------------------------
Accumulated depreciation, depletion, and amortization
        And valuation allowances                                    --                  --                  --
                                                             ---------------------------------------------------

Net capitalized costs                                        $22,296,000         $15,934,000         $12,091,000
                                                             ===================================================

Company's share of equity method investee's
        Capitalized costs                                    $ 9,565,000         $ 3,988,000         $ 1,143,000
                                                             ===================================================




                                                          60


<PAGE>


                                             CHAPARRAL RESOURCES, INC.

                             SUPPLEMENTAL INFORMATION - DISCLOSURES ABOUT OIL AND GAS
                                          PRODUCING ACTIVITIES-UNAUDITED



                                Costs Incurred in Oil and Gas Property Acquisition,
                                      Exploration, and Development Activities

                                                         Year Ended           Year Ended           Year Ended
                                                         December 31,         December 31,         November 30,
                                                            1998                 1997                 1996
                                                         ------------------------------------------------------------------
Costs Incurred
Property acquisition costs--
   unproved leases:
            United States                                $      --            $      --            $      --
            Republic of Kazakhstan                              --              2,625,000            6,058,000
Property acquisition costs-- proved properties:
            United States                                       --                   --                   --
            Republic of Kazakhstan                              --                   --                   --
Exploration costs
            United States                                       --                   --                   --
            Republic of Kazakhstan                         6,761,000            1,218,000            1,610,000
Development costs
            United States                                       --                   --                   --
            Republic of Kazakhstan                              --                   --                   --
Company's share of equity method investee's
      Costs of property acquisition, exploration,
      And development                                    $ 5,578,000          $ 2,845,000          $   874,000
                                                         -----------------------------------------------------
                                                         $12,339,000          $ 6,688,000          $ 8,542,000
                                                         =====================================================

                                  Results of Operations for Producing Activities


                                                   Year Ended           Year Ended         Year Ended
                                                   December 31,         December 31,       November 30,
                                                      1998                 1997                1996
                                                   ---------------------------------------------------
Revenues
      Sales                                        $    --               $   --               $147,000
      Transfers                                         --                   --                   --
                                                   ---------------------------------------------------
            Total                                       --                   --                147,000
Production Costs                                        --                   --                 37,000
Exploration Expenses                                    --                   --                   --
Depreciation, depletion, and amortization
     and valuation provisions                           --                   --                  3,000
                                                        --                   --                107,000
Income tax expenses                                     --                   --                   --
                                                   ---------------------------------------------------
Results of operations from producing
     Activities (excluding corporate overhead
     And interest costs)                           $    --               $   --               $107,000
                                                   ===================================================
Company's share of equity method investee's
     Results of operations for producing
     Activities                                         --                   --                   --
                                                   ===================================================




                                                       61


<PAGE>


                                             CHAPARRAL RESOURCES, INC.

                             SUPPLEMENTAL INFORMATION - DISCLOSURES ABOUT OIL AND GAS
                                          PRODUCING ACTIVITIES-UNAUDITED



                             Standardized Measure of Discounted Future Net Cash Flows
                            and Changes Therein Relating to Proved Oil and Gas Reserves


The following are the principal  sources of changes in the standardized  measure
of discounted future net cash flows:

                                                                         Thirteen
                                                 Year Ended             Months Ended            Year Ended
                                                December 31             December 31             November 30
                                                   1998                    1997                    1996
                                                -----------------------------------------------------------
Beginning balance                               $       --              $       --              $    27,000
Expenditures which reduced future
   development costs                                    --                      --                     --
Acquisition of proved reserves                          --                      --                     --
Sale of proved reserves                                 --                      --                  (54,000)
Sales and transfers of oil and gas
   produced, net of production costs                    --                      --                 (110,000)
Net increase (decrease) in price                        --                      --                  860,000
Net decrease in costs                                   --                      --                     --
Extensions and discoveries                              --                      --                   17,000
Revisions of previous quantity
   Estimates                                            --                      --                  (91,000)
Accretion of discount                                   --                      --                   99,000
Effect of change in timing and other                    --                      --                  253,000
Transfer to oil and gas properties
   under agreement for sale                             --                      --               (1,401,000)
                                                -----------             -----------             -----------
Ending balance                                  $       --              $       --              $      --
                                                ===========             ===========             ===========



                                                          62
</TABLE>

<PAGE>


                         Report of Independent Auditors


The Board of Directors and Shareholders
Karakuduk-Munay, Inc.

We have audited the accompanying  balance sheets of Karakuduk-Munay,  Inc. ("the
Company")  as of December  31,  1998 and 1997,  and the  related  statements  of
operations and cash flows and changes in  shareholders'  deficit for each of the
three  years  ended  December  31,  1998.  These  financial  statements  are the
responsibility of the Company's management.  Our responsibility is to express an
opinion on these financial statements based on our audit.

We  conducted  our audits in  accordance  with US  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  present  fairly,  in all  material
respects,  the financial  position of  Karakuduk-Munay,  Inc. as of December 31,
1998 and 1997,  and the results of its operations and its cash flows for each of
the three years  ended  December  31,  1998,  in  conformity  with US  generally
accepted accounting principles.

Without  qualifying  our  opinion,  we draw your  attention to the fact that the
accompanying  financial  statements have been prepared assuming the Company will
continue as a going concern.  As more fully described in Note 3 to the financial
statements,  the  Company has  incurred  recurring  operating  losses and relies
solely on the  foreign  shareholder  to  provide  all  funding in the form of an
interest bearing loan. The Company requires significant  additional financing to
meet its financial  commitments and  requirements  through calendar year 1999 as
described  in Note 18.  These  conditions  raise  substantial  doubt  about  the
Company's  ability to continue as a going concern.  The financial  statements do
not  include  any  adjustments  to reflect the  possible  future  effects on the
recoverability and classification of assets or the amounts and classification of
liabilities that may result from the outcome of this uncertainty.



