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

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

For the fiscal year ended            December 31, 1998                         
                          ----------------------------------------

                                       OR

[    ]   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
         EXCHANGE ACT OF 1934 [NO FEE REQUIRED]

For the transition period from __________________ to __________________


Commission file number  1-3793                 

                         CANADA SOUTHERN PETROLEUM LTD.

             (Exact name of registrant as specified in its charter)

        NOVA SCOTIA, CANADA                                     98-0085412
    State or other jurisdiction of                           (I.R.S. Employer
    incorporation or organization                            Identification No.)

  Suite 1410, One Palliser Square
  125 Ninth Avenue, S.E.
  Calgary, Alberta   CANADA                                       T2G OP6
(Address of principal executive offices)                         (Zip Code)

Registrant's telephone number, including area code             (403) 269-7741

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


  Title of each class                  Name of each exchange on which registered

Limited Voting Shares,                            Pacific Exchange, Inc.
$1 (Canadian) per share                           Boston Stock Exchange
                                                  Toronto Stock Exchange

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

                                (Title of Class)

Limited Voting Shares,                            NASDAQ SmallCap Market
$1 (Canadian) per share            

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


<PAGE>



                                                       
          Indicate by check mark if disclosure of delinquent  filers pursuant to
Item 405 of Regulation S-K ss.229.405 of this chapter) 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.                   [ X ]

          The aggregate market value of the voting stock held by  non-affiliates
of the registrant was approximately U.S. 67,501,000 at March 15, 1999.


                   (APPLICABLE ONLY TO CORPORATE REGISTRANTS)


         Indicate the number of shares  outstanding of each of the  registrant's
classes of common stock, as of the latest practicable date.

         Limited Voting Shares, par value $1.00 (Canadian) per share, 14,234,740
shares outstanding as of March 15, 1999.


                       DOCUMENTS INCORPORATED BY REFERENCE


                  Proxy Statement of Canada Southern  Petroleum Ltd.  related to
the Annual Meeting of Shareholders  for the year ended December 31, 1998,  which
is incorporated into Part III of this Form 10-K.


<PAGE>



                                TABLE OF CONTENTS


                                                                            Page

                                     PART I

Item 1.   Business                                                            4

Item 2.   Properties                                                         14

Item 3.   Legal Proceedings                                                  21

Item 4.   Submission of Matters to a Vote of Security Holders                24

                                     PART II

Item 5.   Market for the Company's Limited Voting Shares and Related
          Stockholder Matters                                                25

Item 6.   Selected Financial Data                                            27

Item 7.   Management's Discussion and Analysis of Financial Condition
          and Results of Operations                                          28

Item 7A.  Quantitative and Qualitative Disclosures About Market Risk         33

Item 8.   Financial Statements and Supplementary Data                        34

Item 9.   Changes in and Disagreements with Accountants on
          Accounting and Financial Disclosure                                56

                                    PART III

Item 10.  Directors and Executive Officers of the Company                    56

Item 11.  Executive Compensation                                             56

Item 12.  Security Ownership of Certain Beneficial Owners and Management     56

Item 13.  Certain Relationships and Related Transactions                     56

                                     PART IV

Item 14.  Exhibits, Financial Statement Schedules and Reports on Form 8-K    57

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

Unless  otherwise  indicated,  all dollar  figures  set forth are  expressed  in
Canadian currency. The exchange rate at March 15, 1999 was $1.00 Canadian = U.S.
$.6552.



<PAGE>



                                     PART I

Item 1.  Business

         The  nature of Canada  Southern  Petroleum  Ltd.'s  (the  "Company"  or
"Canada Southern")  business is described at Item 1(c) herein, and a description
of its principal oil and gas properties in Canada appears in Item 2 herein.  For
additional  information regarding the development of the Company's business, see
"Properties" and "Supplemental Information on Oil and Gas Activities".

         (a)  General Development of Business

Yukon Territory - The Kotaneelee Field

         The  Company's  principal  asset  is a  30%  carried  interest  in  the
Kotaneelee  gas field located on Ex-Permit 1007 (31,888 gross acres or 9,566 net
acres) in the extreme southeastern corner of the Yukon Territory. This partially
developed  field is connected to a major  pipeline  system.  Two wells have been
completed  to date that are  capable of an  estimated  output of in excess of 60
million  cubic feet per day, the  capacity of the field  dehydration  plant.  At
December 31, 1998, field production was  approximately  60-65 million cubic feet
("mmcf") per day. The operator is Anderson  Exploration Ltd., which acquired all
of Columbia Gas  Development  of Canada  Ltd.'s  interests.  See Item 3 - "Legal
Proceedings"  for a discussion  of the  Kotaneelee  Litigation  concerning  this
asset.

         Production  at  Kotaneelee  commenced  in February  1991.  According to
government  reports,  total  production  in billion  cubic feet ("bcf") from the
Kotaneelee gas field since 1991 has been as follows:

                       Calendar Year               Production (bcf)
                       -------------               ----------------
                           1991                           8.1
                           1992                          18.0
                           1993                          17.5
                           1994                          16.7
                           1995                          15.7
                           1996                          15.2
                           1997                          14.4
                           1998                          16.0
                                                        -----
                           Total                        121.6
                                                        =====



<PAGE>


         At  present,  the  Company  does not  receive  any cash  payments  from
production  but is credited with 30% of the gross  revenues until a like percent
of the working interest costs,  exclusive of any interest expense, are recovered
by the  operator.  The Company  will not receive  any  payment  from  production
revenues until its share of the working  interest costs are recovered.  When the
deferred  costs are recovered,  30% of gross  revenues (net of gross  overriding
royalties)  less  30% of  current  working  interest  costs  will be paid to the
Company.  Gross  overriding  royalties  amount  to 10% to the  Canadian  Federal
government  and 4.06% to certain  individuals.  The operator has reported to the
Company  development  costs  totaling  approximately  $95,849,000  and,  of that
amount,  approximately $19,039,000  (Company share = $5,712,000)  remained to be
recovered at December 31, 1998.  The Company has  contested  the amount of costs
that have been charged to the carried interest account. It is estimated that the
Company will not begin to receive  proceeds from the Kotaneelee gas field before
the year 2000,  based  upon a price of $1.28 per mcf  (average  1998  price) and
current production rates. The period before payment to the Company begins may be
shorter or longer,  depending on prevailing market conditions and the results of
the Kotaneelee Litigation.

British Columbia Properties

         The  Company's  major source of income has been from oil and gas fields
in northeast British Columbia. These fields, developed in the 1950's and 1960's,
produce revenue  through both working and carried  interest  agreements.  During
November 1998, the major working interests in these fields were sold to Canadian
Natural Resources Ltd. ("CNRL") for approximately $3.5 million.

         In addition  to the  producing  properties,  since 1988 the Company has
acquired a number of leases in northeast  British  Columbia by  participating in
British  Columbia land sales.  To date five wells have been drilled on the lands
resulting in three oil discoveries and two dry holes. Currently,  the Company is
defining the prospects by geophysics.  Work completed to date indicates that six
of the prospects justify drilling. The Company estimates that the drilling costs
(excluding completion costs) of the six prospects would be $1,625,000.  However,
as most of these wells would be wildcat wells  (exploratory  wells), the Company
plans to reduce its risk by selling or  farming  out part of its  interest.  The
timing of the drilling is dependent on the  availability  of funds.  The Company
anticipates  that its  average  net cost per well  (assuming  a farmout or sale)
would  be  approximately  $75,000,  or a total of  $525,000,  for  drilling  and
completion costs.

         One  prospect  has been farmed out on a seismic  option  basis.  If the
farmee  elects to drill a well,  the Company  will not be required to pay any of
the drilling  costs.  In 1998,  the Company  acquired  leases on two  additional
prospects.

         In the Paradise area, one well that was drilled and completed as an oil
well in 1997 proved to be  non-commercial.  Another oil well,  which was drilled
under a farmout arrangement,  is currently suspended. An additional farmout well
which was drilled in late 1997 has been plugged and abandoned.


<PAGE>

         The Company also has interests at Buick Creek,  Wargen and Siphon.  The
Siphon and Wargen fields have new operators.  As these properties are held under
the  carried  interest  agreements,  the  Company  is not aware of any  proposed
exploration  and  development  plans for these  properties,  but anticipates the
change of operator will cause new work to be done.

Arctic Islands

         As of December 31, 1998,  the Company held working  interests in 45,100
gross  acres  (1,817 net acres) and  carried  interests  in 131,730  gross acres
(37,180 net acres) in the Sverdrup  Basin,  located in the Arctic  Islands.  The
Hecla, Whitefish,  Drake Point, Roche Point,  Kristoffer,  Romulus and Bent Horn
fields have been designated  significant discovery lands ("SDL" ) by the Federal
Government.  The  Company's  interests in the SDL's have been  retained  pending
development.

         Panarctic  Oils Ltd.  ("Panarctic"),  the  operator,  received  Federal
government  regulatory  approvals for a pilot project to move shipments of crude
oil from the Bent Horn field by tanker through the Northwest Passage to southern
Canada in 1985. Through December 31, 1996,  approximately 2.7 million barrels of
Bent Horn crude had been sold with  deliveries  being made at northern  Canadian
and  European  markets as well as the  eastern  seaboard  market.  In 1996,  the
operator  decided  to shut down  production  from the field  and  dismantle  the
production  facilities because of economic  uncertainties.  The Company has a 5%
carried interest in the area which has not yet reached payout status. The timing
of any payout is uncertain.

Northwest Territories Properties

         The Company has a 45% carried interest in the Northwest  Territories in
the Celibeta  field  designated as  Significant  Discovery  Lands ("SDL") by the
Federal  Government  (1,594  gross  acres and 717 net  acres).  The gas field is
presently shut-in.

Alberta

         In 1994,  the Company  purchased a 5% working  interest in the Kitscoty
heavy oil field and the  related  facilities.  Oil  recovery  from this field is
being enhanced by steam injection.

         In 1996, the Company purchased an additional 5% working interest in the
Kitscoty field.  Three more wells were drilled in 1996; two horizontal wells and
one  vertical  well.  All the wells  encountered  oil and were  completed as oil
wells.  One well  also  discovered  three  potential  gas  zones  which  will be
evaluated for future use as fuel for the steam generation  needed to enhance the
oil production.  Scheduled remedial work programs have been postponed pending an
increase in the current low  netbacks on heavy oil.  Additional  work at the new
Lloydminister  heavy oil discovery at 16-2-51-2 W4M has also been  postponed for
this reason.


<PAGE>


         During 1997 and 1998, the Company  participated  in the exploration and
development  of a  glauconite  heavy oil project in the  Atlee/Majestic  area. A
multitude of production problems occurred which caused numerous delays. Although
the project was successful in developing  substantial  reserves,  the prevailing
low heavy oil prices made the economic  return on this  project  less  favorable
than other Company projects. For this reason, the Company's interest was sold in
November 1998 for $2.2 million.

         The  Company  also  acquired a 10-20%  working  interest in over 12,000
acres in four other areas of Alberta. These lands were purchased on the basis of
seismic  work  which  showed  a number  of  promising  prospects.  Subsequently,
additional seismic work has confirmed the potential of those prospects.  One was
drilled in 1997 and completed as a potential gas well. A second well was drilled
in early 1998 and completed as an oil well.

         In 1998,  the  Company  purchased  leases  (100%  interest)  in an area
prospective  for both oil and gas. The leases are currently being evaluated with
the intent of drilling in late 1999 or early 2000.

         In Alberta,  the Company  currently has working  interests ranging from
10% to 100% in a total of 1,920 gross (326 net) developed acres and 26,869 gross
(8,448 net) undeveloped acres.

Saskatchewan

         The  Company  has  a  3.75%  working   interest  in  five  sections  in
Saskatchewan.  During 1997, three wells were drilled on the lands resulting in 2
dry holes and 1 shut-in gas well.

United States

         Texas

         In 1996 and 1997,  the  Company  participated  in the  drilling of four
wells in Texas  which  resulted  in four  potential  oil  wells.  Because of low
production  rates  and low oil  prices,  three  of the  wells  have  since  been
abandoned, leaving one producing oil well. During 1998, the costs of these wells
totaling  $489,000  were written off.  Based on the  technical  results of these
wells in which it has a relatively small interest,  the Company  commenced a new
leasing program and acquired four leases (100% interest) on which it conducted a
seismic  program in 1998.  Currently,  plans are being made to test the first of
several Chappel reef prospects on these leases in the second quarter of 1999.


<PAGE>


         California

         During March 1998,  the Company  agreed to  participate  with two other
companies in a heavy oil recovery project in California.  The field is estimated
to have  approximately  12 million  barrels of oil in place with only 13% of the
oil recovered to date.  The initial  purchase price for a 90% (75% after payout)
interest in the project is U.S.  $200,000  (Company  share 30% - U.S.  $60,000).
Capital  expenditures were expected to be U.S. $600,000 to perform remedial work
on the field and to complete a pilot stream flood program  during the first year
of  the  project  (Company  share  U.S.  $180,000).   If  the  total  amount  of
expenditures is  less than  U.S. $600,000,  the participants'  interests will be
reduced proportionately to an amount which is not less than 10% (Company share -
3%).  Because of the current low price of heavy oil, major  development  work on
the project has been suspended  pending an increase in oil prices.  In addition,
the Company also wrote off the  carrying  costs of the property in the amount of
$196,000 during 1998.

         (b)      Financial Information about Industry Segments

         Since the Company is primarily  engaged in only one  industry,  oil and
gas exploration and development, this item is not applicable to the Company. See
Item 8 - "Financial  Statements  and  Supplemental  Data" for general  financial
information concerning the Company.

         (c)      (1)      Narrative Description of the Business

                  The  Company  was   incorporated  in  1954  under  the  Canada
Corporations   Act.  In  1979,  it  became  subject  to  the  Canadian  Business
Corporations Act and in 1980, was continued under the Nova Scotia Companies Act.

