<PAGE>   1



                     U.S. SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

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

                                    FORM 10-Q

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


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

                FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 1998

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

                    FOR THE TRANSITION PERIOD FROM ___ TO ___

                           COMMISSION FILE NO. 0-21179



                           QUEEN SAND RESOURCES, INC.
                           QUEEN SAND RESOURCES, INC.
                            NORTHLAND OPERATING CO.
                            CORRIDA RESOURCES, INC.
           (Exact name of registrants as specified in their charter)



                DELAWARE                             75-2615565
                 NEVADA                              75-2564071
                 NEVADA                              75-2593510
                 NEVADA                              75-2691594
     (State or Other Jurisdiction of              (I.R.S. Employer
      Incorporation or Organization)             Identification Nos.)

                          13760 NOEL ROAD, SUITE 1030,
                       L.B. #44, DALLAS, TEXAS 75240-7336
               (Address of principal executive offices)(Zip code)
               --------------------------------------------------
       (Registrants' telephone number, including area code) (972) 233-9906

                                        
                                 3500 Oak Lawn
                                   Suite 380
                           Dallas, Texas  75218-4398
                           -------------------------
                     (Former name, former address of former
                   fiscal year, if changed since last report)


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

APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding
of each of the issuer's (parent only) classes of common stock, as of 
February 12, 1999: 32,129,713.


<PAGE>   2



                         PART I - FINANCIAL INFORMATION

                   QUEEN SAND RESOURCES, INC. AND SUBSIDIARIES

                     CONSOLIDATED CONDENSED BALANCE SHEETS
                                  (UNAUDITED)

<TABLE>
<CAPTION>
                                                          December 31,        June 30,
                                                             1998               1998
                                                         -------------      -------------
<S>                                                      <C>                <C>          
                       Assets
Current assets:
     Cash                                                $   3,039,000      $   1,029,000
     Accounts receivable and other current assets            5,436,000          5,382,000
                                                         -------------      -------------
         Total current assets                                8,475,000          6,411,000

Net property and equipment                                 107,966,000        142,467,000
Other assets                                                12,060,000          4,797,000
                                                         -------------      -------------

                                                         $ 128,501,000      $ 153,675,000
                                                         =============      =============


        Liabilities and Stockholders' Equity

Current liabilities:
     Accounts payable and other                          $  10,121,000      $   6,751,000
     Current portion of long-term debt                          82,000             85,000
                                                         -------------      -------------
         Total current liabilities                          10,203,000          6,836,000

Long-term obligations, net of current portion              136,294,000        153,619,000


Commitments

Stockholders' deficit:
    Preferred stock, $.01 par value, authorized                 96,000             96,000
     50,000,000 shares:  issued and outstanding
     9,605,958 and 9,610,400 at December 31 and June
     30, respectively
    Common stock, $.0015 par value,                             62,000             51,000
       authorized 100,000,000 shares: issued and
       outstanding 31,979,190 and 24,323,767 at
       December 31 and June 30, respectively
   Additional paid-in capital                               65,086,000         34,012,000
   Accumulated deficit                                     (75,989,000)       (35,939,000)
   Treasury stock                                           (7,251,000)        (5,000,000)
                                                         -------------      -------------
             Total stockholders' deficit                   (17,996,000)        (6,780,000)
                                                         -------------      -------------

                                                         $ 128,501,000      $ 153,675,000
                                                         =============      =============
</TABLE>


               See accompanying notes to unaudited interim period
                  consolidated condensed financial statements.


                                     - 2 -
<PAGE>   3


                   QUEEN SAND RESOURCES, INC. AND SUBSIDIARIES

                CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
                                  (UNAUDITED)

<TABLE>
<CAPTION>
                                                         Three Months                       Six Months
                                                            Ended                              Ended
                                                         December 31                        December 31
                                                         ------------                       -----------
                                                   1998              1997              1998              1997
<S>                                             <C>               <C>               <C>               <C>         
Revenues
  Oil & gas revenues                            $  1,394,000      $  1,748,000      $  2,748,000      $  3,342,000
  Net profits and royalties interests              5,590,000                --        11,515,000                --
  Interest and other income                               --            15,000            66,000            15,000
                                                ------------      ------------      ------------      ------------
Total Revenues                                     6,984,000         1,763,000        14,329,000         3,357,000

Expenses:
   Oil and gas production expenses                   688,000           969,000         1,853,000         2,074,000
   General & administrative expenses                 717,000           694,000         1,379,000         1,218,000
   Interest and financing costs                    4,421,000           338,000         9,088,000           639,000
   Depreciation, depletion and amortization        3,892,000           424,000         6,928,000           871,000
   Write-down of oil and gas properties           35,033,000                --        35,033,000                --
                                                ------------      ------------      ------------      ------------

                                                  44,751,000         2,425,000        54,281,000         4,802,000
                                                ------------      ------------      ------------      ------------

Net Loss                                        $(37,767,000)     $   (662,000)     $(39,952,000)     $ (1,445,000)
                                                ============      ============      ============      ============

Net Loss per Common Share                       $      (1.21)     $      (0.02)     $      (1.32)     $      (0.07)

Weighted average shares of common stock           31,190,000        27,285,000        30,317,000        27,031,000
outstanding during the period
</TABLE>


               See accompanying notes to unaudited interim period
                  consolidated condensed financial statements.