                                          /S/ ERNST & YOUNG KAZAKHSTAN
April 8, 1999
Almaty, Kazakshtan


                                       63
<PAGE>


                              Karakuduk-Munay, Inc.
                              Balance Sheets as at
                           December 31, 1998 and 1997
                             (Amounts in US dollars)





                                                   December 31,     December 31,
                                                        1998           1997
                                                   ----------------------------
ASSETS

Cash                                               $     52,958    $    414,384
Prepaid and other receivables (Note 4)                  125,231         272,455
VAT receivable (Note 5)                                    --           109,099
Crude oil inventory (Note 6)                            551,342            --
                                                   ----------------------------
  Total current assets                                  729,531         795,938

Long term VAT receivable (Note 5)                       863,077            --

Materials and supplies inventory (Note 7)             1,494,572         511,858

Property, plant and equipment, net (Note 8)           4,209,396       1,589,057

Oil and gas properties - full cost
 method (Note 9)                                     12,563,120       5,874,525
                                                   ----------------------------

                        TOTAL ASSETS               $ 19,859,696    $  8,771,378
                                                   ============================


LIABILITIES AND SHAREHOLDERS' DEFICIT

Accounts payable (Note 11)                         $  2,247,954    $  2,100,722
Accrued liabilities (Note 12)                           779,596         666,856
Current portion of loans payable
 to third parties (Note 13)                             177,780            --

Current portion of loans payable
 to partner (Note 13)                                 3,000,000            --
                                                   ----------------------------
  Current liabilities                                 6,205,330       2,767,578

Loans payable to third parties (Note 13)                577,775            --
Loans payable to partner (Note 13)                   20,380,080       9,819,497


                      TOTAL LIABILITIES            $ 27,163,185    $ 12,587,075

SHAREHOLDERS' DEFICIT

Charter capital (Note 15)                               200,000         200,000

Accumulated deficit                                  (7,503,489)     (4,015,697)
                                                   ----------------------------
                                                     (7,303,489)     (3,815,697)
                                                   ----------------------------

TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT        $ 19,859,696    $  8,771,378
                                                   ============    ============




                 See accompanying notes which form an integral
                       part of these financial statements.


                                       64


<PAGE>
<TABLE>
<CAPTION>


                                                 Karakuduk-Munay, Inc.
                                               Statements of Operations
                                 for the years ended December 31, 1998, 1997 and 1996
                                               (Amounts in U.S. dollars)





                                               December 31,          December 31,           December 31,
                                                   1998                  1997                  1996
                                               --------------------------------------------------------
<S>                                            <C>                   <C>                    <C>
Management service fee (Note 13)               $   845,840           $   495,000            $   825,000
General and administrative expenses              1,297,513               836,868                909,520
Interest expense (Note 13)                         508,539               155,624                137,533
Depreciation on fixed assets (Note 8)              440,901               147,660                 42,709
Miscellaneous taxes                                135,441                30,214                  2,937

Write-down of crude oil inventory (Note 6)         192,481                  --                     --

Exchange loss/(gain)                                67,077                  (387)                24,475
                                               -----------           -----------            -----------
Net loss                                         3,487,792             1,664,979              1,942,174
                                                                                            ===========




                             See accompanying notes which form an integral
                                   part of these financial statements.


                                                   65


<PAGE>


                                                 Karakuduk-Munay, Inc.
                                               Statements of Cash Flows
                                               (Amounts in U.S. dollars)





                                                                   December 31,        December 31,       December 31,
                                                                       1998                1997               1996
                                                                  ----------------------------------------------------
Cash flows from operating activities:
Net loss                                                          $ (3,487,792)       $ (1,664,979)       $ (1,942,174)

Adjustments to reconcile net loss to net
 cash used by operating activities:
Write-down of crude oil inventory                                      192,481                --                  --
Depreciation of fixed assets                                           440,901             147,660              42,709
Changes in working capital:
     (Increase)/decrease in prepaid and other receivables              147,224            (255,979)             76,230
     (Increase) in VAT receivable                                     (753,978)            (51,803)            (57,296)
     (Increase) in crude oil inventory                                (743,823)               --                  --
     (Increase) in materials and supplies inventory                   (982,714)           (483,437)            (28,421)
     Increase in accounts payable and accrued liabilities              259,972           2,022,350             146,819
     Increase/(decrease) in long term payable for land usage              --               (34,000)             34,000
                                                                    --------------------------------------------------
Net cash used by operating activities                               (4,927,729)           (320,188)         (1,728,133)

Cash flows from investing activities
Purchase of fixed assets                                            (3,061,240)         (1,284,782)           (464,208)
Investments in oil and gas assets (net of assets
   contributed in-kind through Charter Fund)                        (6,688,595)         (4,068,937)         (1,237,718)
Payment of signature bonus                                                --                  --              (513,000)
                                                                    --------------------------------------------------
Net cash used in investing activities                               (9,749,835)         (5,353,719)         (2,214,926)

Cash flows from financing activities
Cash contributed as charter fund                                          --                  --                40,000
Increase in loans from third parties                                   800,000                --                  --
Principal payments on third party loans                                (44,445)               --                  --
Increase in loan due to cash contribution                           10,422,567           4,134,783           2,240,000
Increase in loans payable for management
     services and other expenditures                                 2,094,451           1,526,995           1,527,339
Increase in loans payable for interest                               1,043,565             389,624             137,533
                                                                  ----------------------------------------------------

Net cash provided by financing activities                           14,316,138           6,051,402           3,944,872


Net increase/(decrease)  in cash                                      (361,426)            377,495               1,813
Cash at beginning of year                                              414,384              36,889              35,076
                                                                  ----------------------------------------------------
Cash at end of year                                               $     52,958        $    414,384        $     36,889
                                                                  ============        ============        ============





                                 See accompanying notes which form an integral
                                    part of these financial statements.


                                                       66


<PAGE>


                                               Karakuduk-Munay, Inc.
                                        Statements of Shareholders' Deficit
                                             (Amounts in U.S. dollars)






                                        Authorized            Accumulated
                                     Charter Capital             Deficit                   Total
                                     -------------------------------------------------------------

Balance at December 31,1995           $   100,000             $  (408,544)             $  (308,544)

Charter capital contributions             100,000                    --                    100,000
Net loss for the year 1996                   --                (1,942,174)              (1,942,174)

Balance at December 31,1996               200,000              (2,350,718)              (2,150,718)

Net loss for the year 1997                   --                (1,664,979)              (1,664,979)

Balance at December 31,1997               200,000              (4,015,697)              (3,815,697)
Net loss for the year 1998                   --                (3,487,792)              (3,487,792)

                                      ------------------------------------------------------------
Balance at December 31,1998           $   200,000             $(7,503,489)             $(7,303,489)
                                      ============================================================







                                    See accompanying notes which form an integral
                                         part of these financial statements.