         The Company is,  either in its own right,  or through  other  entities,
engaged in the  exploration  for and  development  of  properties  containing or
believed to contain recoverable oil and gas reserves and the sale of oil and gas
from these properties.  Although many of the properties in which the Company has
interests are undeveloped,  all properties with proved reserves are partially or
fully  developed.  The  Company's  interests  in  exploratory  ventures  are  on
properties located in Alberta, British Columbia, Saskatchewan, the Northwest and
Yukon Territories and the Arctic Islands in Canada and in the United States. The
Company's principal asset is its 30% carried interest in the Kotaneelee field, a
partially  developed gas field (See Item 3 - "Legal  Proceedings".)  The Company
also has interests in producing properties in British Columbia and Alberta.



<PAGE>


Most of this acreage is covered by carried  interest  agreements,  which provide
that revenues are not payable to the Company until  expenditures by the carrying
partners have been recouped from  production,  and that operating  decisions are
made by the carrying  partners.  Generally,  the Company may, at any time, as to
each block or economic unit, elect to convert from a carried  interest  position
to  a  working  interest   position  by  paying  its  share  of  the  unrecouped
expenditures  for the unit (i.e.,  expenditures  not  recouped  from  production
revenues).  At December 31, 1998, the Company's share of unrecouped expenditures
were as follows:

         British Columbia:
           Ex-permit 149                   $ 4,013,000

         Yukon and Northwest Territories:
           Ex-permit 1007 (Kotaneelee)*    $19,039,000
           Ex-permit 2713 (Celibeta)       $   321,000

         *See Item 3 - Legal Proceedings

                           (i)      Principal Products

                                    The majority of the Company's interests  are
carried  interests.  The Company also participates in the production and sale of
crude oil and natural gas derived from its working interests.

                           (ii)     Status of Product or Segment

                                    At present,  some of the properties in which
the Company has interests are undeveloped and/or nonproducing.

                           (iii)    Raw Materials

                                    Not applicable.

                           (iv)     Patents, Licenses, Franchises and
                                    Concessions Held

                                    Permits and concessions are important to the
Company's  operations,  since they allow the  search for and  extraction  of any
crude oil and natural gas  discovered  on the areas  covered.  See the  detailed
schedule of properties under Item 2 - "Properties."

                           (v)      Seasonality of Business

                                    The  Company's  business  is  not  seasonal,
except  that  sales of  natural  gas peak  during  the  winter  heating  season.
Exploration  and  development  activities  are  restricted in certain areas on a
seasonal basis because extreme weather conditions affect  transportation and the
ability to pursue these activities.

<PAGE>


                           (vi)     Working Capital Items

                                    Not applicable.

                           (vii)    Customers

                                    Substantially  all  oil production  from the
Company's properties for the current year was purchased by CNRL, the operator of
the majority of the producing properties.  Most of the natural gas produced from
Company  properties  was sold by the  operator,  Petro  Canada,  to various  gas
marketers.  The  production  from the Kotaneelee gas field is also being sold by
the working interest partners who have not disclosed the purchasers.

                           (viii)   Backlog

                                    Not applicable.

                           (ix)     Renegotiation of Profits or Termination of
                                    Contracts or Subcontracts at the Election of
                                    the Government

                                    Not applicable.

                           (x)      Competitive Conditions in the Business

                                    The exploration  for and  production  of oil
and gas are highly  competitive  operations,  both internally within the oil and
gas industry and externally with producers of other types of energy. The ability
to exploit a discovery of oil or gas is dependent  upon  considerations  such as
the ability to finance  development  costs, the  availability of equipment,  and
the ability  to overcome  engineering and construction  delays and difficulties.
The  Company  must  compete  with  companies  which have  substantially  greater
resources  available to them.  Because the majority of Company  interests are in
remote areas,  operation of its  properties is more difficult and costly than in
more accessible areas.

                                    Furthermore,  competitive  conditions may be
substantially  affected by various  forms of energy  legislation  which may have
been or may be proposed  in the United  States and  Canada;  however,  it is not
possible to predict the nature of any such  legislation  which may ultimately be
adopted or its effects upon the future operations of the Company.  For a further
discussion of Canadian  governmental  regulation of the petroleum industry,  see
Item 1(d)(2) - "Risks Attendant to Foreign Operations".

                           (xi)     Research and Development

                                    Not applicable.



<PAGE>


                           (xii)    Environmental Regulation

                                    In the  exploration  for and  development of
natural   resources,   the  Company  is  required  to  comply  with  significant
environmental laws and regulations which add to the expense of those activities.
The Company has not been required to spend significant sums to comply with clean
up laws and regulations.  Compliance by the Company with governmental provisions
regulating the discharge of materials to the  environment or otherwise  relating
to the protection of the  environment are not expected to have a material effect
on the capital expenditures, earnings or competitive position of the Company.

                           (xiii)   Number of Persons Employed by Company


                                    The Company  currently  has  three full time
employees, all of whom are located in Canada. The Company also relies to a great
extent on consultants  (approximately 10) for technical,  legal,  accounting and
administrative  services.  The Company uses consultants  because it is more cost
effective than employing a larger full time staff.

         (d)      Financial Information about Foreign and Domestic Operations
                  and Export Sales

                  (1)      Revenues, Operating Losses and Identifiable Assets

                           Substantially  all of the Company's  operating assets
and revenues are attributable to its operations in Canada.  Operating losses are
substantially attributable to the ongoing Kotaneelee litigation.

                  (2)      Risks Attendant to Foreign Operations

                           The properties in which the Company has interests are
located  primarily  in Canada and are subject to certain  risks  involved in the
ownership  and  development  of such  foreign  property  interests.  These risks
include  but  are not  limited  to  those  of:  nationalization;  expropriation;
confiscatory  taxation;  native rights;  changes in foreign  exchange  controls;
currency  revaluation;  burdensome  royalty  terms;  export sales  restrictions;
limitations on the transfer of interests in exploration licenses; and other laws
and regulations  which may adversely  affect the Company's  properties,  such as
those providing for conversion, proration, curtailment, cessation or other forms
of limiting or  controlling  production of, or  exploration  for,  hydrocarbons.
Thus, an  investment in the Company  represents an exposure to risks in addition
to those inherent in petroleum exploratory ventures.



<PAGE>


Governmental Regulation of the Canadian Oil and Natural Gas Industry

         The oil and  natural  gas  industry  in Canada is subject to  extensive
controls and  regulations  imposed by various  levels of government  relating to
land  tenure,   production,   production  facilities,   pricing  and  marketing,
royalties,  environmental protection and other matters.  Outlined below are some
of the more significant  aspects of the legislation,  regulations and agreements
governing the oil and natural gas industry in Canada. All current legislation is
a matter of public  record  and the  Company is unable to  predict  whether  any
additional legislation or amendments may be enacted.

Land Tenure

         Crude oil and natural gas  located in the  western  provinces  is owned
predominantly by the respective provincial  governments.  Provincial governments
grant  rights to explore for and produce oil and natural gas pursuant to leases,
licenses  and  permits  for  varying  terms  from two  years  and on  terms  and
conditions set forth in provincial legislation including requirements to perform
specific work or make  payments.  Oil and natural gas located in such  provinces
can also be  privately  owned and rights to explore for and produce such oil and
natural  gas are  granted  by  lease  on such  terms  and  conditions  as may be
negotiated.  The term of both Crown and freehold leases will generally  continue
as long as oil or natural gas is produced from the property.

         Oil and natural gas rights on federal lands outside of the provinces is
generally  regulated  by the  Government  of Canada  unless  authority  has been
delegated by agreement to the  territorial  government or the  government of the
province  adjacent to the federal  offshore  area. In May 1993, the Canada Yukon
Oil and Gas Accord was signed  which  allowed  for the  transfer to the Yukon of
authority to administer  and control oil and natural gas  resources  within that
territory and for the  establishment  of an Oil and Gas Management  Regime.  The
transfer  has been  completed  and the lands are now  administered  by the Yukon
Government.

Production and Production Facilities

         The Governments of Canada,  Alberta,  British Columbia and Saskatchewan
have enacted statutory  provisions  regulating the production of oil and natural
gas. These regulations may restrict the maximum allowable production from a well
based on reservoir engineering and/or conservation  practices.  The construction
and  operation of facilities to recover and process oil and natural gas are also
subject to regulation.

Pricing and Marketing - Oil

         In Canada, producers of oil negotiate sales contracts directly with oil
purchasers, with the result that the market determines the price of oil. Certain
purchasers  periodically  advertise  for  volumes  of oil they are  prepared  to
purchase and the price being offered for such volumes. The price depends in part
on oil quality,  prices of competing fuels,  distance to market and the value of
refined products.


<PAGE>


Pricing and Marketing - Natural Gas

         In  Canada,  the price of  natural  gas is  determined  by  negotiation
between buyers and sellers, with the result that the market determines the price
of natural gas. Natural gas exported from Canada is subject to regulation by the
National  Energy Board ("NEB") and the Government of Canada.  Exporters are free
to negotiate  prices and other terms with  purchasers,  provided that the export
contracts must continue to meet certain  criteria  prescribed by the NEB and the
Government of Canada. As is the case with oil, natural gas exports for a term of
less than two years must be made  pursuant  to an NEB order,  or, in the case of
exports  for a longer  duration,  pursuant  to an NEB  license  and  Governor in
Council approval.

         The  Governments of Alberta,  British  Columbia and  Saskatchewan  also
regulate the volume of natural gas which may be removed from those provinces for
consumption   elsewhere   based  on  such   factors  as  reserve   availability,
transportation arrangements and market considerations.

Royalties and Incentives

         The royalty regime is a significant  factor in the profitability of oil
and natural gas  production.  Royalties  payable on production  from lands other
than Crown lands are  determined by  negotiations  between the mineral owner and
the  lessee,  although  production  from  such  lands  may  also be  subject  to
provincial taxes and  regulations.  Crown royalties are determined by government
regulation  and are  generally  calculated  as a percentage  of the value of the
gross production, and the rate of royalties payable generally depends in part on
prescribed  reference prices, well productivity,  geographical  location,  field
discovery date and the type or quality of the product produced. The value of the
gross  production  for royalty  purposes  may be based on a deemed value for the
product rather than the actual value received by the interest holder.

         From time to time the Governments of Canada, Alberta,  British Columbia
and Saskatchewan have established incentive programs which have included royalty
rate reductions, royalty holidays and tax credits for the purpose of encouraging
natural gas and oil exploration or enhanced  recovery  projects.  Incentives are
intended to enhance the  existing  cash flow of the oil and natural gas industry
and to improve the economics of finding and  developing  new and more costly oil
and natural gas reserves.  Oil royalty  holidays for specific  wells and royalty
reductions  reduce the amount of Crown  royalties paid by the interest holder to
the  respective  government.  Tax  credit  programs  provide  a rebate  on Crown
royalties paid.



<PAGE>


Environmental Regulation

         The oil and natural gas industry is subject to environmental regulation
pursuant to local, provincial and federal legislation. Environmental legislation
provides for restrictions  and prohibitions on spills,  releases or emissions of
various  substances  produced in  association  with  certain oil and natural gas
industry  operations.  An  environmental  assessment  and review may be required
prior  to  initiating   exploration  or  development   projects  or  undertaking
significant changes to existing projects. In addition, legislation requires that
well and facility  sites be abandoned and reclaimed to the  satisfaction  of the
appropriate  authorities.  A  breach  of  such  legislation  may  result  in the
imposition of fines or penalties.  Federal environmental  regulations also apply
to the use and transport of certain  restricted and prohibited  substances.  The
Company is committed to meeting its  responsibilities to protect the environment
wherever  it  operates  and  believes  that it is in  material  compliance  with
applicable environmental laws and regulations. The Company has not been required
to  spend  significant  sums to  comply  with  clean  up laws  and  regulations.
Compliance by the Company with governmental  provisions regulating the discharge
of materials to the  environment or otherwise  relating to the protection of the
environment  are  not  expected  to  have  a  material  effect  on  the  capital
expenditures, earnings or competitive position of the Company.

         (3)      Data which Are Not Indicative of Current or Future Operations

                  Not applicable.

Item 2.  Properties

         (a)  The principal asset of the Company is its 30% carried  interest in
the Kotaneelee  field, a partially  developed gas field in the Yukon  Territory.
See Item 3 - "Legal  Proceedings."  The Company also has  interests in producing
properties in British Columbia and Alberta and in several exploration prospects.
The exploratory  ventures are properties  located in British Columbia,  Alberta,
Saskatchewan,  the Yukon and  Northwest  Territories  and the Arctic  Islands in
Canada and in the United  States.  Geophysical,  geological and drilling work on
the Company's  properties is conducted by the operators under various agreements
with the Company. The results of this work are reviewed by Company personnel and
consultants retained by the Company.

         (b)  (1)  The  information  regarding  reserves,  costs  of oil and gas
activities,  capitalized costs,  discounted future net cash flows and results of
operations  is  contained in Item 8 - "Financial  Statements  and  Supplementary
Data."



<PAGE>











The following  graphic  presentation  has been  omitted,  but the following is a
description of the omitted material:




                  Map of Canada showing key Company properties


<PAGE>











The following  graphic  presentation  has been  omitted,  but the following is a
description of the omitted material:




          Map of N.E. British Columbia and Yukon, Northwest Territories
                         showing Company interest lands


<PAGE>











The following  graphic  presentation  has been  omitted,  but the following is a
description of the omitted material:




                        Map showing the Kotaneelee Field


<PAGE>











The following  graphic  presentation  has been  omitted,  but the following is a
description of the omitted material:




                         Map of the Arctic Island Fields
                       showing the Company interest lands


<PAGE>


(2)      Reserves Reported to Other Agencies

         Not applicable.