                                     - 3 -

<PAGE>   4



                   QUEEN SAND RESOURCES, INC. AND SUBSIDIARIES

                CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
                                  (UNAUDITED)
                                        
<TABLE>
<CAPTION>
                                                                        Six Months Ended December 31
                                                                        ----------------------------
                                                                           1998               1997
<S>                                                                   <C>                <C>           
Operating activities:
   Net loss                                                           $ (39,952,000)     $  (1,445,000)
   Depletion, depreciation and amortization of oil and gas assets         6,928,000            871,000
   Write-down of oil and gas properties                                  35,033,000
   Amortization of deferred costs                                           738,000                 --
   Issuance of common stock for services rendered                                --            300,000
   Unrealized gains on foreign exchange obligations                          25,000            (61,000)
   Net changes in operating assets and liabilities                        1,814,000           (608,000)
                                                                      -------------      -------------
Net cash provided by (used in) operating activities                       4,586,000           (943,000)
                                                                      -------------      -------------

Investing activities - additions to property and equipment               (7,392,000)        (7,656,000)

Financing activities:
   Debt issuance costs                                                   (7,934,000)                --
   Proceeds from long-term obligations                                  125,000,000         12,176,000
   Payments on long-term obligations                                   (142,385,000)       (11,950,000)
   Payments on capital lease obligations                                    (37,000)           (35,000)
   Proceeds from the sale of preferred and common stock                  32,423,000         11,153,000
   Repurchase of Series C Preferred Stock for Treasury                   (2,251,000)                --
                                                                      -------------      -------------
Net cash provided by financing activities                                 4,816,000         11,344,000
                                                                      -------------      -------------

Effect of foreign currency exchange rate changes on cash                         --             61,000
                                                                      -------------      -------------

Net increase in cash                                                      2,010,000          2,806,000

Cash at beginning of period                                               1,029,000            309,000
                                                                      -------------      -------------

Cash at end of period                                                 $   3,039,000      $   3,115,000
                                                                      =============      =============
</TABLE>

               See accompanying notes to unaudited interim period
                  consolidated condensed financial statements.


                                     - 4 -
<PAGE>   5


                   QUEEN SAND RESOURCES, INC. AND SUBSIDIARIES

              Notes to Consolidated Condensed Financial Statements
                                December 31, 1998
                                   (unaudited)


(1)    Basis of Presentation

       The accompanying consolidated financial statements include the accounts
       of Queen Sand Resources, Inc. and its wholly owned subsidiaries
       (collectively, the "Company") after elimination of all significant
       intercompany balances and transactions. The financial statements have
       been prepared in conformity with generally accepted accounting principles
       which require management to make estimates and assumptions that affect
       the amounts reported in the financial statements and accompanying notes.
       While management has based its assumptions and estimates on the facts and
       circumstances currently known, final amounts may differ from such
       estimates.

       The interim financial statements contained herein are unaudited but, in
       the opinion of management, include all adjustments (consisting only of
       normal recurring entries) necessary for a fair presentation of the
       financial position and results of operations of the Company for the
       periods presented. The results of operations for the three and six months
       ended December 31, 1998 are not necessarily indicative of the operating
       results for the full fiscal year ending June 30, 1999. Moreover, these
       financial statements do not purport to contain complete disclosure in
       conformity with generally accepted accounting principles and should be
       read in conjunction with the Company's Annual Report filed on Form 10KSB
       for the fiscal year ended June 30, 1998.

       In June 1997, the Financial Accounting Standards Board ("FASB") issued
       Statement of Financial Account Standards ("FAS") No. 130, "Reporting
       Comprehensive Income" ("FAS 130"), which established standards for
       reporting and display of comprehensive income and its components in a
       full set of general-purpose financial statements. Comprehensive income is
       defined as the change in equity of a business enterprise during a period
       from transactions and other events and circumstances from nonowner
       sources. For the three and six months ended December 31, 1998 and 1997,
       the Company's net income and comprehensive income were the same.

       In June 1998, the FASB issued FAS No. 133, "Accounting for Derivative
       Instruments and Hedging Activities" ("FAS 133") which established
       accounting and reporting standards for derivative instruments, including
       certain derivative instruments embedded in other contracts, and for
       hedging activities. FAS 133 requires that an entity recognize all
       derivatives as either assets or liabilities in the statement of financial
       position and measure those instruments at fair value. The Company will
       adopt the provisions of FAS 133 at the beginning of the fiscal year
       beginning July 1, 1999. The adoption of FAS 133 is not expected to have a
       material impact on the Company's financial statements.


(2)    Debt Issuance

       On July 8, 1998, the Company completed a private placement (the "Note
       Offering") of $125,000,000 principal amount of its 12.5% Senior Notes due
       2008 (the "Notes"). In addition, on July 8, 1998 and July 20, 1998, the
       Company completed a private equity placement (the "Private Placement").
       Pursuant to the Note Offering, the Company issued and sold the Notes to
       certain institutional buyers pursuant to Rule 144A and Regulation D
       promulgated under the Securities Act of 1933, as amended. The Notes
       mature on July 1, 2008, and interest on the Notes is payable semiannually
       on January 1 and July 1 of each year, commencing January 1, 1999 at the
       rate of 12.5% per annum. 


                                     - 5 -
<PAGE>   6


       The net proceeds received by the Company from the Note Offering and the
       Private Placement completed on July 8, 1998 of approximately $144.5
       million and on July 20, 1998 of approximately $6.9 million were used to
       repay indebtedness outstanding under the Company's Credit Agreement, to
       repay indebtedness outstanding under the Bridge Facilities, and to unwind
       an interest rate hedge contract at a cost of $3.5 million. Substantially
       all of this indebtedness was incurred to fund the acquisition of oil and
       natural gas properties from trusts managed by J. P. Morgan Investments.

       For the quarter ended December 31, 1998 the Company achieved an interest
       coverage ratio of 1.3x, determined by dividing Earnings before Interest,
       Taxes and Depreciation, Depletion and Amortization by interest expense
       excluding the amortization of deferred debt issuance costs. The Company's
       Credit Agreement required that the Company achieve a minimum interest
       coverage ratio of 1.5x. The Company has received a waiver of this
       covenant violation, and has agreed to not borrow any further funds until
       the scheduled borrowing base review is completed in March 1999.