                                                          67

</TABLE>

<PAGE>


                              Karakuduk-Munay, Inc.
                        Notes to the Financial Statements
                 (Amounts in US dollars unless otherwise stated)





1. Organization and Background Information

Formation
---------

Karakuduk-Munay Inc. (the "Company"), a Kazakhstan Joint Stock Company of Closed
Type,   was   founded   by   "Munaygaz"   State   Holding   Company    (formerly
Kazakhstanmunaygaz  National Petroleum Company),  "Jarkin" State Holding Company
(formerly PGO  Mangistauneftegazgeologiya),  and  Korporatsiya  Mangistau  Terra
International (formerly Korporatsiya  Kramds-Mangistau  Inc.),  collectively the
"Kazakh  Shareholders",  and Central Asian  Petroleum  (Guernsey)  Limited.  The
Company and the Ministry of Energy and Natural Resources  (formerly the Ministry
of Oil and Gas) in the  Republic of  Kazakhstan,  entered  into an  agreement on
August 30, 1995  ("Inception")  referred to as the  Agreement  for  Exploration,
Development and Production of Oil in Karakuduk Oil Field in Mangistau  Oblast of
the Republic of Kazakhstan  (the  "Agreement").  The management and  operational
framework  within which the Company must conduct its  activities are dictated by
the Agreement.

The  Company  may  be  terminated  under  certain  conditions  specified  in the
Agreement. The term of the Agreement is 25 years commencing from the date of the
Company's  registration.  The Agreement can be extended to a date agreed between
the  Ministry  of  Energy  and  Natural  Resources  and the  Company  as long as
production of petroleum and/or gas is continued in the Karakuduk oil field.

Changes in Shareholders
-----------------------

In  accordance  with  Edict # 410 dated  March 24,  1997 and Edict # 1287  dated
August 26, 1997 issued by the Government of the Republic of Kazakhstan,  40 % of
the Charter Fund of the Company  belonging to  "Jarkin"/"Aksay"  and  "Munaygaz"
were transferred to KazakhOil,  the state owned oil and gas company. The Company
and new shareholder were legally  re-registered  with the Ministry of Justice of
the Republic of Kazakhstan on July 24, 1997.  There were no shareholder  changes
in 1998.

Principal Activity
------------------

The Company was  established  for the  purposes of  exploring,  developing,  and
producing  oil and gas  deposits  in the  Karakuduk  Field  in the  Republic  of
Kazakhstan  acting on the basis of the Agreement  which the Company entered into
with the Ministry of Energy and Natural  Resources in the Republic of Kazakhstan
on August 30,  1995.  Prior to the  Company  entering  into the  Agreement,  the
Government  of  Kazakhstan  drilled  22  test  wells  in  the  Karakuduk  Field,
establishing the existence of crude oil reserves.  No additional  exploration or
production  operations have been conducted on the Karakuduk Field.  Neither were
there any  commercial  quantities  of crude oil produced  from the original test
wells,  prior to Inception of the Agreement.  In accordance  with the Agreement,
the Company retains the contractual rights to explore,  develop, and produce the
crude oil reserves, if any, underlying the Karakuduk Field.

The Company's work program and minimum expenditure  commitment was stipulated in
License  MG  249  dated  June  28,  1995.  These  expenditure  obligations  were
subsequently amended by Resolution P65-H of September 18, 1996, Resolution P97-H
of December 8, 1997,  and Decree No. 1392 of December 31, 1998.  Decree No. 1392
requires  the  Company  to meet  expenditure  commitments  of $16.5  million  by
December 31, 1998 and $30 million by December 31, 1999. Expenditure  commitments
through  December 31, 1998 exceeded the commitment  requirement of $16.5 million
by  approximately  $480,000.  The excess is applicable  against the  expenditure
commitment  required as of December  31, 1999.  Should the license  terms not be
adhered to, the License may be withdrawn by the Government of Kazakhstan.


                                       68


<PAGE>


                              Karakuduk-Munay, Inc.
                 Notes to the Financial Statements - (Continued)
                 (Amounts in US dollars unless otherwise stated)





1. Organization and Background Information (Continued)

During  1998,  the  Company  was engaged in various  exploration  and  appraisal
activities  associated  with  the  Karakuduk  Field.  The  Company's  activities
included conducting capital workover  operations,  processing and transportation
of  limited  crude  oil  production  to  the  KazTransOil  pipeline,  completing
construction of the field camp and main access road,  beginning  construction of
various  field  facilities  required  to bring  the  Karakuduk  Field  onto full
production,  and importing a drilling rig into  Kazakhstan for  commencement  of
exploratory  drilling activities in 1999. The Company's operations also included
general corporate affairs, such as applying for, and obtaining,  an amendment of
the Company's  License MG-249 with the Government of Kazakhstan as well as other
general and administrative activities.

The Company conducted capital workover operations on four test wells, which were
drilled  prior to the  Company  entering  into  the  Agreement.  Production  was
established from two of the four wells. The Company did not commence exploratory
drilling operations during 1998.

The Company  produced  limited  amounts of crude oil  throughout the majority of
1998. The crude oil was produced,  processed, and transported to the KazTransOil
pipeline by truck.  As of December 31, 1998,  the Company had placed 11,103 tons
(81,052  barrels) of crude oil into the KazTransOil  pipeline,  but did not sell
any of the crude oil  produced  during  1998.  In  accordance  with an agreement
between the Company and KazTransOil, all of the crude oil production placed into
the pipeline is recorded as crude oil inventory,  until  formally  nominated for
sale by the Company.

2. Basis of Presentation

The  Company  maintains  its  accounting  records  and  prepares  its  financial
statements  in  U.S.  dollars  in  accordance  with  the  accounting  procedures
prescribed by the Agreement. The accompanying financial statements,  prepared in
accordance with U.S. generally accepted accounting  principles,  differ in minor
respects  (related to  disclosure)  from those issued for statutory  purposes in
Kazakhstan.

The  Company has  reclassified  some of its  comparative  numbers in order to be
consistent  with the  current  year  classifications  in the  Balance  Sheet and
Statement of  Operations.  This has no impact on the results for the year or the
net assets of the Company.