(3)      Production

         Average  sales price per unit and average  production  cost for oil and
gas produced during the periods shown below are as follows:


                  Average Sales Price               Average Production Costs
Year       Oil (per bbl)      Gas (per mcf)     Oil (per bbl)      Gas (per mcf)
                 ($)                ($)               ($)                ($)
1998            14.84               2.17              8.41               1.41
1997            22.50               2.31              8.70               1.30
1996            25.47               1.64              8.67                .79
                                              
(4)      Productive Wells and Acreage

         Productive wells and acreage on working and carried interest properties
as of December 31, 1998 are as follows:

               Gross Wells                                       Net Wells
          Oil               Gas                            Oil              Gas
         46.0              69.0                           6.72             11.49

                                              Gross and Net Developed Acres
                                         Gross Acres                   Net Acres

Alberta                                      3,840                         349
British Columbia                            46,638                       7,681
Yukon Territory                              3,350                       1,005
Arctic Islands                               3,060                         153
Texas, USA                                     160                          33
California, USA                                262                          79
                                            ------                       -----
                                            57,310                       9,300
                                            ======                       =====



<PAGE>


(5)      Undeveloped Acreage

         Total  developed  and  undeveloped  acreage  in which the  Company  has
interests is summarized by geographic area in the table below:

             Gross and Net Petroleum Acreage as of December 31, 1998
                                     Developed Acres         Undeveloped Acres
                                   Gross    Net            Gross    Net
                                   Acres   Acres     %     Acres   Acres      %
Canada:                                  
  British Columbia:                      
    Carried Interests             28,592   6,039   21.1     6,415   1,363   21.2
    Working Interests              6,269   1,005   16.0    11,913   7,797   65.5
    Overriding royalty interest   11,777     637    5.4     6,123      95    1.6
                                  ------   -----          -------  ------
  Total British Columbia          46,638   7,681           24,451   9,255
                                  ------   -----          -------  ------
                                         
  Saskatchewan:                          
    Working Interests                                       3,200     120    3.8
                                                          ------- -------
                                         
  Alberta:                               
    Working Interests              1,920     326   17.0    26,869   8,448   31.4
    Overriding Royalty Interest    1,920      23    1.2       640      21    3.3
                                  ------   -----          -------  ------
  Total Alberta                    3,840     349           27,509   8,469
                                  ------   -----          -------  ------
                                         
  Yukon & Northwest Territories:         
    Carried Interests              3,350   1,005   30.0    31,726   9,757   30.8
                                         
  Arctic Islands:                        
    Carried Interests              3,060     153    5.0   128,670  37,027   28.8
    Working Interests                  -       -           45,100   1,817    4.0
                                  ------   -----          -------  ------
  Total Arctic Islands             3,060     153          173,770  38,844
                                  ------   -----          -------  ------
                                         
  Total Canada                    56,888   9,188          260,656  66,445
                                         
California, USA                      262      79   30.2         -       -
Texas, USA                           160      33   20.6       889     889  100
                                  ------   -----          -------  ------
  Total United States                422     112              889     889
                                         
               TOTAL              57,310   9,300          261,545  67,334
                                  ======   =====          =======  ======
                                           
(6)      Drilling activity                

         Productive and dry net wells drilled during the following periods:

                                        Gross                          Net
                  Year         Productive       Dry         Productive       Dry
                  1998               9           2            1.440         .200
                  1997              25           2            3.606         .250
                  1996              10           2            1.044         .150
                                                       

<PAGE>


(7)      Present Activities

         There were no wells drilling at December 31, 1998.

(8)      Delivery Commitments

         None.

Item 3.  Legal Proceedings

         The  Company,  which has a 30%  interest in the  Kotaneelee  gas field,
believes  that the  working  interest  owners in the field  have not  adequately
pursued the  attainment of contracts for the sale of Kotaneelee  gas. In October
1989 and in March 1990,  the Company  filed  statements of claim in the Court of
Queens  Bench of Alberta,  Judicial  District of  Calgary,  Canada,  against the
working interest partners in the Kotaneelee gas field. The named defendants were
Amoco Canada  Petroleum  Corporation,  Ltd.,  Dome Petroleum  Limited (now Amoco
Canada Resources Ltd.), and Amoco Production  Company  (collectively  the "Amoco
Dome Group"),  Columbia Gas Development of Canada Ltd.  ("Columbia"),  Mobil Oil
Canada Ltd.  ("Mobil") and Esso Resource of Canada Ltd.  ("Esso")  (collectively
the "Defendants").

         The  Company  claims  that the  Defendants  breached  either a contract
obligation  and/or a  fiduciary  duty owed to the Company to market gas from the
Kotaneelee  gas field when it was  possible to so do. The Company  asserts  that
marketing  the  Kotaneelee  gas was  possible  in 1984 and  that the  Defendants
deliberately failed to do so. The Company seeks money damages and the forfeiture
of the Kotaneelee gas field.  The Company  presented  evidence at trial that the
money damages sustained by the Company were approximately $100 million.

         In  addition,  the  Company  has  claimed  that the  Company's  carried
interest  account should be reduced  because of improper  charges to the carried
interest account by the Defendants.  The Company claims that when the Defendants
in 1980  suspended  production  from the field's gas wells,  they failed to take
precautionary  measures  necessary  to protect  and  maintain  the wells in good
operating condition. The wells thereafter deteriorated, which caused unnecessary
expenditures  to be incurred,  including  expenditures  to redrill one well.  In
addition,  the Company claims that  expenditures  made to repair and rebuild the
field's dehydration plant should not have been necessary had the facilities been
properly  constructed and maintained by the Defendants.  The  expenditures,  the
Company claims,  were  inappropriately  charged to the field's carried  interest
account.  The effect of an increased  carried  interest account is to extend the
period before payout begins to the carried interest account owners.


<PAGE>


         The Company claims that production from the field should have commenced
in 1984. At that time the field's carried interest account was approximately $63
million.  The Company  claims  that by 1993 at least $34 million of  unnecessary
expenses  had been  wrongfully  charged to the  carried  interest  account.  The
Company's 30% share of these expenses would be approximately $10.2 million.  The
Company  further  claims that if production  had commenced in 1984,  the carried
interest  account  would have been paid off in  approximately  two years and the
Company would have begun to receive revenues from the field in 1986. At present,
the Company does not expect to receive revenues before the year 2000, based on a
price of Cdn. $1.28 per mcf and current production rates.

         Columbia has filed a counterclaim  against the Company seeking,  if the
Company is  successful in its claim for the  forfeiture of the field,  repayment
from the  Company of all sums  Columbia  has  expended on the  Kotaneelee  lands
before the Company is entitled to its interest.

         The parties to the litigation have conducted  extensive discovery since
the filing of the claims.  The trial began on  September 3, 1996 and the Company
completed the  presentation  of its case against the Defendants on September 16,
1998. Based upon newly discovered evidence, the Company filed a new claim during
May 1998 that the Defendants failed to develop the field in a timely manner. The
Company is unable to estimate the time necessary to conclude the litigation.

Matters Ancillary to Kotaneelee Litigation

         In its 1989  statement  of  claim,  the  Company  sought a  declaratory
judgment regarding two issues:

         (1)      whether interest accrued on the carried interest account; and

         (2)      whether  expenditures  for  gathering  lines  and  dehydration
                  equipment are expenditures  chargeable to the carried interest
                  account or whether the Company  will be assessed a  processing
                  fee on gas throughput.

         With respect to the first issue, the Company maintains that no interest
should  accrue  on the  account  and the  Defendants  have  not  contested  this
position.  With  regard to the second  issue,  the  Company  maintains  that the
expenditures are chargeable to the carried  interest  account.  Mobil,  Esso and
Columbia have essentially  agreed to the Company's position while the Amoco Dome
Group continues to contest this issue.



<PAGE>


         On January 22, 1996, the Company settled two claims outstanding against
the Company in the Court of Queens Bench, Calgary,  Alberta,  which related to a
suit brought against  AlliedSignal  Inc.  ("AlliedSignal")  in Florida which was
dismissed on the basis that Canada was the appropriate forum for the litigation.
AlliedSignal  had sought  additional  relief  against  the  Company in Canada to
preclude  other  types of suits by the  Company  and to recover the costs of the
defense of the initial action.  The settlement bars  AlliedSignal  from making a
claim  against  the  Company  for any costs in  connection  with the  Kotaneelee
Litigation.  The Company agreed not to bring any action against  AlliedSignal in
connection  with the  Kotaneelee  gas field.  Neither  party  made any  monetary
payment to the other party.

         In 1991,  Anderson  Exploration  Ltd.  acquired  all of the  shares  in
Columbia and changed its name to Anderson Oil & Gas Inc. ("Anderson").  Anderson
is now the sole operator of the field and is a direct  defendant in the Canadian
lawsuit.  Columbia's  previous parent, The Columbia Gas System,  Inc., which was
reorganized in a bankruptcy  proceeding in the United States,  is  contractually
liable to Anderson in the legal proceeding described above.

         The working  interest  owners have reported that they have been selling
Kotaneelee gas since February 1991.

         Under  Canadian law,  certain  costs (known as "taxable  costs") of the
litigation may be assessed against the  non-prevailing  party.  Previously,  the
Company had reported  that while such costs were not  determinable,  the Company
estimated  that  taxable  costs,   assuming  a  twelve  month  trial,  could  be
approximately  $1.5  million  and noted  that the judge in complex  and  lengthy
trials has the discretion to increase an award.

         Effective September 1, 1998, the Alberta Rules of Court were amended to
provide  for a  material  increase  in the  costs  which may be  awarded  to the
prevailing party in matters before the Court. In addition,  the Company believes
that the trial  will  extend  well  beyond  its  original  time  estimates  and,
therefore, potentially assessable costs would increase accordingly.

         The trial has been lengthy,  complicated  and costly to all parties and
the Company believes that the prevailing party or parties in the litigation will
argue for a substantial  assessment of costs against the non-prevailing party or
parties.  The Court has very broad  discretion  as to whether to award costs and
disbursements   and  as  to  the  calculation  of  the  amount  to  be  awarded.
Accordingly,  the Company is unable to determine  whether,  in the event that it
does not prevail on its claims in the litigation, costs will be assessed against
it or in what amount.  However,  since the costs incurred by the Defendants have
been  substantial,  and since the Court has broad  discretion in the awarding of
costs, an award to the Defendants  potentially  could be material.  A cost award
against the Company  could be of sufficient  magnitude to  necessitate a sale of
Company assets or a debt or equity financing to fund such an award. There are no
assurances that any such sale or financing would be consummated.


<PAGE>

         There is no assurance  whatever  that the Company will be successful on
the merits of its claims, which have been vigorously defended by the Defendants.
There is also no  assurance  that the Company  will be awarded any  damages,  or
that,  if damages are  awarded,  the Court will apply the measure of damages the
Company claims should be applied.

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

         Not applicable.

Executive Officers of the Company

         The following information with respect to the executive officers of the
Company is furnished pursuant to Instruction 3 to Item 401(b) of Regulation S-K.

                                               Length of         Other Positions
                                                Service             Held with
     Name         Age     Office            in this Office           Company

M. A. Ashton      63      President       Since June 4, 1997        Director

         All  officers  of the  Company  are  elected  annually  by the Board of
Directors and serve at the pleasure of the Board of Directors.

         The Company is aware of no  arrangement  or  understanding  between the
individual named above and any other person pursuant to which any individual was
selected as an officer.



<PAGE>


                                     PART II

Item 5.  Market for the Company's Limited Voting Shares and Related
                  Stockholder Matters

         (a)      Principal Markets

         The Company's  Limited  Voting Shares,  par value $1.00 per share,  are
traded on The  Toronto,  Pacific and Boston Stock  Exchanges,  and in the NASDAQ
SmallCap Market.

         The quarterly high and low closing prices (in Canadian  dollars) on The
Toronto Stock Exchange during the calendar periods indicated were as follows:

1997          1st quarter        2nd quarter       3rd quarter       4th quarter
----          -----------        -----------       -----------       -----------
High            11.00              12.50             16.60              15.00
Low              8.50               7.50             12.25              10.75


1998          1st quarter        2nd quarter       3rd quarter       4th quarter
----          -----------        -----------       -----------       -----------
High            11.75              10.50              9.00              10.00
Low              9.00               8.00              5.50               6.25

         The quarterly high and low closing prices (in United States dollars) on
the  Pacific  Exchange,  Inc.  during the  calendar  periods  indicated  were as
follows:

1997          1st quarter        2nd quarter       3rd quarter       4th quarter
----          -----------        -----------       -----------       -----------
High               8                  9             11 15/16             11
Low              6 1/2              5 3/4            8 13/16            7 1/4


1998          1st quarter        2nd quarter       3rd quarter       4th quarter
----          -----------        -----------       -----------       -----------
High            8 5/16              7 5/8            6 3/16              6 1/2
Low              6 3/8              5 3/4             3 1/2             4 3/16



<PAGE>


         (b)      Approximate Number of Holders of Limited Voting
                  Shares at March 15, 1999

                                                              Approximate
         Title of Class                                Number of Record Holders 

      Limited Voting Shares, par value
      $1.00 per share.                                           4,600

         (c)      Dividends

         The Company has never paid a dividend on its Limited Voting Shares. Any
future  dividends  will  be  dependent  on  the  Company's  earnings,  financial
condition, and business prospects. The Company is legally restricted from paying
any  dividend  or making  any other  payment to  shareholders  (except by way of
return of capital) on the Limited  Voting Shares until its  accumulated  deficit
($23,849,000 at December 31, 1998) is eliminated.

         Current  Canadian law does not restrict the  remittance of dividends to
persons not resident of Canada.  Under  current  Canadian tax law and the United
States-Canada tax treaty, any dividends paid to U.S.  shareholders are currently
subject to a 15% Canadian withholding tax.



<PAGE>


Item 6.           Selected Financial Data

         The following selected consolidated financial information (in thousands
except per share and exchange rate data) of the Company insofar as it relates to
each  of the  fiscal  periods  shown  has  been  extracted  from  the  Company's
consolidated financial statements.