       The Company's payment obligations under the Notes are fully,
       unconditionally and jointly and severally guaranteed on a senior
       subordinated basis by all of the current domestic subsidiaries and future
       Restricted Subsidiaries. Such guarantees are subordinated to the
       guarantees of Senior Debt issued by the Guarantors (as defined in the
       Indenture) under the Credit Agreement and to other guarantees of Senior
       Debt issued in the future. All of the Company's current subsidiaries are
       wholly owned. There are currently no restrictions on distributions from
       the Guarantors to the Company.

       Separate financial statements and other disclosures concerning the
       Guarantors are not presented because management has determined they are
       not material to investors. The combined condensed financial information
       of the Company's current subsidiaries, the Guarantors, is as follows:

<TABLE>
<CAPTION>
                                                 December 31,
                                                     1998           June 30, 1998
                                                 -------------      -------------
<S>                                              <C>                <C>          
Current assets                                   $   7,889,000      $   6,172,000
Net property and equipment                         107,868,000        142,421,000
Other assets, net                                    1,825,000          2,244,000
                                                 -------------      -------------

  Total assets                                   $ 117,582,000      $ 150,837,000
                                                 =============      =============

Current liabilities                              $   2,457,000      $   6,145,000
Intercompany payables                              166,357,000         23,703,000
Long-term debt                                      10,328,000        151,423,000
Stockholder's deficit                              (61,560,000)       (30,434,000)
                                                 -------------      -------------

  Total liabilities and stockholder's equity     $ 117,582,000      $ 150,837,000
                                                 =============      =============
</TABLE>


<TABLE>
<CAPTION>
                                                      For the six months ended
                                                   December 31,      December 31,
                                                       1998              1997
                                                   ------------      ------------
<S>                                                <C>               <C>         
Oil and gas sales and net 
  profits interests                                $ 14,263,000      $  3,342,000

Costs and expenses:
  Production expenses                                 1,853,000         2,074,000
  General and administrative                            747,000           444,000
  Depreciation, depletion and
    amortization                                      6,855,000           863,000
  Write-down of oil and gas
    properties                                       35,033,000                --
  Interest expense                                    1,026,000           567,000
  Other                                                (125,000)           (4,000)
                                                   ------------      ------------
                                                     14,023,000         3,944,000
                                                   ------------      ------------

Net income (loss)                                  $(31,126,000)     $    602,000
                                                   ============      ============
</TABLE>



                                     - 6 -
<PAGE>   7


(3)    Capital Stock

       During the six months ended December 31, 1998 the Company issued
       5,819,475 shares of its common stock for $31,777,000 net of costs (at per
       share prices ranging from $2.50 to $7.00). Additionally, the Company
       issued 8,742 shares of its common stock valued at $65,000 ($7.4375 per
       share) as partial consideration for the acquisition of a natural gas
       property in Utah.

       During the six months ended December 31, 1998 the holders of 2,290 shares
       of the Company's Series C preferred stock converted their Series C
       preferred stock into 395,351 shares of common stock. In conjunction with
       these conversions, the Company issued 17,284 shares of common stock in
       payment of stock dividends. The value of these stock dividends was
       $98,000. Additionally, during the six months ended December 31, 1998 the
       Company repurchased 2,152 shares of Series C preferred stock. The funds
       used to complete this transaction were raised from the issuance of
       416,667 shares of the Company's common stock.

       During the six months ended December 31, 1998 the holders of some of the
       shares of common stock issued during the period exercised their reset
       rights. As a result, 814,619 shares of common stock were issued by the
       Company. The Company placed no additional value on these transactions as
       the reset rights were issued as a part of the Private Placement.



(4)    Write-down of Oil and Gas Properties

       The Company limits the capitalized costs of oil and gas properties, net
       of accumulated depreciation, depletion and amortization, to the estimated
       net future revenues from proved oil and gas reserves less estimated
       future development costs and production expenditures, discounted at 10%,
       plus the lower of cost or estimated fair value of unproved properties, as
       adjusted for future income tax effects. If capitalized costs exceed this
       limit (the full cost ceiling), the excess is charged to depreciation,
       depletion and amortization expense. During the quarter ended December 31,
       1998 the Company recorded a full cost ceiling write-down of $35,033,000.


                                     - 7 -
<PAGE>   8


ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND 
         RESULTS OF OPERATIONS



FORWARD-LOOKING STATEMENTS

All statements in this document concerning the Company other than purely
historical information (collectively, "Forward-Looking Statements") reflect the
current expectation of management and are based on the Company's historical
operating trends, estimates of proved reserves and other information currently
available to management. These statements assume, among other things, (i) that
no significant changes will occur in the operating environment for the Company's
oil and gas properties, gas plants and gathering systems, and (ii) that there
will be no material acquisitions or divestitures. The Company cautions that the
Forward-Looking Statements are subject to all the risks and uncertainties
incident to the acquisition, development and marketing of, and exploration for,
oil and gas reserves. These risks include, but are not limited to, commodity
price risk, environmental risk, drilling risk, reserve, operations, and
production risks, regulatory risks and counterparty risk. Many of these risks
are described in the Company's Annual Report on Form 10-KSB for the fiscal year
ended June 30, 1998 filed with the Securities and Exchange Commission in
September 1998. The Company may make material acquisitions or dispositions,
enter into new or terminate existing oil and gas sales or hedging contracts, or
enter into financing transactions. None of these can be predicted with any
certainty and, accordingly, are not taken into consideration in the
Forward-Looking Statements made herein. For all of the foregoing reasons, actual
results may vary materially from the Forward-Looking Statements and there is no
assurance that the assumptions used are necessarily the most likely.