The material accounting principles adopted by the Company are described below:

Foreign Currency Translation
----------------------------

The Company's  functional currency is the U.S. dollar. All transactions  arising
in currencies other than U.S. dollars, including assets,  liabilities,  revenue,
expenses, gains, or losses are measured and recorded into U.S. dollars using the
exchange rate in effect on the date of the transaction.

Cash and other monetary  assets held and  liabilities  denominated in currencies
other than U.S.  dollars are translated to U.S. dollars at the rates of exchange
ruling  as  of  December  31,  1998  (83.80  Kazakh  Tenge  per  U.S.   dollar).
Non-monetary  assets and liabilities  denominated in currencies  other than U.S.
dollars  have  been  translated  at  the  estimated   historical  exchange  rate
prevailing on the date of the  transaction.  Exchange  gains and losses  arising
from  translation  of  non-U.S.  dollar  amounts at the  balance  sheet date are
recognized  as an increase  or  decrease in income for the period.  By using the
U.S. dollar as its reporting currency for the financial  statements and by using
the temporal method of translation  where  applicable,  the effects of inflation
have been taken into  consideration in all material  respects since movements in
the  exchange  rate  between the U.S.  dollars and Tenge during 1996 to 1998 are
considered a reasonable approximation of the general price index. (See Note 19).


                                       69


<PAGE>


                              Karakuduk-Munay, Inc.
                 Notes to the Financial Statements - (Continued)
                 (Amounts in US dollars unless otherwise stated)





2. Basis of Presentation (Continued)

The Tenge is not a convertible  currency  outside of the Republic of Kazakhstan.
The translation of Tenge  denominated  assets and liabilities in these financial
statements  does not  indicate  that the Company  could  realize or settle these
assets and liabilities in dollars.

As of December 31,  1998,  $530,511 of net monetary  assets are  denominated  in
Tenge.

Interest Capitalization
-----------------------

The Company capitalizes interest on significant  construction projects for which
expenditures  are being  made.  The  Company  follows  the full  cost  method of
accounting.   Accordingly,   the  Company's   assets   qualifying  for  interest
capitalization include unusually significant  investments in unproved properties
and other major development  projects that are not being depreciated,  depleted,
or amortized currently, provided that work is currently in progress.

The Company began  exploration  activities in 1997. As of December 31, 1998, the
Company's  oil and gas  investment in the  Karakuduk  Field is not  considered a
proven property and economic production has not commenced. Consequently, none of
the  capital  costs  related  to the  Karakuduk  Field  have  been  depreciated,
depleted,  or amortized  during 1998.  Beginning in 1997,  and throughout all of
1998, the Company capitalized  certain borrowing costs to significant,  unproven
oil and gas properties on which the Company is currently conducting  exploration
and appraisal activities.  The Company capitalized $565,542 in 1998 and $234,000
in 1997, respectively. Other interest costs are expensed as incurred.

Oil and Gas Assets Subject to Depreciation, Depletion and Amortization
----------------------------------------------------------------------

The  Company  follows  the  full  cost  method  of  accounting  for  oil and gas
properties.   Accordingly,  all  costs  directly  associated  with  acquisition,
exploration  and  development  of oil and gas reserves are  capitalized  in cost
pools for each country in which the Company  operates.  The  limitation  on such
capitalized  costs is  determined  in  accordance  with rules  specified  by the
Securities  and Exchange  Commission.  Capitalized  costs are depleted using the
units of production method based on proven reserves.

Oil and Gas Properties Not Subject to Depletion
-----------------------------------------------

Costs  associated  with  acquisition  and evaluation of unproved  properties are
excluded  from the  amortization  computation  until it is  determined if proved
reserves can be attributed to the properties.  These unevaluated  properties are
assessed  annually for possible  impairment and the amount impaired,  if any, is
added to the  amortization  base.  Costs of exploratory dry holes and geological
and  geophysical  costs  not  directly  associated  with  specific   unevaluated
properties are added to the amortization base as incurred.

Depreciation of Property Plant and Equipment
--------------------------------------------

Depreciation of equipment is calculated on the straight-line method based on the
estimated useful life of the assets as follows:
                                                             Period
                                                             ------

         Office buildings and apartments                    20 years
         Office equipment                                    3 years
         Vehicles                                            5 years
         Field buildings                                    15 years
         Field equipment                              up to 10 years


                                       70

<PAGE>



                              Karakuduk-Munay, Inc.
                 Notes to the Financial Statements - (Continued)
                 (Amounts in US dollars unless otherwise stated)



2. Basis of Presentation (Continued)

Inventory
---------

Crude oil inventory is valued using the first-in, first-out method, at the lower
of cost or net realizable  value.  The Company's  capitalized  cost of crude oil
inventory is the lesser of the actual costs to produce,  transport and store the
crude oil in inventory, or the inventory's net realizable value.

Materials and supplies inventory is valued using the first-in,  first-out method
and is recorded at the lower of cost or net  realizable  value.  Certain  unique
items, such as drilling equipment,  are valued using the specific identification
method.

Revenue Recognition
-------------------

Revenues and their  related  costs are  recognized  upon  delivery of commercial
quantities of oil and gas  production,  in accordance with the accrual method of
accounting.  Losses, if any, are provided for in the period in which the loss is
determined to occur.

Income Taxes
------------

The Company  accounts for income taxes under the  provisions of the Statement of
Financial  Accounting Standards ("SFAS") 109, Accounting for Income Taxes, which
require that taxes be provided on the  liability  method based upon the tax rate
at which items of income and expense are expected to be settled in the Company's
tax return.

Earnings Per Common Share
-------------------------

Basic earnings  (loss) and diluted  earnings (loss) are not presented due to the
Company being of a "closed" nature, and having no underlying shares outstanding.

New Accounting Standards
------------------------

In  June  1998,  the  FASB  issued  SFAS  No.  133,  Accounting  for  Derivative
Instruments and Hedging  Activities.  This standard provides a comprehensive and
consistent  standard for the  recognition  and  measurement of  derivatives  and
hedging  activities.  This statement is effective for years beginning after June
15, 1999. As of December 31, 1998, the Company has not adopted SFAS 133.

The Company is  evaluating  SFAS 133 and intends to adopt the statement no later
than January 1, 2000. The impact of SFAS 133 on the Company's financial position
and results of operations is not expected to be material.