                                           Year ended December 31,

                                1998      1997      1996       1995      1994
                                ----      ----      ----       ----      ----
                                ($)        ($)       ($)       ($)        ($)

Operating revenues              1,810      2,120     1,755     1,657      1,691
                              =======    =======   =======   =======    ======= 

Total revenues                  3,409      2,515     2,228     1,793      1,942
                              =======    =======   =======   =======    ======= 

Net loss                       (2,707)    (1,758)   (1,461)   (1,162)    (1,210)
                              =======    =======   =======   =======    ======= 

Net loss per share              (.19)      (.12)     (.11)     (.09)      (.10)
                              =======    =======   =======   =======    ======= 

Working capital                 6,876      5,573     8,403     1,510      2,417
                              =======    =======   =======   =======    ======= 

Total assets                   17,546     20,956    20,375    12,380     13,390
                              =======    =======   =======   =======    ======= 

Shareholders' Equity:
     Capital stock             40,489     40,489    38,888    29,635     29,513
     Deficit                  (23,849)   (21,143)  (19,385)  (17,923)   (16,762)
                              --------   --------  --------  --------   --------
                               16,640     19,346    19,503    11,712     12,751
                              =======    =======   =======   =======    ======= 
Average number of
  shares outstanding           14,235     14,084    13,362    12,622     12,613
                              =======    =======   =======   =======    ======= 

Exchange rates:
     Year-end                  .6535      .6992     .7297     .7329      .7129
                               =====      =====     =====     =====      =====

     Average for the period    .6749      .7224     .7335     .7289      .7324
                               =====      =====     =====     =====      =====

     Range                    .63-.67    .69-.75   .72-.75   .70-.75    .71-.76
                              =======    =======   =======   =======    =======

U.S. GAAP Information

Under U.S. generally accepted accounting principles ("GAAP"), the above selected
information  would be as follows (See Note 6 in Notes to Consolidated  Financial
Statements):

Net loss                      (2,328)    (1,588)   (1,236)   (1,001)    (1,140)
                              =======    =======   =======   =======    =======
Net loss per share              (.16)      (.11)     (.09)     (.08)      (.09)
                              =======    =======   =======   =======    =======
                                                                     


<PAGE>


Item 7.  Management's Discussion and Analysis of Financial Condition
         and Results of Operations

         Statements   included  in  Management's   Discussion  and  Analysis  of
Financial Condition and Results of Operations which are not historical in nature
are intended to be, and are hereby  identified as, "forward looking  statements"
for  purposes  of the  "Safe  Harbor"  Statement  under the  Private  Securities
Litigation Reform Act of 1995. The Company cautions readers that forward looking
statements  are  subject to certain  risks and  uncertainties  that could  cause
actual results to differ  materially from those indicated in the forward looking
statements.

(1)      Liquidity and Capital Resources

         At December 31, 1998, the Company had  approximately $7 million of cash
and securities  available which amount  includes the $5.7 million  proceeds from
the sale of certain  properties that was completed in November 1998. These funds
are expected to be used for general corporate  purposes,  including  exploration
and development  and to continue the Kotaneelee  field  litigation.  The Company
estimates  that it  currently  has adequate  working  capital for 1999 and 2000.
However,  it might be required  to raise  additional  funds  through the sale of
properties or other means in order to complete the Kotaneelee Litigation.

         Cash  flow used in  operations  during  1998  increased  to  $2,351,000
compared to $1,003,000 during the 1997 period. The $1,348,000 difference between
the periods was caused primarily by the following:


                  Increase in loss from operations            $(1,332,000)
                  Increase in accounts receivable and other     1,488,000
                  Net change in current liabilities            (1,504,000)
                                                              ------------
                  Increase in net cash used in operations     $(1,348,000)
                                                              ============

         A  significant  proportion  of the  Company's  property  interests  are
covered by carried interest agreements,  which provide that expenditures made by
the operator are recouped solely out of revenues from production.  Major capital
expenditures  made by the operators  have an impact on the  Company's  cash flow
from  operations as no revenues are reported or received until the capital costs
have been  recovered by the  operator.  Certain  properties  in the Fort Nelson,
British  Columbia area in which the Company has carried  interests  have reached
payout status. Proceeds from these carried interests plus oil and gas sales from
working interest  properties are the Company's major sources of working capital.
During 1998, the Company sold the majority of its Canadian  working interest oil
and gas properties, therefore, the Company expects a significant decrease in its
1999 revenues, royalties and lease operating expenses.


<PAGE>


         The Company is currently evaluating and expects to continue to evaluate
oil and gas properties and may make  investments  in such  properties  utilizing
cash on hand. The Company  anticipates  that its capital  expenditures  for land
acquisitions and drilling for the year 1999 will be approximately $1,200,000. In
addition,  substantial  continuing  expenses  are  expected  to be  incurred  in
connection  with the Kotaneelee  Litigation.  During 1998, the Company  expended
approximately  $2.4 million in connection with the Kotaneelee  Litigation  which
has been the principal cause of the Company's losses since 1991.

         The Company has established a reserve for its potential share of future
site  restoration  costs.  The  estimated  amount of these  costs,  which  total
$271,000,  is being  provided on a unit of production  basis in accordance  with
existing legislation and industry practice.

         At  December  31,  1998,  the  Company  believes  that it is year  2000
compliant. In addition, the year 2000 change will have no material impact on the
Company's internal operations or financial results. However, the Company will be
dependent on its  suppliers,  partners and  customers to make their systems year
2000 compliant.

(2)      Results of Operations

1998 vs. 1997

         The net  loss  for the  year  1998 was  $2,706,537,  ($.19  per  share)
compared to a net loss of  $1,757,664  ($.12 per share) for the 1997  period.  A
summary of revenue and expenses during the periods is as follows:

                               1998                1997              Net Change
                               ----                ----              ----------
Revenues                    $ 3,409,361         $ 2,514,978         $   894,383
Costs and expenses           (6,115,898)         (4,272,642)         (1,843,256)
                            ------------        ------------        ------------
Net loss                    $(2,706,537)        $(1,757,664)        $  (948,873)
                            ============        ============        ============
                                                              
         Oil sales  decreased  by 20% due  primarily  to a 34%  decrease  in the
average  prices of oil sold  which was  partially  offset  by a 2%  increase  in
production.  There was also a decrease in  royalties  paid by the  Company.  The
Company  sold the  majority  of its oil  producing  properties  in two  separate
transactions  effective  July 1, 1998 and September 1, 1998.  The 1998 royalties
paid amount includes a provincial  royalty tax credit in the amount of $117,000.
Oil unit sales in barrels ("bbls") (before deducting  royalties) and the average
price per barrel sold during the periods indicated were as follows:

                              1998                             1997
                   ----------------------------    -----------------------------
                          Average price                  Average price
                    bbls     per bbl    Total       bbls    per bbl    Total

Oil sales          64,954    $14.84   $964,000     63,783   $22.50   $1,436,000
Royalties paid                         (66,000)                        (315,000)
                                      ---------                      -----------
Total                                 $898,000                       $1,121,000
                                      ========                       ==========
                                                 
                                                 
<PAGE>                                          



         Gas sales  increased  35% because of a 52%  increase in number of units
sold which was  partially  offset by a 6% decrease in the average price for gas.
In addition,  gas sales include  royalty income which decreased 13% in 1998. The
Company sold the majority of its working interest gas properties  effective July
1, 1998. The primary increase in gas production was the payout of two wells that
had been in a penalty  position.  These wells were  included  in the  properties
sold.  The volumes in million  cubic feet  ("mmcf") and the average price of gas
per  thousand  cubic feet  ("mcf")  sold  during the periods  indicated  were as
follows:

                              1998                             1997
                   ----------------------------    -----------------------------
                         Average price                    Average price
                   mmcf     per mcf     Total      mmcf      per mcf     Total

Gas sales           304      2.17     $660,000      200       2.31     $462,000
Royalty income                         127,000                          146,000
Royalties paid                         (82,000)                         (85,000)
                                      ---------                        ---------
Total                                 $705,000                         $523,000
                                      ========                         ========

         Proceeds under carried  interest  agreements  decreased 57% to $207,000
during 1998 compared to $476,000 in 1997.  During 1998,  there were  significant
expenditures  made  by  the  operators  of  the  carried  interest   properties,
therefore, revenues from these properties will be substantially lower in 1999.

         Interest  and  other  income  decreased  44% in 1998.  Interest  income
decreased  from  $336,000  to  $194,000  in 1998  due to the  decrease  in funds
available for investment and lower interest rates. In addition,  the 1998 period
includes  proceeds  from the  sale of  seismic  data in the  amount  of  $27,000
compared to $59,000 from such sales in 1997.  Interest income should increase in
1999 with the increased funds available from the 1998 sale of properties.  It is
not possible for the Company to estimate the amount of future seismic data sales
which are  dependent on a purchaser's  evaluation  of a prospective  oil and gas
prospect for the related seismic data that the Company owns.

         Gain on the sale of properties in 1998 amounted to $1,378,000 primarily
represents  the sale of the  Company's  heavy oil  properties in Alberta and the
sale of certain working interest properties in British Columbia.

         General and  administrative  costs  increased 18% in 1998 to $1,301,000
from $1,105,000 in 1997 primarily as a result of increased  Company  activity in
connection with the Kotaneelee litigation and the Company's exploration program.
In addition,  the  expenses  increased  in the United  States  because of the 7%
increase in the value of the U.S.  dollar compared to the Canadian dollar during
1998.



<PAGE>


         Legal  expenses  increased  24% during 1998 to  $2,358,000  compared to
$1,898,000  during 1997. These expenses are related primarily to the cost of the
Kotaneelee litigation.  During 1998, the Company continued the presentation of a
major part of its case against the working interest partners. The Company's case
was completed on September 16, 1998 and Defendants' case is now proceeding.  The
1998 costs represent both legal fees and the cost of various Company experts who
testified,   were  being   prepared   for   testimony,   or   assisted   in  the
cross-examination of defense witnesses.

         Lease  operating  costs increased 22% from $799,000 in 1997 to $976,000
in the 1998 period. The increase  represents the charges by the operators of the
Company's properties which is related to the increased production.  In addition,
the  Company's  share  of  production  costs  in  producing  Alberta  heavy  oil
increased.  Lease  operating  costs should  decrease in 1999 because of the 1998
sale of properties.

         Depletion,  depreciation and amortization expense increased 39% in 1998
to $870,000  from  $624,000 in 1997.  The  increase in  depletion in 1998 is the
result  of  increased  production  and the  amount  of  additional  costs  being
depleted.

         A foreign  exchange  gain of $179,000 was recorded in 1998,  contrasted
with a gain of $231,000 on the Company's U.S.  investments in 1997. In 1998, the
gain was  attributable  to the continuing  strengthening  of the U.S.  dollar as
compared to the Canadian dollar on the Company's U.S. investments.

         Abandonments  and write downs were $685,000 which resulted from a write
down of certain of the Company's  properties in California and Texas. There were
no abandonments and write downs in 1997.

         Income taxes. No provision for income taxes was required in 1998. There
has been no income tax  recovery  recorded  in the  accounts  for the  Company's
losses  because there is a lack of virtual  certainty  that the recovery will be
realized.  If at such time as the Company  begins to receive  revenues  from the
Kotaneelee  gas field,  it is expected  that the tax  recovery  benefit of these
losses will be recognized.

1997 vs. 1996

         The net  loss  for the  year  1997 was  $1,757,664,  ($.12  per  share)
compared to a net loss of  $1,461,283  ($.11 per share) for the 1996  period.  A
summary of revenue and expenses during the periods is as follows:

                                 1997                1996             Net Change
                                 ----                ----             ----------
Revenues                      $2,514,978          $2,228,393          $ 286,585
Costs and expenses            (4,272,642)         (3,689,676)          (582,966)
                              -----------         -----------         ----------
Net loss                     $(1,757,664)        $(1,461,283)         $(296,381)
                             ============        ============         ==========
                                            


<PAGE>


         Oil  sales  increased  by  46%  due  primarily  to an 85%  increase  in
production which was partially offset by a 12% decrease in the average prices of
oil sold.  There was also a 184% increase in royalties paid by the Company.  Oil
unit sales in barrels  ("bbls")  (before  deducting  royalties)  and the average
price per barrel sold during the periods indicated were as follows:

                               1997                             1996
                   ------------------------------   ----------------------------
                          Average price                   Average price
                    bbls     per bbl    Total        bbls    per bbl    Total
                                                                     
Oil sales          63,783    $22.50   $1,436,000    34,565   $25.47    $880,000
Royalties paid                          (315,000)                      (111,000)
                                      -----------                      ---------
Total                                 $1,121,000                       $769,000
                                      ==========                       ========
                                                                    
         Gas sales  increased 33%. There was a 41% increase in the average price
for gas and a 2%  increase  in  number of units  sold.  In  addition,  gas sales
include royalty income which increased 35% in 1997. The volumes in million cubic
feet ("mmcf") and the average price of gas per thousand  cubic feet ("mcf") sold
during the periods indicated were as follows:


                               1997                            1996
                   -----------------------------   -----------------------------
                          Average price                   Average price
                   mmcf      per mcf     Total     mmcf      per mcf     Total
                                                         
Gas sales           200       $2.31    $462,000     197       $1.64    $323,000
Royalty income                          146,000                         108,000
Royalties paid                          (85,000)                        (36,000)
                                       ---------                       ---------
Total                                  $523,000                        $395,000
                                       ========                        ========
                                                        
         Proceeds under carried  interest  agreements  decreased 20% to $476,000
during 1997 compared to $591,000 in 1996. The operator of the Company's  carried
interest  properties  increased  its  development  activities  during late 1996,
thereby incurring additional capital costs which were deducted in 1997. Proceeds
under carried interest agreements are derived from net production revenues after
payout of capital costs.

         Interest  and  other  income  decreased  17% in 1997.  Interest  income
increased  from  $259,000  to  $336,000  in 1997  due to the  increase  in funds
available for investment from the June 1996 rights offering to shareholders.  In
addition, the 1997 period includes proceeds from the sale of seismic data in the
amount of $59,000 compared to $215,000 from such sales in 1996.



<PAGE>


         General and  administrative  costs  increased 23% in 1997 to $1,105,000
from  $895,000 in 1996.  Capital  taxes,  which are based on the  Company's  net
worth,  increased  $48,000 in 1997.  Directors'  fees increased  $44,000 in 1997
because four nonemployee  directors are being paid fees in 1997 compared to 1996
when only two directors  were paid fees.  Geological  and  engineering  expenses
increased $23,000 in 1997 because of the Company's active  exploration  program.
Shareholders'  expenses  increased  $32,000 in 1997  compared to 1996 because of
increased  printing and mailing costs.  Salaries  increased $39,000 in 1997 with
the addition of a new employee.

         Legal  expenses  increased  18% during 1997 to  $1,898,000  compared to
$1,610,000  during 1996. These expenses are related primarily to the cost of the
Kotaneelee  litigation.  During 1997, the Company  presented a major part of its
case against the working interest partners.  The 1997 costs represent both legal
fees and the  cost of  various  Company  experts  who  testified  or were  being
prepared for testimony.