SELECTED FINANCIAL DATA

The following tables set forth-selected financial data for the Company,
presented as if the net profits interests were working interests. The financial
data were derived from the consolidated financial statements of the Company and
should be read in conjunction with the Consolidated Financial Statements and
related Notes thereto included herein. The results of operations for the three
and six months ended December 31, 1998 will not necessarily be indicative of the
operating results for the full fiscal year ending June 30, 1999.

<TABLE>
<CAPTION>
                                                           Three Months                        Six Months
                                                        Ended December 31                   Ended December 31
                                                 ------------------------------      ------------------------------
                                                     1998              1997              1998              1997
                                                 ------------      ------------      ------------      ------------
<S>                                              <C>               <C>               <C>               <C>      
Oil and gas sales (1)                            $  9,405,000      $  1,748,000      $ 18,509,000         3,342,000
Oil and gas production expenses (1)                 3,076,000           969,000         6,033,000         2,074,000
General and administrative expenses                   717,000           694,000         1,379,000         1,218,000
                                                 ------------      ------------      ------------      ------------
EBITDA                                              5,612,000            85,000        11,097,000            50,000
Interest expense, excluding amortization of
  deferred charges (2)                              4,228,000           338,000         8,417,000           639,000
Depreciation, depletion and amortization (3)        4,118,000           424,000         7,665,000           871,000
Write-down of oil and gas properties               35,033,000                --        35,033,000                --
                                                 ------------      ------------      ------------      ------------
Net loss from operations                          (37,767,000)         (677,000)      (40,018,000)       (1,460,000)
Interest and other income                                  --            15,000            66,000            15,000
                                                 ------------      ------------      ------------      ------------
Net loss                                         $(37,767,000)     $   (662,000)     $(39,952,000)     $ (1,445,000)
                                                 ============      ============      ============      ============
</TABLE>

(1)  Oil and gas sales and production expenses related to net profits interests
     have been presented as if such net profits interests were working
     interests.

(2)  Interest charges payable on outstanding debt obligations.

(3)  Depreciation, depletion and amortization includes $194,000 and $671,000 of
     amortized deferred charges related to debt obligations for the three and
     six months ended December 31, 1998, respectively, and $32,000 and $66,000
     of amortized deferred charges related to the Company's gas price hedging
     program for the three and six months ended December 31, 1998, respectively.


                                     - 8 -
<PAGE>   9



<TABLE>
<CAPTION>
                                               Three Months Ended         Six Months Ended
                                                   December 31               December 31
                                               ------------------       ---------------------
                                                 1998       1997          1998          1997
<S>                                            <C>        <C>           <C>          <C>  
PRODUCTION DATA
  Oil (Mbbls)                                     121.9      59.0          275.0        119.5
  Gas (MMcf)                                    3,741.2     242.1        7,049.5        486.5
  Mmcfe                                         4,472.8     596.2        8,699.6      1,203.7
  Oil and Gas (MBOE)                              745.5      99.4        1,449.9        200.6

AVERAGE SALES PRICE
  Oil (per Bbl)                                $  12.97   $ 17.96       $  12.75     $  18.14
  Gas (per Mcf)                                $   2.09   $  2.84       $   2.13     $   2.41
  Per Mcfe                                     $   2.10   $  2.93       $   2.13     $   2.78
  Per BOE                                      $  12.62   $ 17.59       $  12.77     $  16.66

AVERAGE COST ($/MCFE) DATA:
Production and operating costs                 $   0.59   $  1.44       $   0.60     $   1.54
Production and severance taxes                 $   0.10   $  0.19       $   0.10     $   0.18
Depreciation, Depletion and Amortization       $   0.83   $  0.67       $   0.79     $   0.69
General and Administrative Expenses            $   0.16   $  1.17       $   0.16     $   1.01
Interest and Financing Expense                 $   0.95   $  0.57       $   0.97     $   0.58
</TABLE>


The following discussion of the results of operations and financial condition
should be read in conjunction with the Consolidated Financial Statements and
related Notes thereto included herein.

THE THREE MONTHS ENDED DECEMBER 31, 1998 COMPARED TO THE THREE MONTHS ENDED
DECEMBER 31, 1997

RESULTS OF OPERATIONS

The following discussion and analysis reflects the operating results as if the
net profits interest were working interests. The Company believes that this
will provide the readers of the report with a more meaningful understanding of
the underlying operating results and conditions for the period.

         During the three months ended December 31, 1998 the Company determined
that a property in which it holds a net profits interest was unprofitable and,
under current operating conditions and with expected future commodity prices it
was unlikely to become profitable through June 30, 1999. At June 30, 1998 the
net profits interest related to this property was in an accumulated deficit
position. Under the terms of the net profits interest in this property, the
Company is not required to fund any deficits. Such deficits are accrued and
future net profits are applied to any accumulated deficits until such time as
those accumulated deficits are eliminated. During the three months ended
September 30, 1998 the Company had recorded sales of 13,000 barrels of oil and,
net profits interests of $42,000 associated with this property. The net profits
interests revenues of $42,000 were comprised of, on a working interest basis,
$154,000 of revenues and $112,000 of production expenses. As such, the Company
has adjusted its records to remove the production and net profits interests
recorded during the three months ending September 30, 1998 during the three
months ended December 31, 1998. There is no value associated with this property
on the balance sheet of the Company. In the absence of these adjustments, the
amounts reported in Selected Financial Data for the three months ended December
31, 1998 would have been as follows: Oil and gas sales - $9,559,000; Oil and gas
production expenses - $3,188,000; and, Oil production - 134.9 Mbbls. By way of
comparison, the comparable amounts for the three months ended September 30, 1998
would have been as follows: Oil and gas sales - $8,950,000; Oil and gas
production expenses - $2,844,000; and, Oil production - 140.1 Mbbls.