Fair Value of Financial Instruments
-----------------------------------

All of the Company's financial instruments,  including loans payable to partner,
cash and trade  receivables,  have fair values which  approximate their recorded
values as they are either  short-term  in nature or carry  interest  rates which
approximate market rates.

Use of Estimates
----------------

The preparation of financial  statements in conformity  with generally  accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities,  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.

                                       71

<PAGE>


                              Karakuduk-Munay, Inc.
                 Notes to the Financial Statements - (Continued)
                 (Amounts in US dollars unless otherwise stated)




2. Basis of Presentation (Continued)

Leases
------

The Company  expenses  rentals on  operating  leases  over the lease term,  on a
straight-line basis, as the rents become payable.

3. Going Concern

These  financial  statements have been prepared  assuming that  Karakuduk-Munay,
Inc.,  will continue as a going  concern.  The Company has  recurring  operating
losses and relies solely on Central Asian Petroleum (Guernsey) Limited ("CAP-G")
to provide all funding in the form of an interest  bearing loan, as discussed in
Note 13. In accordance with the license agreement,  CAP-G is required to provide
all funding to the Company which is not provided by  self-generated  income from
the sale of oil and gas production or borrowed from other  third-party  sources.
The Company does not  anticipate  that its current cash  reserves and cash flows
from  operations  will be  sufficient to meet its capital  requirements  through
fiscal  year 1999.  Should the Company  not meet its  capital  requirements,  as
described  in Note 18,  under the license  agreement  to develop  the  Karakuduk
Field, the Company's  rights under the agreement may be terminated.  The Company
believes additional  financing will be available;  however there is no assurance
that  additional  financing will be available,  or if available,  that it can be
obtained on terms favorable or affordable to the Company.

These conditions raise substantial doubt about the Company's ability to continue
as a going concern.  The financial  statements do not include any adjustments to
reflect the possible future effects on the  recoverability and classification of
liabilities that may result from the outcome of this uncertainty.

4. Prepaid and Other Receivables

As of December 31, 1998, Prepayments and Other Receivables,  primarily consisted
of  advances  to the  Custom's  Post for  payment of value added tax ("VAT") and
custom's  duties on future imported  materials and supplies.  As of December 31,
1997,   Prepayments  and  Other  Receivables   primarily  consisted  of  prepaid
equipment, which was capitalized to plant & equipment during 1998. The breakdown
of Prepaid and Other Receivables is as follows:

                                                      December 31,  December 31,
                                                           1998         1997
                                                      --------------------------

Travel advances to employees                           $   --        $ 18,606
Import VAT, custom duties and prepaid taxes             120,631        41,256

Advance payment for oil and gas assets                    4,600       212,593
                                                       --------      --------
Total                                                  $125,231      $272,455
                                                       ========      ========

5.        VAT Receivable

VAT receivable is a Tenge denominated asset due from the Republic of Kazakhstan.
The VAT receivable  consists of VAT paid on local  expenditures  (Local VAT) and
VAT paid on Imported goods (Import VAT). Currently,  VAT is calculated as 20% of
the value of goods received  (Import and Local VAT) or services  rendered (Local
VAT only).  VAT charged to the Company is  recoverable  in future  periods as an
offset against the Company's fiscal obligations.



                                       72

<PAGE>


                              Karakuduk-Munay, Inc.
                 Notes to the Financial Statements - (Continued)
                 (Amounts in US dollars unless otherwise stated)


5. VAT Receivable (Continued)

From  December 31, 1997 to December  31,  1998,  the  Company's  VAT  receivable
increased  from  $109,099  to  $863,077,  respectively,  due  to  the  Company's
increased spending on operations. During 1998, the Company offset both the Local
and Import VAT receivable  against  additional VAT charged on imported goods. In
prior years,  the Company  received  several refunds of VAT previously paid into
the  Government  of  Kazakhstan.  The  ability of the  Company to obtain  future
refunds or to offset the VAT receivable against future Import VAT liabilities is
uncertain.  The Company does expect,  however,  to obtain full economic  benefit
from the VAT  receivable  through the Company's  right of offset  against future
fiscal obligations, as provided for in the Agreement.

6. Crude Oil Inventory

During 1998, the Company  produced  approximately  11,103 tons of crude oil from
two capital  workover wells  re-completed  in the Karakuduk Field in early 1998.
The crude oil was produced into storage tanks, transferred to heated oil trucks,
transported to the KazTransOil  pipeline terminal at Say-Utes  (approximately 89
kilometers),  and placed into the  KazTransOil  pipeline.  In an agreement  with
KazTransOil,  the entity  controlling  the export  pipeline,  the  Company's oil
production  placed into the  pipeline is recorded as crude oil  inventory  until
formally nominated for sale by the Company.

As of December  31,  1998,  the  Company had not  completed a sale of crude oil,
either  to the local or export  markets.  The  Company  recorded  all  operating
(lifting) costs required to produce, transport, and store the Company's 1998 oil
production as costs of crude oil inventory.  As of December 31, 1998, the actual
costs of the inventory,  based upon year-end crude oil prices,  exceeded the net
realizable  value  of  the  inventory.  Therefore,  the  Company  recognized  an
impairment  to crude oil  inventory,  to  properly  reflect  the  estimated  net
realizable value of $551,342.  The impairment,  totaling  $192,481,  was charged
directly to expense.

7. Materials and Supplies Inventory

The categories of Materials and Supplies  Inventory listed below represent plant
and equipment for development  activities,  tangible  drilling costs (drillbits,
tubing, casing,  wellheads,  etc.) required for exploratory drilling operations,
spare parts, diesel fuel, and various materials for use in oil field operations.
The Inventory in Transit as of December 31, 1998 includes  additional tubing and
casing required for drilling planned exploratory wells in 1999.