         Lease  operating  costs increased 68% from $477,000 in 1996 to $799,000
in the 1997 period.  The increased costs are relative to the 85% increase in oil
production.  Although the revenue on these  properties also increased during the
period,  the costs are not yet  proportional  to revenue because some of the new
wells are awaiting installation of production facilities.

         A foreign  exchange  gain of $231,000 was recorded in 1997,  contrasted
with a gain of $25,000 on the Company's  U.S.  investments in 1996. In 1997, the
gain was  attributable to a strengthening  of the U.S. dollar as compared to the
Canadian dollar on the Company's U.S. investments.

         Income taxes. No provision for income taxes is required for the current
period.

Item 7A. Quantitative and Qualitative Disclosure About Market Risk

         The Company  does not have any  significant  exposure to market risk as
the only market risk  sensitive  instruments  are its  investments in marketable
securities.  At December 31, 1998,  the carrying value of such  investments  was
approximately  $6,703,000 which was  approximately  equal to fair value and face
value of the  investments.  Since the Company expects to hold the investments to
maturity,  the maturity  value should be realized.  In addition,  the  Company's
investments in marketable  securities  included  investments  held in the United
States which are subject to foreign exchange fluctuations. At December 31, 1998,
the investments in the United States totaled $1,823,000.


<PAGE>


Item 8.  Financial Statements and Supplementary Data



                                AUDITORS' REPORT




To the Shareholders of
Canada Southern Petroleum Ltd.


We have audited the  consolidated  balance sheets of Canada  Southern  Petroleum
Ltd.  as at December  31,  1998 and 1997,  and the  consolidated  statements  of
operations  and deficit,  cash flows and limited  voting shares and  contributed
surplus for each of the years in the three year period 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 audits.

We conducted our audits in accordance with generally accepted auditing standards
in Canada.  Those standards  require that we plan and perform an audit to obtain
reasonable  assurance  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.

In our opinion,  the consolidated  financial  statements  present fairly, in all
material  respects,  the financial position of Canada Southern Petroleum Ltd. as
at December 31, 1998 and 1997 and the results of its  operations and the changes
in its  financial  position for each of the years in the three year period ended
December 31, 1998, in accordance with accounting  principles  generally accepted
in Canada.




Calgary, Canada                                    /s/ ERNST & YOUNG LLP
March 18, 1999                                     Chartered Accountants


<PAGE>


                         CANADA SOUTHERN PETROLEUM LTD.
                  (Incorporated under the laws of Nova Scotia)

                           CONSOLIDATED BALANCE SHEETS
                         (Expressed in Canadian dollars)


                                                         As at December 31,
                                                         1998          1997
                                                     -----------    -----------
           Assets
 Current assets
 Cash and cash equivalents (Note 2)                  $ 6,208,634    $ 2,129,156
 Marketable securities (Note 3)                          751,511      3,373,334
 Accounts receivable (Notes 4 and 7)                     266,116      1,226,086
 Other assets                                            319,697        242,278
                                                     -----------    -----------
 Total current assets                                  7,545,958      6,970,854
                                                     -----------    -----------

 Oil and gas properties and equipment
   (full cost method) (Note 4)                        10,000,010     13,984,771
                                                     -----------    -----------
 Total assets                                        $17,545,968    $20,955,625
                                                     ===========    ===========

           Liabilities and Shareholders' Equity

 Current liabilities
   Accounts payable                                  $   375,554    $ 1,120,521
   Accrued liabilities (Note 10)                         294,491        277,715
                                                     -----------    -----------
 Total current liabilities                               670,045      1,398,236
                                                     -----------    -----------

 Future site restoration costs                           236,045        210,974
                                                     -----------    -----------

 Contingencies (Note 8)                                        -              -

 Shareholders' Equity
   Limited Voting Shares, par value
     $1 per share (Note 5)
   Authorized - 100,000,000 shares
   Outstanding -14,234,740 shares                     14,234,740     14,234,740
   Contributed surplus                                26,254,139     26,254,139
                                                     -----------    -----------
 Total capital                                        40,488,879     40,488,879
 Deficit                                             (23,849,001)   (21,142,464)
                                                     -----------    -----------
 Total shareholders' equity                           16,639,878     19,346,415
                                                     -----------    -----------
 Total liabilities and shareholders' equity          $17,545,968    $20,955,625
                                                     ===========    ===========

                             See accompanying notes.


                  Approved on behalf of the Board

                                 /s/ M. A. Ashton        /s/ Arthur B. O'Donnell
                                     Director                Director


<PAGE>


                         CANADA SOUTHERN PETROLEUM LTD.

                Consolidated Statements of Operations and Deficit
                         (Expressed in Canadian dollars)


<TABLE>
<CAPTION>
                                                                         Year ended December 31,
                                                            1998                   1997                  1996
                                                        ------------           ------------          ------------ 
Revenues:
<S>                                                     <C>                    <C>                 <C>           
  Oil sales (Notes 9 and 10)                            $    897,878           $  1,120,789        $      768,576
  Gas sales (Notes 9 and 10)                                 705,277                523,433               395,068
  Proceeds under carried interest agreements                 206,503                475,697               590,935
  Interest and other income                                  221,523                395,059               473,814
  Gain on sale of assets                                   1,378,180                      -                     -
                                                        ------------           ------------          ------------ 
                                                                                          -
    Total revenues                                         3,409,361              2,514,978             2,228,393
                                                        ------------           ------------          ------------ 

Costs and expenses:
  General and administrative                               1,300,595              1,104,535               894,766
  Legal (Note 8)                                           2,357,707              1,897,506             1,610,477
  Lease operating costs                                      975,899                799,372               476,562
  Depletion, depreciation and amortization                   869,600                623,600               654,982
  Foreign exchange gains                                    (178,850)              (231,457)              (24,693)
  Provision for future site restoration costs                 29,500                 21,500                24,600
  Rent                                                        76,812                 57,586                52,982
  Abandonments and write downs                               684,635                      -                     -
                                                        ------------           ------------          ------------ 
                                                                                          -
    Total costs and expenses                               6,115,898              4,272,642             3,689,676
                                                        ------------           ------------          ------------ 

  Loss before income taxes                                (2,706,537)            (1,757,664)           (1,461,283)
  Income taxes (Note 6)                                            -                      -                     -
                                                        ------------           ------------          ------------ 
                                                                                          -
Net loss                                                  (2,706,537)            (1,757,664)           (1,461,283)
  Deficit - beginning of period                          (21,142,464)           (19,384,800)          (17,923,517)
                                                        ------------           ------------          ------------ 
  Deficit - end of period                               $(23,849,001)          $(21,142,464)         $(19,384,800)
                                                        =============          =============         =============

Net loss per share (Basic & Fully Diluted)                 $(.19)                 $(.12)                $(.11)
                                                           ======                 ======                ======

Average number of shares
  Outstanding (Basic & Fully Diluted)                     14,234,740             14,084,294            13,362,410
                                                          ==========             ==========            ==========
</TABLE>


                             See accompanying notes.



<PAGE>


                         CANADA SOUTHERN PETROLEUM LTD.

                      Consolidated Statements of Cash Flows
                         (Expressed in Canadian dollars)

<TABLE>
<CAPTION>
                                                                                  Year ended
                                                                                  December 31,
                                                               1998                   1997                   1996
                                                           -----------            -----------            ----------- 
Cash flows from operating activities:
<S>                                                        <C>                    <C>                    <C>         
    Net loss                                               $(2,706,537)           $(1,757,664)           $(1,461,283)
    Adjustments to reconcile net loss
       to net cash provided by
      (used in) operating activity:
    Depreciation, depletion and amortization                   869,600                623,600                654,982
    Future site restoration costs (net)                         25,071                (39,300)               (56,454)
    Gain on sale of assets                                  (1,378,180)                     -                      -
    Abandonments and write downs                               684,635                      -                      -
  Change in assets and liabilities:
    Accounts and interest receivable                           959,970               (590,863)              (284,625)
    Other assets                                               (77,419)               (14,910)               112,074
    Accounts payable                                          (744,967)               680,684                314,328
    Accrued liabilities                                         16,776                 95,611                (54,228)
                                                           -----------            -----------            ----------- 
Net cash used in operations                                 (2,351,051)            (1,002,842)              (775,206)
                                                           -----------            -----------            ----------- 

Cash flows from investing activities:
  Additions to oil and gas properties (net)                 (1,942,474)            (3,258,426)            (1,496,308)
  Sale (purchase) of marketable securities                   2,621,823              2,079,452             (5,452,786)
  Proceeds from the sale of properties                       5,751,180                      -                      -
                                                           -----------            -----------            ----------- 
et cash used in investing activities                        6,430,529             (1,178,974)            (6,949,094
                                                           -----------            -----------            ----------- 

Cash flows from Financing Activities:
  Sale of common stock less expenses                                 -                      -              9,019,609
  Exercise of stock options                                          -              1,601,375                232,707
                                                           -----------            -----------            ----------- 
Net cash from financing activities                                   -              1,601,375              9,252,316
                                                           -----------            -----------            ----------- 

Increase (decrease) in cash
  and cash equivalents                                       4,079,478               (580,441)             1,528,016
Cash and cash equivalents at the
  beginning of period                                        2,129,156              2,709,597              1,181,581
                                                           -----------            -----------            ----------- 
Cash and cash equivalents at the
  end of period (Note 2)                                   $ 6,208,634            $ 2,129,156            $ 2,709,597
                                                           ===========            ===========            ===========
</TABLE>


                             See accompanying notes.

<PAGE>


                         CANADA SOUTHERN PETROLEUM LTD.

                CONSOLIDATED STATEMENTS OF LIMITED VOTING SHARES
                             AND CONTRIBUTED SURPLUS
                         (Expressed in Canadian dollars)



<TABLE>
<CAPTION>
                                                          Limited
                                         Number        Voting Shares      Contributed    
                                       of shares        $1 par value        surplus           Total
                                       ----------      -------------      -----------      -----------
                                                                                         
<S>                                    <C>               <C>               <C>              <C>       
Balance as at December 31, 1995        12,645,791        12,645,791        16,989,397       29,635,188
                                                                                         
Sale of common stock                    1,268,549         1,268,549         7,751,060        9,019,609
Exercise of stock options                  42,200            42,200           190,507          232,707
                                       ----------       -----------       -----------      -----------
                                                                                         
Balance as at December 31, 1996        13,956,540        13,956,540        24,930,964       38,887,504
                                                                                         
Exercise of stock options                 278,200           278,200         1,323,175        1,601,375
                                       ----------       -----------       -----------      -----------
                                                                                         
Balance as at December 31, 1997        14,234,740       $14,234,740       $26,254,139      $40,488,879
  and 1998                             ==========       ===========       ===========      ===========
</TABLE>


                             See accompanying notes.



<PAGE>

                         CANADA SOUTHERN PETROLEUM LTD.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                         (Expressed in Canadian dollars)
                        December 31, 1998, 1997 and 1996

1.       Summary of significant accounting policies

Accounting principles

         The  Company  prepares  its  accounts  in  accordance  with  accounting
principles  generally  accepted in Canada which,  except as described in Note 6,
conform  in  all  material  respects  with  United  States  generally   accepted
accounting principles ("U.S. GAAP").

Consolidation

         The  consolidated  financial  statements include the accounts of Canada
Southern Petroleum Ltd. and its wholly-owned subsidiaries,  Canpet Inc. and C.S.
Petroleum Limited.

Use of Estimates

         The  preparation of financial  statements in conformity  with generally
accepted  accounting  principles  requires  management  to  make  estimates  and
assumptions  that affect the amounts  reported in the financial  statements  and
accompanying  notes.   Specifically   estimates  were  utilized  in  calculating
depletion,   depreciation  and   amortization,   site  restoration   costs,  and
abandonments and write downs. Actual results could differ from those estimates.

Cash and cash equivalents

         For the purposes of the statement of cash flows, the Company  considers
all highly liquid investments with a maturity of three months or less to be cash
equivalents.

Oil and gas properties and equipment

         The  Company,   which  is  engaged  primarily  in  one  industry,   the
exploration for and the  development of oil and gas  properties,  principally in
Canada,  follows the full cost method of accounting for oil and gas  properties,
whereby all costs associated with the exploration for and the development of oil
and gas reserves are capitalized. Such costs include land acquisition, drilling,
geological, geophysical and overhead expenses.

         The Company  periodically reviews the costs associated with undeveloped
properties  and  mineral  rights  to  determine  whether  they are  likely to be
recovered.  When such  costs  are not  likely to be  recovered,  such  costs are
transferred to the depletable pool of oil and gas costs.


<PAGE>


                         CANADA SOUTHERN PETROLEUM LTD.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                         (Expressed in Canadian dollars)
                        December 31, 1998, 1997 and 1996

1.       Summary of significant accounting policies (Cont'd)

         The net  carrying  cost of the  Company's  oil  and gas  properties  in
producing  cost  centers is limited to an  estimated  recoverable  amount.  This
amount is the  aggregate  of future net  revenues  from proved  reserves and the
costs of  undeveloped  properties,  net of  impairment  allowances,  less future
general and administrative  costs,  financing costs and income taxes. Future net
revenues  are  calculated  using  year  end  prices  that are not  escalated  or
discounted. For Canadian GAAP future net revenues are undiscounted, whereas, for
U.S. GAAP future net revenues are discounted at 10%.

         The costs of the Company's 30% carried  interest in the  Kotaneelee gas
field are  included  in oil and gas  properties  and in the cost  center for the
purpose of computing  depletion.  In addition,  the Company's share of estimated
net reserves  after payout are also  included in the proved oil and gas reserves
base for the purpose of computing depletion. However, no revenue production data
will be reported for financial  statement purposes until the Company is entitled
to participate in the field's revenue after payout status is achieved.

         Gains or losses  are not  recognized  upon  disposition  of oil and gas
properties unless crediting the proceeds against  accumulated costs would result
in a change in the rate of depletion of 20% or more.

         Depletion is provided on costs  accumulated  in producing  cost centers
including production equipment using the unit of production method. For purposes
of the depletion calculation, gross proved oil and gas reserves as determined by
outside  consultants  are  converted to a common unit of measure on the basis of
their approximate relative energy content.