REVENUES: The Company's total revenues rose by $7.7 million (438%) to $9.4
million for the three months ended December 31, 1998, from $1.8 million during
the comparable period in 1997.


                                     - 9 -
<PAGE>   10


         The Company produced 122,000 barrels of crude oil during the three
months ended December 31, 1998, an increase of 63,000 barrels (107%) over the
59,000 barrels produced during the comparable period in 1997. This increase was
comprised of an overall decrease of 1,000 barrels (2%) from the properties that
the Company owned during both periods and an increase of 64,000 barrels from the
properties acquired during the period January 1, 1998 to September 30, 1998. The
decrease in production of crude oil from the properties owned during the
comparative quarters is a reflection of the successful development and
exploitation program of the Company, offset by the natural depletion of the
crude oil reservoirs.

         The Company produced 3,741,000 Mcf of natural gas during the three
months ended December 31, 1998, an increase of 3,499,000 Mcf (1,445%) over the
242,000 Mcf produced during the comparable period in 1997. This increase
consists of a decrease of 300 Mcf from the properties that the Company owned
during both periods and an increase of 3,499,000 Mcf from the properties
acquired during the period January 1, 1998 to September 30, 1998. The slight
change in production from the properties owned during the comparative quarters
is a result of the successful development and exploitation program of the
Company, offset by the natural depletion of the natural gas reservoirs.

         On a thousand cubic feet of gas equivalent ("Mcfe") basis, production
for the three months ended December 31, 1998 was 4,473,000 Mcfe, up 3,877,000
(650%) over the 596,000 Mcfe produced during the comparable period in 1997.

         The increase in revenues arising from the increased production has been
buffered by the significant industry-wide decline in oil and natural gas prices.
The average price per barrel of crude oil sold by the Company during the three
months ended December 31, 1998 was $12.97, a decrease of $4.99 per barrel (28%)
from the $17.96 per barrel during the three months ended December 31, 1997. The
average price per Mcf of natural gas sold by the Company was $2.09 during the
three months ended December 31, 1998, a decrease of $0.75 per Mcf (26%) from the
$2.84 per Mcf during the comparable period in 1997. Crude oil and natural gas
prices have decreased subsequent to December 31, 1998. On an Mcfe basis, the
average price received by the Company during the three months ended December 31,
1998 was $2.10, a $0.83 decrease (28%) from the $2.93 the Company received
during the comparable period in 1997.

         During the three months ended December 31, 1998 the Company received
$223,000 in cash settlements and amortized $33,000 of deferred hedging costs, as
a result of its natural gas price-hedging program. The net positive effect on
the average natural gas prices received by the Company during the period was
$0.06 per Mcf (2%). An additional $147,000 was received on its oil price hedging
program. The net positive effect on average oil prices received by the Company
during the period was $1.20 per barrel (10%). During the comparable period in
1997 the Company neither received nor paid any cash on its natural gas
price-hedging program. The Company received $8,000 on its oil price-hedging
program during the three months ended December 31, 1997. The impact of this
payment was to increase the average price received on the Company's oil sales
during the comparable period by $0.07 per barrel (.4%).

SEVERANCE AND PRODUCTION TAXES: Severance and production taxes were $433,000
($0.10 per Mcfe) during the three months ended December 31, 1998, as compared to
$112,000 ($0.19 per Mcfe) during the comparable period in 1997. The increase of
$322,000 (288%) is a result of the 437% increase in revenues for the three month
period ended December 31, 1998, as compared to the same period for 1997. This
increase was buffered by the shift in revenues from 39% gas during the three
months ended December 31, 1997 to 83% gas during the three months ended December
31, 1998. The reduction in severance and production taxes on a per Mcfe basis
relates to severance and production tax abatements on certain net profits
interests.

PRODUCTION EXPENSES: The Company's lease operating expenses rose to $2.6 million
for the three months ended December 31, 1998, an increase of $1.8 million (208%)
over the $858,000 incurred during the comparable period in 1997. This increase
is a result of the increased production of crude oil and natural gas by the
Company. Lease operating expenses were $0.59 per Mcfe during the three months
ended December 31, 1998; a decrease of $0.85


 
                                     - 10 -
<PAGE>   11


(59%) from the $1.44 per Mcfe incurred during the comparable period in 1997.
This improvement is a result of the acquisition of properties with lower average
operating costs per Mcfe than those the Company has owned during the preceding
years and improved efficiencies at an operating level.

DEPLETION, DEPRECIATION AND AMORTIZATION EXPENSE: Depletion and oil field
equipment related depreciation costs were $3.9 million ($0.83 per Mcfe) during
the three months ended December 31, 1998, an increase of $3.5 million (818%)
over the $400,000 ($0.67 per Mcfe) charged to income during the comparable
period in 1997. The increase in the provision is primarily a result of the 658%
Mcfe increase in production for the three month period ended December 31, 1998,
as compared to the same period for 1997. On a cost per Mcfe basis, the increase
of $0.16 per Mcfe (23%) is primarily the result of the increased average cost of
reserves the Company acquired during the period January 1, 1998 to September 30,
1998.

         Pursuant to SEC regulations, the Company recorded a $35.0 million
non-cash write-down of the carrying value of its oil and gas properties to
reflect the impact of low oil and gas prices at December 31, 1998. The Company
was not required to record a similar write-down at December 31, 1997.

GENERAL AND ADMINISTRATIVE EXPENSES: The increase of $14,000 in general and
administrative costs for the three months ended December 31, 1998, compared to
the same period for 1997 is a result of the increased management support
requirements of the Company as it continues to acquire new properties, redevelop
existing properties and raise the funds necessary to accomplish these
activities. Since inception the Company has been growth oriented and has
directed its efforts at acquiring and developing oil and natural gas producing
properties. This activity requires additional personnel and outside consultants
thereby increasing general and administrative expenses.