                                                 December 31,       December 31,
                                                     1998                1997
                                                 -------------------------------
Inventory in-house                                $1,084,359        $  224,998

Inventory in-transit                                 410,213           286,860
                                                  ----------        ----------
Total                                             $1,494,572        $  511,858
                                                  ==========        ===========



                                       73


<PAGE>


                              Karakuduk-Munay, Inc.
                 Notes to the Financial Statements - (Continued)
                 (Amounts in US dollars unless otherwise stated)





8. Property, Plant and Equipment

Upon  full  amortization  of  tangible  assets,  the right of  ownership  of the
tangible  assets shall be transferred  to the Kazakhstan  Ministry of Energy and
Natural  Resources in accordance with the Agreement.  The Company is entitled to
the use of the fully  amortized  tangible  assets  during  the whole term of the
Agreement.  A summary of property,  plant and equipment is provided in the table
below:

                                                 December 31,       December 31,
                                                     1998               1998
                                                 -------------------------------

Office buildings and apartments                  $   214,468        $    67,212
Office equipment and furniture                       390,671            227,318
Vehicles                                           1,663,364            541,479
Field buildings                                    2,248,920            329,936
Field equipment and furniture                        323,824            169,190
Capital work-in progress                                --              444,872
                                                 -----------        -----------
Total                                              4,841,247          1,780,007
Accumulated depreciation                            (631,851)          (190,950)
                                                 -----------        -----------
Net book value                                   $ 4,209,396        $ 1,589,057
                                                 ===========        ===========



Vehicles includes both vehicles for specialized tasks (cranes, bulldozers, heavy
trucks,  crude oil trucks,  etc.) and vehicles for  personnel  transport.  Field
buildings  include the construction of the main field camp and construction of a
mini-camp to house the drilling crew and service company  personnel  required to
perform exploratory drilling operations.  Field equipment and furniture includes
furniture and fixtures for the field camp and other  equipment.  The majority of
plant and equipment was placed in service in the latter part of 1998.

The office and apartment buildings, office and apartment furniture and fixtures,
office equipment,  vehicles,  field buildings,  field furniture and fixtures and
other equipment are all depreciated on a straight-line  basis over the estimated
useful life of each asset.

9. Oil and Gas Properties

As of December 31, 1998, the Company's Oil and Gas Properties are not subject to
amortization  under the Full Cost  method of  accounting.  While the Company has
obtained  a  certain  level of  crude  oil  production  in  1998,  the  reserves
underlying the Karakuduk  Field are classified as unproven until the Company can
establish the commercial viability of the reserves. As of December 31, 1998, the
Company's  reserves are not considered  commercially  viable,  as the production
costs required to obtain the crude oil in inventory  exceeded the net realizable
value of the production, based upon year-end crude oil prices.

Management fees related to the salary costs of individuals  directly  associated
with  exploration  and appraisal  activities  on the  Karakuduk  field have been
capitalized along with the license acquisition costs, geological and geophysical
expenditures,  and  related  interest  costs.  Other  overhead  and  general and
administrative costs have been expensed as incurred.


                                       74


<PAGE>


                              Karakuduk-Munay, Inc.
                 Notes to the Financial Statements - (Continued)
                 (Amounts in US dollars unless otherwise stated)





9. Oil and Gas Properties (Continued)

Costs of Oil and Gas Properties  excluded from the  amortization  consist of the
following:

                                                   December 31,     December 31,
                                                      1998             1997
                                                   -----------------------------

Acquisition costs                                  $   507,870       $   507,870
Exploration and appraisal costs                     11,255,708         5,132,655
Capitalized interest                                   799,542           234,000
                                                   -----------       -----------


  Total                                            $12,563,120       $ 5,874,525
                                                   ===========       ===========


Management believes that over the life of the project, future cash flows justify
the carrying  amount of assets  disclosed  above.  No  impairment  provision has
therefore been deemed necessary in these financial statements.

10. Bonuses

The Company was required to pay an unrecoverable  (non-tax deductible) signature
bonus to the Kazakhstan  Ministry of Geology amounting to $513,000 in accordance
with the Agreement.  The Company  capitalized the initial signature bonus to Oil
and Gas Assets -  Acquisition  Costs (see Note 9). This amount will be amortized
by the units of production  method,  when the Company  begins  producing  proven
reserves. Production based bonuses will be payable to the Kazakhstan Ministry of
Geology  amounting to $500,000 when  cumulative  production  reaches ten million
barrels and $1,200,000 when cumulative production reaches fifty million barrels.
Under current  Kazakhstan tax law, the production bonuses will be considered tax
deductible  expenditures in the calculation of profits taxes. No amounts related
to the production bonuses have been achieved as of December 31, 1998.

11. Accounts Payable

Accounts  Payable as of December 31, 1998  includes  payables for  equipment and
services  required  for  field  operations,   including  construction  of  field
facilities,  transportation  services,  catering  services,  mobilization of the
drilling rig, project design costs of capital projects, etc.

12. Accrued Current Liabilities

                                                  December 31,     December 31,
                                                     1998             1997
                                                  ------------------------------
Accrued management service fee                      573,750          573,750
Accrued audit fees                                   75,000           48,000
Accrued interest payable                              3,613             --
Miscellaneous taxes payable                         127,233           45,106
                                                   --------         --------

  Total accrued liabilities                        $779,596         $666,856
                                                   ========         ========




                                       75


<PAGE>


                              Karakuduk-Munay, Inc.
                 Notes to the Financial Statements - (Continued)
                 (Amounts in US dollars unless otherwise stated)





13. Loans Payable

Loans Payable to Third Parties
------------------------------

During  1998,  the Company  borrowed a total of $800,000  from the Chase Bank of
Texas,  N.A.  ("Chase"),  a U.S.  financial  institution.  On March 6, 1998, the
Company borrowed the initial $500,000 from Chase. The note accrues interest at a
fixed,  annual  interest  rate of 6.84% and is repayable in 18 equal,  quarterly
installments  of $27,778,  which began on December 6, 1998. The final  principal
payment is due on or before  February  26,  2003.  On June 9, 1998,  the Company
borrowed an additional  $300,000 from Chase. The second note accrues interest at
a fixed, annual interest rate of 6.875% and is repayable in 18 equal,  quarterly
installments  of  $16,667,  which also  began on  December  6,  1998.  The final
principal payment is payable on or before March 6, 2003.

As of December 31, 1998,  the  Company's  outstanding  principal  balance on the
notes totaled $755,555, of which $177,780 is due before December 31, 1999.