         Depreciation  has been computed for  equipment,  other than  production
equipment,  on the straight-line  method based on estimated useful lives of four
to ten years.

         Substantially   all  of  the  Company's   exploration  and  development
activities  related  to oil  and gas  are  conducted  jointly  with  others  and
accordingly the  consolidated  financial  statements  reflect only the Company's
proportionate interest in such activities.

Revenue recognition

         The Company recognizes revenue on its working interest  properties from
the production of oil and gas in the period the oil and gas are sold.



<PAGE>


1.       Summary of significant accounting policies (Cont'd)

         Revenue  under  carried  interest  agreements is recorded in the period
when the proceeds become  receivable.  The Company is entitled to participate in
oil and gas net  revenues  after the  repayment  of  exploration,  drilling  and
completion  expenses to the party or parties  bearing  these costs.  The carried
interest  accounts  are subject to  independent  audits  which are  performed in
subsequent  years. In the past,  these audits have resulted in both positive and
negative  adjustments.  For these reasons,  the proceeds under carried  interest
agreements may fluctuate each year  depending on both capital  expenditures  and
any audit adjustments.

Earnings per share

         Earnings per common share is based upon the weighted  average number of
common and common equivalent shares  outstanding  during the period. In February
1997, the FASB issued Statement No. 128,  Earnings per Share ("EPS"),  which the
Company adopted retroactively  in 1997 for purposes of U.S. GAAP reporting.  The
Company's basic and diluted  calculations of EPS are the same  for both U.S. and
Canadian GAAP.

Future site restoration costs

         Total future site  restoration  costs are  estimated to be $271,000 and
are being  provided on a unit of  production  basis.  The  provision is based on
current costs of complying with existing  legislation and industry  practice for
site restoration and abandonment. At December 31, 1998, approximately $36,000 in
such costs have yet to be accrued. The sale of the Company's Alberta and British
Columbia  properties  during 1998  relieved the Company of $533,000 of potential
future restoration costs.

Income taxes

         The Company  follows the deferral  method of tax allocation  accounting
whereby  the income tax  provision  is based on pre-tax  income  reported in the
accounts.  Under this method,  full provision is made for deferred  income taxes
resulting  from  claiming  deductions  at the  rates  permitted  by  income  tax
legislation, which may differ from those used in the accounts.

Foreign currency translation

         Transactions  for  settlement in U.S.  dollars have been  translated at
average monthly exchange rates. Assets and liabilities in U.S. dollars have been
translated at the year end exchange  rates.  Exchange gains or losses  resulting
from these adjustments are included in costs and expenses.



<PAGE>


1.       Summary of significant accounting policies (Cont'd)

Financial instruments

         The carrying value for cash and cash equivalents,  accounts  receivable
and accounts payable approximates fair value based on anticipated cash flows and
current market conditions.

Comprehensive income

         In 1997, the Financial Accounting Standards Board issued FASB Statement
No. 130,  Reporting  Comprehensive  Income. As the Company has no items of other
comprehensive  income, the net loss under U.S. GAAP for all periods presented is
equal to the comprehensive loss.

2.       Cash and cash equivalents

         The Company  considers  all highly liquid short term  investments  with
maturities  of  three  months  or  less  at  date  of  acquisition  to  be  cash
equivalents.  Cash  equivalents  are carried at cost which  approximates  market
value.

<TABLE>
<CAPTION>
                                                                                    1998                 1997
<S>                                                                              <C>                  <C>        
Cash                                                                             $  269,918           $  436,030
Canadian and U.S. bankers acceptances (1998-4.9%, 1997-2.9%)                      4,880,833              988,437
U.S. Government securities (1998-4.8%, 1997-5.6%)                                 1,057,883              704,689
                                                                                 ----------           ----------
                                                                                 $6,208,634           $2,129,156
                                                                                 ==========           ==========
</TABLE>

3.       Marketable Securities

         At  December  31,  1998  and  1997,  the  Company  held  the  following
marketable securities which were expected to be held until maturity:

<TABLE>
<CAPTION>
                                                             1998
                   Security                        Par value        Maturity Date      Amortized Cost     Fair value

U.S. Federal National                                                                                                 
<S>                                                <C>              <C>                 <C>               <C>       
  Mortgage Assoc.                                  $  765,111       Apr. 7, 1999        $  751,511        $  751,711
                                                   ==========                           ==========        ==========
                                                                                                      
                                                                                                      
                                                             1997                                          
U.S. Federal Home Bank Note                        $  143,021       Mar. 6, 1998        $  140,418        $  141,247
U.S. Federal Home Bank Note                           286,041       Apr. 6, 1998           278,324           280,925
U.S. Federal Farm Credit Bank Note                    143,021        May 4, 1998           139,600           139,469
U.S. Treasury Note                                  2,145,309       May 31, 1998         2,137,934         2,149,321
U.S. Federal Home Loan Bank Note                      715,103      Jun. 19, 1998           677,058           683,411
                                                   ----------                           ----------        ----------
Total                                              $3,432,495                           $3,373,334        $3,394,373
                                                   ==========                           ==========        ==========
</TABLE>


<PAGE>


4.       Oil and gas properties and equipment

<TABLE>
<CAPTION>
                                                                                      Less
                                                                                  Accumulated
                                                                                 Provisions and         Net Book
                                                                  Cost             Writedowns            Value
                                                               -----------       --------------       -----------
Balance December 31, 1998
<S>                                                            <C>                 <C>                <C>        
Oil and gas properties-developed                               $18,524,670         $8,720,066         $ 9,804,605
Oil and gas properties-(U.S.) undeveloped                          851,651            684,635             167,016
Seismic data                                                       112,000            112,000    
                                                               -----------         ----------         -----------
                                                                                                                -
                                                                19,488,321          9,516,701           9,971,621
Equipment                                                           75,073             46,684              28,389
                                                               -----------         ----------         -----------
                                                               $19,563,394         $9,563,385         $10,000,010
                                                               ===========         ==========         ===========

Balance December 31, 1997
Oil and gas properties - developed                             $21,192,037         $7,854,066         $13,337,971
Oil and gas properties (U.S.) - undeveloped                        616,980                  -             616,980
Seismic data                                                       112,000            112,000    
                                                               -----------         ----------         -----------
                                                                                                                -
                                                                21,921,017          7,966,066          13,954,951
Equipment                                                           67,769             37,949              29,820
                                                               -----------         ----------         -----------
                                                               $21,988,786         $8,004,015         $13,984,771
                                                               ===========         ==========         ===========
</TABLE>

         Substantially  all gas  sales  were made to  CanWest  Gas  Supply  Inc.
and oil sales were made to Probe Exploration,  Inc. ("Probe").  The gain on sale
of assets and the  amount of  abandonments  and write  downs are same under both
Canadian  and  U.S.  GAAP.  During  1998,  a total of  $95,000  of  general  and
administrative expenses were capitalized.

         The $266,000 amount of accounts receivable is due from various industry
partners which include Probe,  Berkley  Petroleum Ltd.,  PetroCanada and Alberta
Treasury.

5.       Limited Voting Shares and stock options

         The Memorandum of Association  (Articles of Continuance) of the Company
provides that no person (as defined) shall vote more than 1,000 shares.

         Under the  terms of the  Company's  1985,  1992 and 1998  stock  option
plans,  the Company is  authorized  to grant  certain  employees,  directors and
consultants  options to purchase  Limited  Voting  Shares at prices based on the
market price of the shares as determined  on the date of the grant.  The options
are normally exercisable  immediately and issued for a period of five years from
the date of grant.

         On January 27, 1998, the Company's Board of Directors  approved a stock
option  plan  that  permits  the  granting  of  both  stock  options  and  stock
appreciation  rights.  The plan for 700,000 shares was approved by the Company's
shareholders at the June 1998 Annual Meeting.  A total of 700,000 Limited Voting
Shares were reserved for the plan.


<PAGE>


5.       Limited Voting Shares and stock options (Cont'd)

         In 1996,  the Company sold 1.3 million  shares to its  shareholders  at
$7.50 per share.  The  proceeds to the  Company  from the rights  offering  were
$9,019,609 after deducting the $494,509 cost of the offering.

         Following  is  a  summary  of  option   transactions   which   reflects
adjustments of the stock option prices and the number of shares subject to stock
options as discussed above:

Options Outstanding    Expiration Dates    Number of Shares    Option Prices
-------------------    ----------------    ----------------    -------------
December 31, 1995    Oct. 1997 - Aug. 1999      461,700
  Canceled                                     (137,000)        3.45 - 7.00
  Exercised                                     (42,200)        3.45 - 8.75
  Granted                                       150,700         3.15 - 6.37
  Granted                                        12,500            8.75
                                                -------
December 31, 1996    Oct. 1999 - Jun. 2001      445,700
                                                -------
  Exercised                                    (278,200)        3.70 - 8.75
  Granted                                        35,000            13.50
December 31, 1997    Aug. 1999 - Oct. 2002      202,500        6.37 - 13.50
  Granted                                         7,500            10.25
                                               --------
December 31, 1998    Aug. 1999 - Apr. 2003      210,000 ($7.94 weighted average)
                                                =======
                   
Options reserved for future grants              869,634

         On July 8, 1996,  137,000 options to purchase  limited voting shares of
the Company which were previously  granted were canceled and reissued to reflect
the June 1996 rights offering.

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

          Pro forma  information  regarding net income and earnings per share is
required  by  Statement  123,  and has been  determined  as if the  Company  had
accounted for its stock  options under the fair value method of that  Statement.
The fair value for these  options  was  estimated  at the date of grant  using a
Black-Scholes option pricing model.



<PAGE>


5.       Limited Voting Shares and stock options (Cont'd)

          Option  valuation  models  require  that  input of  highly  subjective
assumptions including the expected stock price volatility. All of the valuations
assumed no expected  dividend.  The assumptions used in the 1996 valuation model
were:  risk free  interest  rate - 6.7%,  expected  life - 5 years and  expected
volatility - .396. The  assumptions  used in the 1997 valuation model were: risk
free  interest rate - 5.7%,  expected  life - 5 years and expected  volatility -
 .459. The assumptions  used in the 1998 valuation model were: risk free interest
rate - 4.45%, expected life - 5 years and expected volatility - .328.

          Because the Company's 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 stock options.

          For the purpose of pro forma disclosures,  the estimated fair value of
the  stock  options  is  expensed  in the year of grant  since the  options  are
immediately exercisable. The Company's pro forma information is as follows:

                                                            Amount     Per Share
Net loss as reported Canadian GAAP - December 31, 1996   $(1,461,283)    $(.11)
Stock option expense                                          49,373        -
                                                         -----------     ------
Pro forma net loss U.S. GAAP - December 31, 1996         $(1,510,656)    $(.11)
                                                         ============    ======
                                                            
Net loss as reported Canadian GAAP - December 31, 1997   $(1,757,664)    $(.12)
Stock option expense                                         225,400      (.02)
                                                         -----------     ------
Pro forma net loss U.S. GAAP - December 31, 1997         $(1,983,064)    $(.14)
                                                         ============    ======
                                                            
Net loss as reported Canadian GAAP - December 31, 1998   $(2,706,537)    $(.19)
Stock option expense                                          29,600        -   
                                                         -----------     ------
Pro forma net loss U.S. GAAP - December 31, 1998         $(2,736,137)    $(.19)
                                                         ============    ======
                                                             
6.        Income taxes

          Income  taxes vary from the amounts that would be computed by applying
the Canadian federal and provincial income tax rates as follows:

                                                 1998        1997        1996
                                            ------------  ----------  ----------
                                                44.84%      44.84%      44.84%
                                                ======      ======      ======
Provision (recovery) for income taxes
based on combined basic Canadian federal
and provincial income tax                   $(1,213,611)  $(788,137)  $(655,239)
Nondeductible crown charges                     104,663     154,463      61,599
Resource allowance                              403,270     232,922           -
Other                                            24,919      21,106         478
Nontaxable portion of capital gain              (20,049)    (20,743)          -
Unrealized tax loss                             700,808     400,389     593,162
                                            -----------   ---------   ---------
Actual provision for income taxes           $         -   $       -   $       -
                                            ===========   =========   =========
                                                              

<PAGE>

6.       Income taxes (Cont'd)

         At December 31, 1998,  the Company had net operating  losses for income
tax  purposes of  approximately  $3,821,000  which are  available  to be carried
forward to future periods.  These losses expire in the following  years:  1999 -
$194,000,  2000 - $294,000, 2001 - $545,000, 2002 - $569,000, 2003 - $1,077,000,
2004 - $544,000 and 2005 - $1,711,000.

         At December 31, 1998,  the  following  oil and gas tax  deductions  are
available to reduce future taxable income,  subject to a final  determination by
taxation authorities.

Canada

Drilling, exploration and lease acquisition costs                     $9,965,000
Earned depletion                                                       1,975,000
Undepreciated capital costs                                            2,322,000
Cumulative eligible capital losses                                       407,000
Share issue costs                                                        175,000

United States

Exploration and lease acquisition costs                                 $819,000

         The tax benefits  attributable  to the above  accumulated  expenditures
will not be  reflected  in the  consolidated  financial  statements  until  such
benefits are realized.

         Under U.S.  GAAP,  the  provisions for income taxes would have differed
for the reasons set out below:

         In February  1992,  the United States  Financial  Accounting  Standards
Board issued  Statement No. 109,  "Accounting  for Income Taxes",  effective for
fiscal years  beginning  after  December 15, 1993.  Under U.S. GAAP, the Company
would have been required to adopt Statement No. 109 commencing July 1, 1993.

         Under Statement No. 109, the liability method is used in accounting for
income  taxes.  Under this  method,  deferred  tax assets  and  liabilities  are
determined  based on differences  between  financial  reporting and tax bases of
assets and  liabilities  and are  measured  using the enacted tax rates and laws
that will be in effect when the  differences  are  expected  to  reverse.  Under
Canadian GAAP and previously  under U.S. GAAP,  income tax expense is determined
using the deferral method.  Deferred tax expense is based on items of income and
expense that are reported in different years in the financial statements and tax
returns and are  measured at the tax rate in effect in the year the  differences
originated.