INTEREST EXPENSE: Interest expense increased by $4.1 million, to $4.4 million
for the three months ended December 31, 1998, compared to $338,000 for the three
months ended December 31, 1997. This increase is a function of the increased
debt the Company incurred, primarily related to the acquisition of the net
profits and royalty interests in April 1998. The interest expense of $4.4
million is comprised of $4.2 million in cash interest charges and $194,000 of
amortized deferred costs.

NET LOSS: The Company has incurred losses since its inception, including $37.8
million ($1.21 per common share) for the three months ended December 31, 1998
compared to $662,000 ($0.02/share) for the three months ended December 31, 1997.
The decline in oil and natural gas prices since December 31, 1997 caused the
Company to record non-cash write-downs of oil and gas properties of $28,166,000
and $35,033,000 for the year ended June 30, 1997 and for the three and six
months ended December 31, 1998, respectively. Further declines in oil and
natural gas prices could lead to additional non-cash write-downs of the
Company's oil and gas properties. The Company currently believes, but cannot
assure, that as a result of the April 1998 acquisition of net profits and
royalty interests from J.P. Morgan that the Company's future revenues from crude
oil and natural gas will be sufficient to cover its production costs and
operating expenses, provided that the prevailing prices for crude oil and
natural gas do not decline further and production volume is maintained. The
Company entered the 1999 fiscal year (July 1, 1998 to June 30, 1999) with a plan
to improve production from the properties it had acquired through June 1998 and
to acquire additional oil and natural gas producing properties to provide the
revenue base required to generate additional positive cash flow from operations.
The Company's revenues, profitability and future rate of growth are
substantially dependent upon prevailing prices for crude oil and natural gas and
the volumes of crude oil and natural gas produced by the Company (see `-Changes
in Prices and Hedging Activities'). In addition, the Company's proved reserves
will decline as crude oil and natural gas are produced unless the Company is
successful in acquiring additional properties containing proved reserves or
conducts successful exploration and development activities.


                                     - 11 -
<PAGE>   12


THE SIX MONTHS ENDED DECEMBER 31, 1998 COMPARED TO THE SIX MONTHS ENDED DECEMBER
31, 1997

RESULTS OF OPERATIONS

         The following discussion and analysis reflects the operating results as
if the net profits interests were working interests. The Company believes that
this will provide the readers of the report with a more meaningful understanding
of the underlying operating results and conditions for the period.

REVENUES: The Company's total revenues rose by $13.8 million (453%) to $18.5
million for the six months ended December 31 1998, from $3.3 million during the
comparable period in 1997.

         The Company produced 275,000 barrels of crude oil during the six months
ended December 31, 1998, an increase of 155,000 barrels (130%) over the 120,000
barrels produced during the comparable period in 1997. This increase was
comprised of an increase of 2,000 barrels (2%) from the properties that the
Company owned during both periods and an increase of 153,000 barrels from the
properties acquired during the period January 1, 1998 to September 30, 1998. The
increase in production of crude oil from the properties owned during the
comparative quarters is a reflection of the successful development and
exploitation program of the Company, offset by the natural depletion of the
crude oil reservoirs.

         The Company produced 7,050,000 Mcf of natural gas during the six months
ended December 31, 1998, an increase of 6,563,000 Mcf (1,349%) over the 486,000
Mcf produced during the comparable period in 1997. This increase consists of an
increase of 44,000 Mcf (9%) from the properties that the Company owned during
both periods and an increase of 6,519,000 Mcf from the properties acquired
during the period January 1, 1998 to September 30, 1998. The increase in
production from the properties owned during the comparative quarters is a result
of the successful development and exploitation program of the Company, offset by
the natural depletion of the natural gas reservoirs.

         On a thousand cubic feet of gas equivalent ("Mcfe") basis, production
for the six months ended December 31, 1998 was 8,700,000 Mcfe, up 7,496,000
(623%) over the 1,204,000 Mcfe produced during the comparable period in 1997.

         The increase in revenues arising from the increased production has been
buffered by the significant industry-wide decline in oil and natural gas
prices. The average price per barrel of crude oil sold by the Company during
the six months ended December 31, 1998 was $12.75, a decrease of $5.39 per
barrel (30%) from the $18.14 per barrel during the six months ended December
31, 1997. The average price per Mcf of natural gas sold by the Company was
$2.13 during the six months ended December 31, 1998, a decrease of $0.28 per
Mcf (12%) from the $2.41 per Mcf during the comparable period in 1997. Crude
oil and natural gas prices have decreased subsequent to December 31, 1998. On
an Mcfe basis, the average price received by the Company during the six months
ended December 31, 1998 was $2.13, a $0.65 decrease (23%) from the $2.78 the
Company received during the comparable period in 1997.

         During the six months ended December 31, 1998 the Company received
$681,000 in cash settlements and amortized $66,000 of deferred hedging costs, as
a result of its natural gas price-hedging program. The net positive effect on
the average natural gas prices received by the Company during the period was
$0.10 per Mcf (5%). An additional $232,000 was received on its oil price hedging
program. The net positive effect on average oil prices received by the Company
during the period was $0.84 per barrel (7%). During the comparable period in
1997 the Company neither received nor paid any cash on its natural gas
price-hedging program. The Company paid $6,000 on its oil price-hedging program
during the six months ended December 31, 1997. The impact of this payment was to
decrease the average price received on the Company's oil sales during the
comparable period by $0.04 per barrel (.2%).

SEVERANCE AND PRODUCTION TAXES: Severance and production taxes were $844,000
($0.10 per Mcfe) during the six months ended December 31, 1998, as compared to
$221,000 ($0.18 per Mcfe) during the comparable period in 1997. The increase of
$623,000 (282%) is a result of the 454% increase revenues for the six month
period ended December 31, 1998, as compared to the same period for 1997. This
increase was buffered by the shift in revenues from 35% gas during the six
months ended December 31, 1997 to 81% gas during the six months ended  


                                     - 12 -
<PAGE>   13


December 31, 1998. The reduction in severance and production taxes on a per Mcfe
basis relates to severance and production tax abatements on certain net profits
interests.