Loans Payable to Partners
-------------------------

As  discussed  in Note 3, the major  shareholder,  CAP-G  bears  sole  financial
responsibility for providing all funding for the Company, which is not generated
by the  Company's  operations  through  the  sale of oil and gas  production  or
borrowed from third party  sources.  The various forms of funding from CAP-G are
treated as long term loans to the Company and bear interest at the rate of LIBOR
plus  1%.  The  Agreement  requires  installment  payments  on  the  loan  to be
calculated and paid on a quarterly basis and to be equal to 65% of gross revenue
after  deduction of royalties  due to the  Republic of  Kazakhstan.  No sales of
crude oil production occurred in 1998 and no payments on the loan have been made
or are due as of December 31, 1998.

The loan is made up as follows (U.S. dollars):

                                                             December 31,
                                                     ---------------------------
                                                        1998             1997
                                                     -----------     -----------

Cash funding                                         $16,897,350     $ 6,474,783
Management services fee                                4,275,000       2,295,000
Other expenditures                                       634,594         520,143
Accrued interest payable                               1,573,136         529,571
                                                     -----------     -----------

Total interest and loan payable to partner           $23,380,080     $ 9,819,497
                                                     ===========     ===========


Management services are provided by a subsidiary of Chaparral  Resources,  Inc.,
the parent  company of CAP-G.  Services were provided in 1998 for a fixed fee of
$140,000 per month for January and  February,  1998,  and $170,000 per month for
the remainder of 1998.  Management  services were provided to the Company in the
amount of $1,980,000  and  $1,275,000  for the years ended December 31, 1998 and
1997, respectively.

As of  December  31,  1998,  the  Company's  outstanding  principal  and accrued
interest  balance on Loans  Payable to Partners  totaled  $23,380,080,  of which
$3,000,000 is due before  December 31, 1999. The Company  determined the current
portion of Loans Payable to Partner based upon best  estimates of projected 1999
sales revenue, of which 65% will be distributed to CAP-G on a quarterly basis as
described above.

                                       76


<PAGE>


                              Karakuduk-Munay, Inc.
                 Notes to the Financial Statements - (Continued)
                 (Amounts in US dollars unless otherwise stated)





14. Taxes

The following is a summary of the provision for income taxes:
<TABLE>
<CAPTION>

                                                                    Year ended December 31,
                                                     1998                   1997                     1996
                                                 -----------------------------------------------------------
<S>                                              <C>                     <C>                      <C>
Income taxes (benefit) computed
  at statutory rate                              $(1,046,338)            $  (499,494)            $  (582,652)
Non-deductible expenses                              347,012                    --                      --
  Change in asset valuation allowance                699,326                 499,494                 582,652
                                                 -----------------------------------------------------------
Income taxes                                     $      --               $      --               $      --
                                                 ===========================================================

The components of the Company's deferred tax assets and liabilities under FASB No. 109 are as follows:

                                                                     Year ended December 31,
                                                     1998                   1997                    1996
                                                 -----------------------------------------------------------
Deferred tax assets:
  Net operating loss carryforwards               $ 1,904,035             $ 1,204,709             $   705,215
  Valuation allowance                             (1,904,035)             (1,204,709)               (705,215)
                                                 -----------------------------------------------------------
Deferred tax assets                              $      --               $      --               $      --
                                                 ===========================================================
</TABLE>


There were no net deferred tax assets or net income tax benefits recorded in the
financial statements for deductible temporary  differences or net operating loss
carryforwards  due to the fact that the  realization of the related tax benefits
is not considered likely.

The Agreement specifies profits taxes and other taxes applicable to the Company,
which are subject to the laws of the  Republic of  Kazakhstan.  As  discussed in
Note 10, the signature  bonus is not  recoverable  or deductible in  calculating
income tax expense  and has not been  recorded  as a  recoverable  asset for tax
purposes.

The Company began extracting  hydrocarbons  from the Karakuduk Field in 1998. At
December  31,  1998,  the Company has tax loss  carryforwards  of  approximately
$6,346,783 available to offset against future taxable income, in accordance with
the terms of the contract and  legislation  existing as of the date the contract
was signed.  There is a five-year  carryforward of tax losses beginning with the
first year the Company generates net income.

The Company has used the best  estimates  available to determine  the  Company's
deferred tax assets  before  consideration  of the valuation  allowance.  Please
refer to Note 16  regarding  the  uncertainties  of taxation in the  Republic of
Kazakhstan.

                                       77


<PAGE>


                              Karakuduk-Munay, Inc.
                 Notes to the Financial Statements - (Continued)
                 (Amounts in US dollars unless otherwise stated)





15. Charter Capital

The total Charter Fund contribution  specified in the new Founders  Agreement of
Karakuduk-Munay  (dated June 12,  1997) is $200,000.  Each of the  shareholder's
portion of the Charter Fund and their respective  participating  interest in the
Company is:
<TABLE>
<CAPTION>


                                                          December 31,                    December 31,
                                                             1998                             1997

                                                   Charter         Percent          Charter          Percent
                                                 Contribution                     Contribution
                                                 -----------------------------------------------------------
<S>                                                <C>              <C>               <C>              <C>
KazakhOil                                          80,000           40 %              80,000           40 %
Korporatsiya Mangistau Terra International         20,000           10 %              20,000           10 %
Central Asian Petroleum (Guernsey)
   Limited - CAP(G)                               100,000           50 %             100,000           50 %
                                                 --------------------------------------------------------

Total charter capital                            $200,000           100 %           $200,000          100 %
                                                 ========                           ========
</TABLE>


During 1997,  KazakhOil  as the  successor to Munaygaz  state  holding  company,
contributed U.S. $ 40,000 as Munaygaz's initial charter contribution  obligation
that was previously  settled by CAP(G).  The CAP(G) 1996  contribution  has been
reclassified as additional funding of the Company's operations in 1997.

16. Contingencies

Taxation
--------

The existing  legislation  with regard to taxation in the Republic of Kazakhstan
is constantly  evolving as the Government  manages the transition from a command
to a market economy. Tax and other laws applicable to the Company are not always
clearly written and their interpretation is often subject to the opinions of the
local or main State Tax Service.  Instances  of  inconsistent  opinions  between
local, regional and national tax authorities are not unusual.

Basis of Accounting
-------------------

The Company maintains its statutory books and records and calculates its taxable
loss in accordance with U.S. generally accepted accounting principles,  which it
believes it may do under the terms of the Agreement.  The Republic of Kazakhstan
currently requires companies to comply with Kazakh accounting regulations and to
calculate tax profits or losses in accordance with these  regulations as well as
prevailing tax law. There is currently uncertainty,  therefore, as to the extent
of tax losses available to the Company.