<PAGE>


6.       Income taxes (Cont'd)

         The following schedule summarized the Company's income tax recovery and
deferred  tax asset under U.S.  GAAP.  If  Statement  No. 109 was  adopted,  the
Company  would have had a deferred  tax asset  which  primarily  represents  the
excess of  available  resource  deductions  for  income  tax  purposes  over the
recorded  value of oil and gas  properties  together with  operating and capital
income tax loss  carryforwards.  These amounts are expected to be recovered from
the  production of current oil and gas reserves when the  Kotaneelee  litigation
expenditures  have ended.  As certain of the resource  deductions are restricted
and the  operating  loss  carryforwards  are  subject  to  expiration,  there is
considerable  risk  that  certain  of these  deductions  will  not be  utilized.
Accordingly,  the  Company  would have  established  a  valuation  allowance  to
recognize this uncertainty.  Income taxes computed in accordance with U.S. GAAP,
would have resulted in a credit to the provision of taxes.

                                     1998              1997              1996
                                 -----------       -----------       -----------
Deferred tax asset               $4,749,727        $3,663,793        $3,233,506
Valuation reserve                (3,441,222)       (2,733,655)       (2,473,526)
                                 -----------       -----------       -----------
Net deferred tax asset           $1,308,505        $  930,138        $  759,980
                                 ==========        ==========        ==========

Deferred tax recovery            $  378,367        $  170,158        $  225,222
                                 ==========        ==========        ==========

         Net loss  under U.S.  GAAP,  in total,  and per share  based on average
number of shares outstanding during the periods shown is as follows:

<TABLE>
<CAPTION>
                                                             1998              1997              1996
                                                         ------------      ------------      ------------
<S>                                                      <C>               <C>               <C>         
Net loss under Canadian GAAP before income taxes         $(2,706,537)      $(1,757,664)      $(1,461,283)
Income tax adjustment                                        378,367           170,158           225,222
                                                         ------------      ------------      ------------
Net loss under U.S. GAAP                                 $(2,328,170)      $(1,587,506)      $(1,236,061)
                                                         ============      ============      ============
Per Share Basis:                                                                           
Net loss under Canadian GAAP before income taxes            $(.19)            $(.12)            $(.11)
Income tax adjustment                                         .03               .01               .02
                                                            ------            ------            ------ 
Net loss under U.S. GAAP                                    $(.16)            $(.11)            $(.09)
                                                            ======            ======            ======
</TABLE>

          The  deficit  under   U.S.  GAAP   would  have  been  $22,540,496  and
$20,212,326 at December 31, 1998 and 1997, respectively.

7.        Line of credit

          The Company has a line of credit with a Canadian  chartered bank which
provides  for a loan of  $500,000.  The line of credit  provides  for a $125,000
operating  loan and  $375,000  for  letters of credit as part of the  directors'
indemnification  agreements. The interest rate on borrowing is at 3/4% above the
bank's prime lending rate. The line of credit is subject to annual review and is
secured by a general  assignment of accounts  receivable  and an  undertaking to
provide security in the form of assignment of future working interest proceeds.
No drawings were made under this line during 1998 or 1997.


<PAGE>


8.       Litigation

         The  Company,  which has a 30%  interest in the  Kotaneelee  gas field,
believes  that the  working  interest  owners in the field  have not  adequately
pursued the  attainment of contracts for the sale of Kotaneelee  gas. In October
1989 and in March 1990,  the Company  filed  statements of claim in the Court of
Queens  Bench of Alberta,  Judicial  District of  Calgary,  Canada,  against the
working interest partners in the Kotaneelee gas field. The named defendants were
Amoco Canada  Petroleum  Corporation,  Ltd.,  Dome Petroleum  Limited (now Amoco
Canada Resources Ltd.), and Amoco Production  Company  (collectively  the "Amoco
Dome Group"),  Columbia Gas Development of Canada Ltd.  ("Columbia"),  Mobil Oil
Canada Ltd.  ("Mobil") and Esso Resource of Canada Ltd.  ("Esso")  (collectively
the "Defendants").

         The  Company  claims  that the  Defendants  breached  either a contract
obligation  and/or a  fiduciary  duty owed to the Company to market gas from the
Kotaneelee  gas field when it was  possible to so do. The Company  asserts  that
marketing  the  Kotaneelee  gas was  possible  in 1984 and  that the  Defendants
deliberately failed to do so. The Company seeks money damages and the forfeiture
of the Kotaneelee gas field.  The Company  presented  evidence at trial that the
money damages sustained by the Company were approximately $100 million.

         In  addition,  the  Company  has  claimed  that the  Company's  carried
interest  account should be reduced  because of improper  charges to the carried
interest account by the Defendants.  The Company claims that when the Defendants
in 1980  suspended  production  from the field's gas wells,  they failed to take
precautionary  measures  necessary  to protect  and  maintain  the wells in good
operating condition. The wells thereafter deteriorated, which caused unnecessary
expenditures  to be incurred,  including  expenditures  to redrill one well.  In
addition,  the Company claims that  expenditures  made to repair and rebuild the
field's dehydration plant should not have been necessary had the facilities been
properly  constructed and maintained by the Defendants.  The  expenditures,  the
Company claims,  were  inappropriately  charged to the field's carried  interest
account.  The effect of an increased  carried  interest account is to extend the
period before payout begins to the carried interest account owners.



<PAGE>


8.       Litigation (Cont'd)

         The Company claims that production from the field should have commenced
in 1984. At that time the field's carried interest account was approximately $63
million.  The Company  claims  that by 1993 at least $34 million of  unnecessary
expenses  had been  wrongfully  charged to the  carried  interest  account.  The
Company's 30% share of these expenses would be approximately $10.2 million.  The
Company  further  claims that if production  had commenced in 1984,  the carried
interest  account  would have been paid off in  approximately  two years and the
Company would have begun to receive revenues from the field in 1986. At present,
the Company does not expect to receive revenues before the year 2000, based on a
price of Cdn. $1.28 per mcf and current production rates.

          Columbia has filed a counterclaim  against the Company seeking, if the
Company is  successful in its claim for the  forfeiture of the field,  repayment
from the  Company of all sums  Columbia  has  expended on the  Kotaneelee  lands
before the Company is entitled to its interest.

         The parties to the litigation have conducted  extensive discovery since
the filing of the claims.  The trial began on  September 3, 1996 and the Company
completed the  presentation  of its case against the Defendants on September 16,
1998. Based upon newly discovered evidence, the Company filed a new claim during
May 1998 that the Defendants failed to develop the field in a timely manner. The
Company is unable to estimate the time necessary to conclude the litigation.

Matters Ancillary to Kotaneelee Litigation

         In its 1989  statement  of  claim,  the  Company  sought a  declaratory
judgment regarding two issues:

         (1) whether interest accrued on the carried interest account; and

         (2) whether expenditures for gathering lines and dehydration  equipment
are  expenditures  chargeable  to the  carried  interest  account or whether the
Company will be assessed a processing fee on gas throughput.

         With respect to the first issue, the Company maintains that no interest
should  accrue  on the  account  and the  Defendants  have  not  contested  this
position.  With  regard to the second  issue,  the  Company  maintains  that the
expenditures are chargeable to the carried  interest  account.  Mobil,  Esso and
Columbia have essentially  agreed to the Company's position while the Amoco Dome
Group continues to contest this issue.



<PAGE>


8.       Litigation (Cont'd)

         On January 22, 1996, the Company settled two claims outstanding against
the Company in the Court of Queens Bench, Calgary,  Alberta,  which related to a
suit brought against  AlliedSignal  Inc.  ("AlliedSignal")  in Florida which was
dismissed on the basis that Canada was the appropriate forum for the litigation.
AlliedSignal  had sought  additional  relief  against  the  Company in Canada to
preclude  other  types of suits by the  Company  and to recover the costs of the
defense of the initial action.  The settlement bars  AlliedSignal  from making a
claim  against  the  Company  for any costs in  connection  with the  Kotaneelee
Litigation.  The Company agreed not to bring any action against  AlliedSignal in
connection  with the  Kotaneelee  gas field.  Neither  party  made any  monetary
payment to the other party.

         In 1991,  Anderson  Exploration  Ltd.  acquired  all of the  shares  in
Columbia and changed its name to Anderson Oil & Gas Inc. ("Anderson").  Anderson
is now the sole operator of the field and is a direct  defendant in the Canadian
lawsuit.  Columbia's  previous parent, The Columbia Gas System,  Inc., which was
reorganized in a bankruptcy  proceeding in the United States,  is  contractually
liable to Anderson in the legal proceeding described above.

         The working  interest  owners have reported that they have been selling
Kotaneelee gas since February 1991.

         Under  Canadian law,  certain  costs (known as "taxable  costs") of the
litigation may be assessed against the  non-prevailing  party.  Previously,  the
Company had reported  that while such costs were not  determinable,  the Company
estimated  that  taxable  costs,   assuming  a  twelve  month  trial,  could  be
approximately  $1.5  million  and noted  that the judge in complex  and  lengthy
trials has the discretion to increase an award.

         Effective September 1, 1998, the Alberta Rules of Court were amended to
provide  for a  material  increase  in the  costs  which may be  awarded  to the
prevailing party in matters before the Court. In addition,  the Company believes
that the trial  will  extend  well  beyond  its  original  time  estimates  and,
therefore, potentially assessable costs would increase accordingly.



<PAGE>


8.       Litigation (Cont'd)

         The trial has been lengthy,  complicated  and costly to all parties and
the Company believes that the prevailing party or parties in the litigation will
argue for a substantial  assessment of costs against the non-prevailing party or
parties.  The Court has very broad  discretion  as to whether to award costs and
disbursements   and  as  to  the  calculation  of  the  amount  to  be  awarded.
Accordingly,  the Company is unable to determine  whether,  in the event that it
does not prevail on its claims in the litigation, costs will be assessed against
it or in what amount.  However,  since the costs incurred by the Defendants have
been  substantial,  and since the Court has broad  discretion in the awarding of
costs, an award to the Defendants  potentially  could be material.  A cost award
against the Company  could be of sufficient  magnitude to  necessitate a sale of
Company assets or a debt or equity financing to fund such an award. There are no
assurances that any such sale or financing would be consummated.

          There is no assurance  whatever that the Company will be successful on
the merits of its claims, which have been vigorously defended by the Defendants.
There is also no  assurance  that the Company  will be awarded any  damages,  or
that,  if damages are  awarded,  the Court will apply the measure of damages the
Company claims should be applied.

9.       Related party transactions

         In 1991,  the Company  granted  interests to  certain of its  officers,
employees,  directors, counsel and consultants amounting to an aggregate of 7.8%
of any and all benefits to the Company  after  expenses  from the  litigation in
Canada  relating to the  Kotaneelee  gas field.  The Company has reserved a 2.2%
interest in such net  benefits  for  possible  future  grants to persons who may
include officers and directors of the Company.

         Mr. Heath, a director of the Company,  has royalty interests in certain
of the Company's oil and gas properties,  (present and past) which were received
directly  or  indirectly  through  the  Company.  The  Company  and  third-party
operators and/or owners of properties made payments  pursuant to these royalties
for the benefit of Mr. Heath totaling U.S. $8,324,  $11,158 and $10,844 in 1998,
1997 and 1996, respectively.



<PAGE>


10.      Other financial information

Accrued liabilities
                                                         1998             1997
                                                         ----             ----
Accrued accounting and legal expenses                  $ 69,890         $137,650
Accrued royalties                                       141,575          139,645
Other                                                    83,026              420
                                                       --------         --------
                                                       $294,491         $277,715
                                                       ========         ========


                                                  Year ended December 31,
                                             1998          1997          1996
                                            --------      --------      --------

Royalty payments (1)                        $146,161      $366,661      $147,572
                                            ========      ========      ========

Interest payments (2)                       $  1,625      $  1,775      $  2,224
                                            ========      ========      ========

Large corporation tax payments              $ 22,837      $ 27,388      $  2,741
                                            ========      ========      ========
--------------------
(1)      Oil and gas sales are reported net of royalties paid.
(2)      Bank line of credit charges.


11.      Year 2000 date issue

         The Year 2000 Issue arises  because many  computerized  systems use two
digits rather than four to identify a year. Date-sensitive systems may recognize
the year 2000 as 1900 or some other date,  resulting in errors when  information
using year 2000 dates is processed.  In addition,  similar problems may arise in
some systems which use certain dates in 1999 to represent something other than a
date. The effects of the Year 2000 Issue may be experienced before, on, or after
January 1, 2000,  and if not  addressed,  the impact on operations and financial
reporting may range from minor errors to significant systems failure which could
affect an entity's  ability to conduct  normal  business  operations.  It is not
possible  to be certain  that all aspects of the Year 2000 Issue  affecting  the
Company,  including  those  related to the efforts of customers,  suppliers,  or
other third parties, will be fully resolved.


<PAGE>



                         CANADA SOUTHERN PETROLEUM LTD.
                      SUPPLEMENTARY INFORMATION ON OIL AND
                            GAS PRODUCING ACTIVITIES
                                   (unaudited)

          The  following  information  includes  estimates  which are subject to
rapid and unanticipated  change.  Therefore,  these estimates may not accurately
reflect future net income to the Company.

          All amounts below except for costs, acreage, wells drilled and present
activities  relate  to  Canada.  Oil and gas  reserve  data and the  information
relating to cash flows were  provided by Paddock  Lindstrom &  Associates  Ltd.,
independent consultants.

Estimated net quantities of proved oil and gas reserves:


                                                          Oil              Gas
                                                         (bbls)           (bcf)
                                                        --------         -------
Proved reserves:
December 31,1995                                        284,800          33.205
  Revisions of previous estimates                       178,448          (2.655)
  Production*                                           (37,448)         (1.519)
                                                        --------         -------
December 31, 1996                                       425,800          29.031
  Revisions of previous estimates                       179,333          (3.802)
  Production*                                           (71,333)          (.838)
                                                        --------         -------
December 31, 1997                                       533,800          24.391
  Sale of properties                                    350,800)         (2.632)
  Revisions of previous estimates                       145,819)         (2.088)
  Production*                                           (73,381)         (1.263)
                                                        --------         -------
December 31, 1998                                        36,200          18.408
                                                        =======          ======

Proved developed reserves:
December 31, 1994                                       473,600          32.957
                                                        =======          ======
December 31, 1995                                       284,800          33.205
                                                        =======          ======
December 31, 1996                                       358,400          28.265
                                                        =======          ======
December 31, 1997                                       508,200          24.391
                                                        =======          ======
December 31, 1998                                        36,200          18.408
                                                        =======          ======

-----------------
*     Production  data  includes  oil and gas  sales and the  proceeds  from the
      carried interest properties.