PRODUCTION EXPENSES: The Company's lease operating expenses rose to $5.2 million
for the six months ended December 31, 1998, an increase of $3.3 million (180%)
over the $1.9 million incurred during the comparable period in 1997. This
increase is a result of the increased production of crude oil and natural gas by
the Company. Lease operating expenses were $0.60 per Mcfe during the six months
ended December 31, 1998, a decrease of $0.94 (61%) from the $1.54 per Mcfe
incurred during the comparable period in 1997. This improvement is a result of
improved efficiencies at an operating level and the acquisition of properties
with lower average operating costs per Mcfe than those the Company has owned
during the preceding years.

DEPLETION, DEPRECIATION AND AMORTIZATION EXPENSE: Depletion and oil field
equipment related depreciation costs were $6.9 million ($0.79 per Mcfe) during
the six months ended December 31, 1998, an increase of $6.0 million (695%) over
the $826,000 ($0.69 per Mcfe) charged to income during the comparable period in
1997. The increase in the provision is primarily a result of the 622% Mcfe
increase in production for the six month period ended December 31, 1998, as
compared to the same period for 1997. On a cost per Mcfe basis, the increase of
$0.10 per Mcfe (15%) is primarily the result of the increased average cost of
reserves the Company acquired during the period January 1, 1998 to September 30,
1998.

         Pursuant to SEC regulations, the Company recorded a $35.0 million
non-cash write-down of the carrying value of its oil and gas properties to
reflect the impact of low oil and gas prices at December 31, 1998. The Company
was not required to record a similar write-down at December 31, 1997.

GENERAL AND ADMINISTRATIVE EXPENSES: The increase of $161,000 in general and
administrative costs for the six months ended December 31, 1998, compared to the
same period for 1997 is a result of the increased management support
requirements of the Company as it continues to acquire new properties, redevelop
existing properties and raise the funds necessary to accomplish these
activities. Since inception the Company has been growth oriented and has
directed its efforts at acquiring and developing oil and natural gas producing
properties. This activity requires additional personnel and outside consultants
thereby increasing general and administrative expenses.

INTEREST EXPENSE: Interest expense increased by $8.4 million, to $9.1 million
for the six months ended December 31, 1998, compared to $639,000 for the six
months ended December 31, 1997. This increase is a function of the increased
debt the Company incurred, primarily related to the acquisition of the net
profits and royalty interests in April 1998. The interest expense of $9.1
million is comprised of $8.4 million in cash interest charges and $737,000 of
amortized deferred costs.

NET LOSS: The Company has incurred losses since its inception, including $40.0
million ($1.32 per common share) for the six months ended December 31, 1998
compared to $1.4 million ($0.07/share) for the six months ended December 31,
1997. The decline in oil and natural gas prices since December 31, 1997 caused
the Company to record non-cash write-downs of oil and gas properties of
$28,166,000 and $35,033,000 for the year ended June 30, 1997 and for the three
and six months ended December 31, 1998, respectively. Further declines in oil
and natural gas prices could lead to additional non-cash write-downs of the
Company's oil and gas properties. The Company currently believes, but cannot
assure, that as a result of the April 1998 acquisition of net profits and
royalty interests from J.P. Morgan that the Company's future revenues from crude
oil and natural gas will be sufficient to cover its production costs and
operating expenses, provided that the prevailing prices for crude oil and
natural gas do not decline and production volume is maintained. The Company
entered the 1999 fiscal year (July 1, 1998 to June 30, 1999) with a plan to
improve production from the properties it had acquired through June 1998 and to
acquire additional oil and natural gas producing properties to provide the
revenue base required to generate additional positive cash flow from operations.
The Company's revenues, profitability and future rate of growth are
substantially dependent upon prevailing prices for crude oil and natural gas and
the volumes of crude oil and natural gas produced by the Company (see `-Changes
in Prices and Hedging Activities'). In addition, the Company's proved reserves
will decline as crude oil and natural gas are produced unless the Company is
successful in acquiring additional properties containing proved reserves or
conducts successful exploration and development activities.


                                     - 13 -
<PAGE>   14


LIQUIDITY AND CAPITAL RESOURCES

General

     Consistent with the Company's strategy of acquiring and developing
reserves, the Company has an objective of maintaining as much financing
flexibility as is practicable. Since the Company commenced its oil and natural
gas operations, the Company has utilized a variety of sources of capital to fund
its acquisitions and development and exploitation programs, and to fund its
operations.

     The Company's objective is to use the cash generated from operations to
pay operating costs and interest charges and to contribute to the costs of
developing and exploiting its oil and natural gas properties. There can be no
assurance that the cash from operations will be sufficient in the future to
cover such purposes.

     The Company's objective is to use incremental debt, the proceeds from the
issuance of equity securities and the proceeds from the sale of non-core oil
and gas properties to fund a portion of its development and exploitation program
and to fund the acquisition of additional oil and natural gas properties. The
availability of funds under the Credit Agreement is subject to periodic
redeterminations by the bank and there can be no assurance that such funds will
be available to the Company to meet its budgeted capital spending. Furthermore,
the Company's ability to borrow other than under the Amended and Restated
Credit Agreement dated as of April 17, 1998 as amended with Bank of Montreal,
as agent for the Lenders thereunder (the "Credit Agreement") is subject to
restrictions imposed by such Credit Agreement. If the Company cannot secure
additional funds for its planned development and exploitation activities, then
the Company will be required to delay or reduce substantially both of such
activities.