17. Current Kazakhstan Environment

The  ability  of the  Company  to realize  the  carrying  value of its assets is
dependent  on being  able to  transport  hydrocarbons  and  finding  appropriate
markets for their sale. The Company has various options available to it in terms
of possible  exportation  routes to potential  markets,  based on  experience of
other  joint  venture  operations  in the  vicinity of the  Company's  activity.
Domestic  markets in the  Republic of  Kazakhstan  currently do not permit world
market prices to be obtained.

                                       78


<PAGE>


                              Karakuduk-Munay, Inc.
                 Notes to the Financial Statements - (Continued)
                 (Amounts in US dollars unless otherwise stated)




18. License Commitments and Operating Lease Commitment

As specified in Note 1, under the terms of the license the Company has committed
to minimum expenditures of $30 million for the year ended December 31, 1999. The
Company has excess  expenditures  from 1998 of  $480,000,  which will be applied
against the 1999 commitment.  The Company has no other  expenditure  commitments
under the license  after  December  31,  1999.  The  license,  as amended,  also
establishes  a minimum work  program,  requiring  the Company to drill eight new
wells before  December 31, 1999.  The new wells must be between  3,250 and 3,500
meters in depth.

As of  December  31,  1998,  the  Company's  only  major  operating  contractual
commitment  is  the  drilling   contract  with  Challenger  Oil  Services,   PLC
("Contractor") entered into on April 7, 1998. The Company mobilized the drilling
rig in late 1998, but did not begin drilling operations until early 1999.

The drilling contract was retroactively amended as of March 17, 1999, to reflect
the current  economic  environment  in the oil and gas industry as a whole,  and
specifically  in the  Commonwealth of Independent  States  ("CIS").  The amended
contract terms are disclosed in Note 19, Subsequent  Events. Any cost reductions
relating to the contract  amendments  have been  incorporated  in the  Company's
financial statements as of December 31, 1998.

The terms of the drilling contract,  as amended,  require the Company to minimum
lease  commitments  for two years (1999 and 2000) of  $3,102,500  per year.  The
original  drilling  contract obliged the Company to minimum lease commitments of
$3,102,500  for one year only.  Minimum  lease  payments are based upon stand-by
rates without crews.

19. Subsequent Events

Drilling contract
-----------------

As stated in Note 18, on March 17, 1999, the Company  retroactively  amended its
drilling contract with Challenger Oil Services,  PLC, originally entered into on
April 7, 1998.  The  Company is subject to the  following  terms of the  amended
contract:

                                                            Amount
                                                            ------

Operational rate                                          $12,500/Day
Stand-by-rate with crews                                  11,250/Day
Stand-by rate without crews                                8,500/Day
Rig move rate                                             20,000/Move
Rig demobilization (one time charge only)                  $250,000
Lease term                                                  2 years


The Company spudded the first exploratory well (#101) on February 14, 1999.

Sales contract with KazakhOil
-----------------------------

On March 30, 1999,  the Company  entered into a contract  with  KazakhOil,  JSC,
shareholder of the Company, for the sale of 19,000 tons (138,700 barrels) of the
Company's  crude oil production in April 1999.  Under the terms of the contract,
the Company has been granted a transit  quota to export 19,000 tons of crude oil
to the far abroad and near abroad  markets.  KazakhOil  will act as a broker for
the sale.

According  to the  contract,  net revenue to the Company is based upon a formula
indexed  to the  price  of  Brent  crude  on the  date  of  sale,  adjusted  for
transportation  costs  and  other  minor  charges.  The sale  will  occur in two
batches: 13,000 tons and 6,000 tons. The Company expects the initial 13,000 tons
to be nominated for sale in early April. The Company expects the remaining 6,000
tons to be nominated before April 30, 1999.

                                       79

<PAGE>




                              Karakuduk-Munay, Inc.
                 Notes to the Financial Statements - (Continued)
                 (Amounts in US dollars unless otherwise stated)





19. Subsequent Events (Continued)

Devaluation of Tenge
--------------------

On April 5, 1999,  the  government  decided not to  continue  its support of the
National  currency,  the Tenge and allowed it to float  freely  against the U.S.
dollar.  Immediately  thereafter,  the official exchange rate declined from 87.5
tenge to the U.S. dollar to 142 tenge to the U.S. dollar.

The devaluation decreases the tenge realizable value of any U.S. dollar or other
hard currency denominated monetary assets held by the Company, and increases the
tenge obligation of any U.S. dollar or other hard currency  denominated monetary
liabilities held by the Company.

As these financial  statements are denominated in U.S. dollars,  the only impact
will relate to that described on Note 2 to these accounts. The net impact is not
expected to be material to the Company's financial statements.

20. Impact of Year 2000 (unaudited)

The Year 2000 Issue is the result of computer  programs  being written using two
digits  rather than four to define the  applicable  year.  Any of the  Company's
computer  programs  that have  time-sensitive  software  which is not "Year 2000
Compliant" may recognize a date using "00" as the year 1900 rather than the year
2000.  This  could  result  in  a  system  failure  or  miscalculations  causing
disruptions of operations,  including, among other things, a temporary inability
to process transactions or engage in normal business activities.

The Company has completed an assessment and currently believes that the computer
systems it has in place are Year 2000 compliant.

The Company  has  initiated  formal  communication  with all of its  significant
suppliers  and large  customers to determine  the extent to which the Company is
vulnerable  to those  third  parties  failure to  remediate  their own Year 2000
Issue. In particular,  it is unclear as to the extent the Kazakh  government and
other organizations who provide significant  infrastructure  services within the
Kazakh  Republic have  addressed the Year 2000 Issue.  Furthermore,  the current
crisis  in  Russia  and  the CIS  could  adversely  affect  the  ability  of the
government  and  such  organizations  to  fund  adequate  Year  2000  compliance
programs.  There is no guarantee  that the systems of the government or of other
organizations on which the Company relies will be timely converted and would not
have an adverse effect on the Company and its systems.

The Company's financial  statements as of December 31, 1998 and 1997 and for the
periods then ended do not include any adjustments to reflect the possible future
effect on the  recoverability  and  classification  of assets or the  amounts or
classifications  of  liabilities  that  may  result  from  the  outcome  of this
uncertainty.




                                       80