<PAGE>


Results of oil and gas operations:


                                                 1998        1997        1996
                                              ----------  ----------  ----------
Income:
  Oil and gas sales                           $1,603,155  $1,644,222  $1,163,644
  Proceeds under carried
    interest agreements                          206,503     475,697     590,935
  Gain on sale of assets                       1,378,180           -           -
                                              ----------  ----------  ----------
                                               3,187,838   2,119,919   1,754,579
                                              ----------  ----------  ----------
Costs and expenses:
  Production costs                               975,899     799,372     476,562
  Depletion depreciation, and
    amortization                                 869,600     623,600     654,982
  Provision for future site
    restoration costs                             29,500      21,500      24,600
  Abandonments and write downs                   684,635           -           -
  Income tax expense                                   -           -           -
                                              ----------  ----------  ----------
                                               2,559,634   1,444,472   1,156,144
                                              ----------  ----------  ----------
Net income from operations                    $  628,204  $  675,447  $  598,453
                                              ==========  ==========  ==========

Capitalized costs of oil and gas activities:


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

Acquisition costs                             $   11,000  $  399,000  $  484,000
Exploration                                      174,000     546,000     146,000
Development                                    1,758,000   2,313,000     866,000

Standardized  measure of discounted future net cash flows relating to proved oil
and gas  reserve  quantities  during  the  following  period  (in  thousands  of
dollars):


                                                 1998        1997        1996
                                              ----------  ----------  ----------
Future cash inflows                            $ 28,052    $ 46,435    $ 49,410
Future development and production costs         (14,030)    (22,517)    (20,813)
                                               --------    --------    --------
                                                 14,022      23,918      28,597
Future income tax expense*                            -      (1,573)     (2,931)
                                               --------    --------    --------
Future net cash flows                            14,022      22,345      25,666
10% annual discount                              (4,781)     (7,836)     (9,691)
                                               --------    --------    --------
Standardized measure of discounted            
  future net cash flows                        $  9,241    $ 14,509    $ 15,975
                                               ========    ========    ========
                                             
* Reflects tax benefit for the years 1998, 1997 and 1996,  from  carryforward of
exploration,  development and lease  acquisition  costs,  undepreciated  capital
costs and book earned depletion of $16,381,000, $18,065,000, and $17,032,000.

         Current prices used in the foregoing  estimates were based upon selling
prices at the wellhead in the last month of each fiscal  period.  Current  costs
were based upon estimates made by consulting engineers at the end of each year.


<PAGE>


Changes in the standardized  measure during the following  periods (in thousands
of dollars):

                                                  Year ended December 31,
                                             1998          1997          1996
                                            -------       -------       -------
Changes due to:
Sale of properties                          $(4,374)      $     -       $     -
Prices and production costs                    (402)         (579)        3,248
Future development costs                     (1,204)       (2,350)       (1,049)
Sales net of production costs                  (906)       (1,562)       (1,330)
Development costs incurred
  during the year                             1,758         2,313           866
Net change due to extensions,
  discoveries and improved recovery               -         1,692         1,458
Revisions of quantity estimates                (872)       (3,642)       (4,229)
Accretion of discount                         1,045         1,723         1,660
Net change in income taxes                     (313)          939           423
                                            -------       -------       -------
Net change                                  $(5,268)      $(1,466)      $ 1,047
                                            ========      ========      =======



<PAGE>


Item 9.  Changes in and Disagreements with Accountants on
         Accounting and Financial Disclosure

         None.

                                    PART III

         For information  concerning Item 10 - "Directors and Executive Officers
of the Company," Item 11 "Executive Compensation," Item 12 - "Security Ownership
of Certain Beneficial Owners and Management" and Item 13 "Certain  Relationships
and Related  Transactions," see the Proxy Statement of Canada Southern Petroleum
Ltd.  relative to the Annual Meeting of  Shareholders  for the fiscal year ended
December  31,  1998,  which  will be filed  with  the  Securities  and  Exchange
Commission,   which  information  is  incorporated  herein  by  reference.   For
information  concerning Item 10 - "Executive  Officers of the Company," see Part
I.



<PAGE>


                                     PART IV

Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K

         (a)      (1)      Financial Statements

                  The  financial  statements  and  schedules  listed  below  and
included under Item 8, above are filed as part of this report.

                                                                          Page
                                                                       Reference

Auditors' Report                                                           34
Consolidated Balance Sheets as at December 31, 1998 and 1997               35
For the years ended December 31, 1998, 1997 and 1996
    Consolidated Statements of Operations and Deficit                      36
    Consolidated Statements of Cash Flows                                  37
Consolidated Statements of Limited Voting Shares and Contributed
  Surplus for the three years ended December 31, 1998                      38
Notes to Consolidated Financial Statements                               39-52
Supplementary Information On Oil and Gas Producing Activities (unaudited)  53

                  (2)      Consolidated Financial Statement Schedules

                           All  schedules  have been  omitted since the required
information  is not  present or not  present in  amounts  sufficient  to require
submission of the schedule,  or because the information  required is included in
the consolidated financial statements or the notes thereto.

                  (3)      Exhibits

                           List of each management  contract or  compensatory or
arrangement required to be filed as an exhibit pursuant to Item 14(c).

                           None.

         (b)      Reports on Form 8-K

                  On November 25, 1998,  the Company  filed a Current  Report on
Form 8-K to report that it had sold its heavy oil properties in Alberta for $2.2
million.  In addition,  the Company also  reported that it completed the sale of
its British Columbia  properties for $3.6 million.  The Company reported that it
would record an estimated total gain of $1.3 million on the transactions.



<PAGE>


         (c)      Exhibits

                  The following exhibits are filed as part of this report:

         Item Number

                  2.       Plan of acquisition, reorganization, arrangement,
                           liquidation or succession

                           Not applicable.

                  3.       Articles of Incorporation and By-Laws

                           (a)  Memorandum of Association as amended on June 30,
                           1982, May 14, 1985 and April 7, 1988 filed as Exhibit
                           4B to Form  S-8 as  filed  on  November  25,  1998 is
                           incorporated by reference.

                           (b) By-laws, as amended,  filed as Exhibit 4C to Form
                           S-8 as filed on November 25, 1998 are incorporated by
                           reference.

                  4.       Instruments defining the rights of security holders,
                           including indentures

                           None.

                  9.       Voting trust agreement

                           None.

                  10.      Material contracts

                           (a)  Agreements relating to Kotaneelee.
                             (1.)  Copy of Agreement dated  May 28, 1959 between
                           the Company et al.  and  Home Oil  Company Limited et
                           al. and Signal Oil and Gas Company is filed herein.

                             (2.) Copies of  Supplementary  Documents to May 28,
                           1959 Agreement (see (1) above),  dated June 24, 1959,
                           consisting  of Guarantee by Home Oil Company  Limited
                           and Pipeline Promotion Agreement, is filed herein.

                             (3.)  Copy of  Modification  to Agreement dated May
                           28, 1959  (see (1) above),  made  as  of  January 31,
                           1961, is filed herein.

                             (4.)  Copy of Agreement dated  April 1, 1966  among
                           the  Company et al. and Dome Petroleum Limited et al.
                           is filed herein.


<PAGE>

                             (5.)  Copy of Letter Agreement  dated  February  1,
                           1977 between the Company and Columbia Gas Development
                           of Canada,  Ltd. for operation of  the Kotaneelee gas
                           field is filed herein.

                           (b)  Copy of Agreement dated January 28, 1972 between
                           the Company and  Panarctic  Oils Ltd. for development
                           of the offshore Arctic Islands  gas  fields  is filed
                           herein.

                           (c)  Stock Option Plan  adopted  December 9, 1992  is
                           filed herein.

                           (d) Stock Option Plan effective July 1, 1998 filed as
                           Exhibit  A  to  Schedule   14A   Information   (Proxy
                           Statement) as filed on May 1, 1998 is incorporated by
                           reference.

                  11.      Statement re computation of per share earnings

                           None.

                  12.      Statement re computation of ratios

                           None.

                  13.      Annual report to security holders, Form 10-Q or
                           quarterly report to security holders

                           Not applicable.

                  16.      Letter re change in certifying accountant

                           Not applicable.

                  18.      Letter re change in accounting principles

                           None.

                  21.      Subsidiaries of the Company

                           Canpet  Inc.  incorporated  in  Delaware on August 3,
                           1973.  C. S. Petroleum  Limited  incorporated in Nova
                           Scotia on December 15, 1981.

                  22.      Published report regarding  matters submitted to vote
                           of security holders

                           None.

<PAGE>

                  23.      Consents of experts and counsel

                           (a)  Paddock  Lindstrom  &  Associates,  Ltd.   filed
                                herein.
                           (b)  Ernst & Young LLP filed herein.

                  24.      Power of attorney

                           Not applicable.

                  27.      Financial Data Schedule

                           Filed herein (EDGAR filing only).

                  99.      Additional exhibits

                  (a)      Statement  of Claim filed on October 27, 1989 against
                           Columbia  Gas  Development  of  Canada  Ltd.,   Amoco
                           Production  Company,  Dome Petroleum  Limited,  Amoco
                           Canada Petroleum  Company Ltd., Mobil Oil Canada Ltd.
                           and Esso  Resources  of Canada  Ltd.  in the Court of
                           Queen's  Bench  of  Alberta   Judicial   District  of
                           Calgary, Alberta, Canada is filed herein.

                  (b)      Amended Statement of Claim,  amending the October 27,
                           1989 Statement of Claim,  filed on March 12, 1990, is
                           filed herein.

                  (c)      Amended Statement of Claim in the same action,  filed
                           on November 17, 1993, is filed herein.

                  (d)      Amended  Statement  of Third  Party  Notice  by Amoco
                           Canada  Production  Company Ltd. and Amoco Production
                           Company,  filed November 17, 1993 in the same action,
                           is filed herein.

                  (e)      Amended Statement of Defense to Third Party Notice by
                           Anderson  Oil  &  Gas  Inc.  (formerly  Columbia  Gas
                           Development of Canada Ltd.) filed January 27, 1994 in
                           the same action is filed herein.

         (d)      Financial Statement Schedules

                  None.


<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.

                                        CANADA SOUTHERN PETROLEUM LTD.
                                                  (Registrant)


Dated:  March 30, 1999                  By /s/ M. Anthony Ashton
                                           M. Anthony Ashton
                                           President and Chief Executive Officer

         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.


By /s/ M. Anthony Ashton                By /s/ Kelly B. Johnson
   M. Anthony Ashton                       Kelly B. Johnson
   President and Director                  Treasurer and Chief Financial and
                                           Accounting Officer

Dated:         March 30, 1999           Dated:           March 30, 1999
       ----------------------------             ----------------------------
               

By /s/ Benjamin W. Heath                By /s/ Timothy L. Largay
   Benjamin W. Heath                       Timothy L. Largay
   Director                                Director


Dated:         March 30, 1999           Dated:           March 30, 1999
       ----------------------------             ----------------------------


By /s/ Arthur B. O'Donnell              By /s/ Eugene C. Pendery
   Arthur B. O'Donnell                     Eugene C. Pendery
   Director                                Director


Dated:         March 30, 1999           Dated:           March 30, 1999
       ----------------------------             ----------------------------



<PAGE>


                                INDEX TO EXHIBITS


Exhibit No.

     10.      (a)     Agreements relating to Kotaneelee

                      (1.)     Copy of Agreement dated May 28,  1959 between the
                               Company  et  al.  and Home Oil Company Limited et
                               al. and Signal Oil and Gas Company

                      (2.)     Copies of Supplementary Documents to May 28, 1959
                               Agreement  (see (1) above),  dated June 24, 1959,
                               consisting  of  Guarantee  by  Home  Oil  Company
                               Limited and Pipeline Promotion Agreement

                      (3.)     Copy of  Modification to Agreement  dated May 28,
                               1959 (see (1) above), made as of January 31, 1961

                      (4.)     Copy of  Agreement  dated April 1, 1966 among the
                               Company et al. and Dome Petroleum Limited et al

                      (5.)     Copy of Letter  Agreement  dated February 1, 1977
                               between the Company and Columbia Gas  Development
                               of Canada,  Ltd. for operation of the  Kotaneelee
                               gas field

              (b)     Copy  of  Agreement  dated  January 28, 1972  between  the
                      Company  and  Panarctic  Oils  Ltd. for development of the
                      offshore Arctic Islands gas fields

              (c)     Stock Option Plan adopted December 9, 1992

     23.      (a)     Consent of Independent Petroleum Engineers

              (b)     Consent of Independent Auditors

     27.      Financial Data Schedule (EDGAR filing only)



<PAGE>


                           INDEX TO EXHIBITS (Cont'd)


Exhibit No.

     99.      (a)     Statement  of  Claim  filed  on  October 27, 1989  against
                      Columbia Gas Development of Canada Ltd., Amoco  Production
                      Company,  Dome Petroleum Limited,  Amoco Canada  Petroleum
                      Company Ltd.,  Mobil Oil Canada Ltd. and Esso Resources of
                      Canada Ltd. in  the  Court  of  Queen's  Bench  of Alberta
                      Judicial District of Calgary, Alberta, Canada

              (b)     Amended Statement of Claim,  amending the October 27, 1989
                      Statement of Claim, filed on March 12, 1990

              (c)     Amended Statement of Claim  in the same action,  filed  on
                      November 17, 1993

              (d)     Amended  Statement  of  Third Party Notice by Amoco Canada
                      Production  Company  Ltd.  and  Amoco  Production Company,
                      filed November 17, 1993 in the same action

              (e)     Amended  Statement  of  Defense to Third  Party  Notice by
                      Anderson Oil & Gas Inc. (formerly Columbia Gas Development
                      of Canada Ltd.) filed January 27, 1994 in the same action