Sources of Capital

     The Company's principal sources of capital for funding its business
activities have been cash flow from operations, debt financings and the issuance
of equity securities. The Company's sources of funds from debt financings
include funds available under the Credit Agreement, the Company's Subordinated
Revolving Credit Agreement (the "ECT Revolving Credit Agreement") with Enron
Capital and Trade Resources Corporation, the bridge facilities entered into with
Bank of Montreal and two affiliates of Enron, DM denominated bonds issued to
European investors, a capital lease, and the 12.5% Senior Note Offering.

     On April 17, 1998, the Company amended and restated its Credit Agreement
with Bank of Montreal, as agent for the lenders party thereto. The Credit
Agreement provides for borrowings up to $125.0 million (subject to borrowing
base limitations) from such lenders to, among other things, fund development and
exploitation expenditures, acquisitions and general working capital. The
proceeds under the Credit Agreement were used to fund the Company's property
acquisitions in part. As of February 12, 1999, the Company had a borrowing base
of $25.0 million under the Credit Agreement, of which $17.3 million was
outstanding as of February 12, 1999. The loan under the Credit Agreement matures
on April 17, 2003. In the event of a default on the indebtedness under the
Credit Agreement, not subsequently waived by the lenders, it is unlikely that
the Company would be able to continue its business.

     Indebtedness incurred under the Credit Agreement generally bears interest
under various interest rate pricing options based upon Federal Funds rate (plus
 .5%), Prime Rate or LIBOR rate options. LIBOR rate loans bear an applicable
margin over the LIBOR rate of (i) 2.25%, if greater than 90% of the available
Borrowing Base has been drawn, (ii) 2%, if greater than 75% and not more than
90% of the available Borrowing Base has been drawn, (iii) 1.5%, if greater than
40% but not more than 75% of the available Borrowing Base has been drawn, and
(iv) 1%, if not more than 40% of the available Borrowing Base has been drawn.
There is no margin applicable for base rate pricing options. The weighted
average cost of funds under this facility was 7.6% during the six months ended
December 31, 1998.


                                     - 14 -
<PAGE>   15


     The loan under the Credit Agreement is secured by a first lien on
substantially all of the Company's oil and natural gas properties. Pursuant to
the Credit Agreement, the Company is subject to certain affirmative and negative
financial and operating covenants that are usual and customary for transactions
of this nature.

     On December 31, 1998 the Company was not in compliance with its interest
coverage ratio covenant of 1.5x. The Company received a waiver under the Credit
Agreement from the Bank regarding this covenant breach. The Company has agreed
to not borrow any further funds until the scheduled borrowing base review is
completed in March, 1999. The Company believes, but cannot assure, that it will
be able to comply with all restrictive covenants in the future or obtain
waivers from the lenders with respect to noncompliance.

     Effective December 29, 1997, the Company established the ECT Revolving
Credit Agreement with ECT, as a lender and as agent for the lenders thereto, to
fund on a revolving basis, capital costs incurred with future development
projects and to fund further acquisitions. The ECT Revolving Credit Agreement is
subordinate to the Credit Agreement. The ECT Revolving Credit Agreement provides
for borrowings up to $10.0 million, on a revolving basis and subject to
borrowing base limitations, which has been initially set at an amount equal to
40% of the borrowing base established from time to time under the Credit
Agreement. This facility is designed to provide bridge financing for development
projects and acquisitions to be completed on relatively short notice or until
the affected assets are eligible to be included in the borrowing base for the
Credit Agreement or financed with longer-term indebtedness or equity capital;
provided, that the availability for acquisitions under the facility is limited
to the lesser of $5.0 million or 50% of the borrowing base as in effect from
time to time. Borrowings in excess of certain amounts under the ECT Revolving
Credit Agreement will reduce the available borrowing base under the Credit
Agreement. The loan is secured by a second priority lien and security interest
(behind the first lien position of the Credit Agreement) in approximately 95% of
the oil and natural gas properties of the Company. There was no indebtedness
outstanding under this facility on February 12, 1999.

     The ECT Revolving Credit Agreement is subject to payment of interest at a
fluctuating rate per annum equal to (i) the rate of 1% above the then highest
rate of interest being paid on any portion of the indebtedness owed under the
Credit Agreement or (ii) the rate of 15%, depending upon whether there is any
indebtedness owed under the Credit Agreement outstanding or whether there has
been a certain amount of indebtedness owed under the ECT Revolving Credit
Agreement for certain time periods.

     On July 8, 1998, the Company completed a private placement (the "Note
Offering") of $125,000,000 principal amount of its 12.5% Senior Notes due 2008
(the "Notes"). In addition, on July 8, 1998 and July 20, 1998, the Company
completed a private equity placement (the "Private Placement"). Pursuant to the
Note Offering, the Company issued and sold the Notes to certain institutional
buyers pursuant to Rule 144A and Regulation D promulgated under the Securities
Act of 1933, as amended. The Notes mature on July 1, 2008, and interest on the
Notes is payable semiannually on January 1 and July 1 of each year, commencing
January 1, 1999 at the rate of 12.5% per annum. The payment of the Notes is
guaranteed by the Company's three operating subsidiaries. The net proceeds
received by the Company from the Note Offering and the Private Placement
completed on July 8, 1998 of approximately $144.5 million and on July 20, 1998
of approximately $6.9 million were used to repay indebtedness outstanding under
the Company's Credit Agreement, to repay indebtedness outstanding under the
Company's bridge facilities, and to unwind an interest rate hedge contract at a
cost of $3.5 million. Substantially all of this indebtedness was incurred to
fund the acquisition of oil and natural gas properties from trusts managed by J.
P. Morgan Investments.

     During the quarter ended December 31, 1998, the Company issued an aggregate
of 814,619 shares of Common Stock to stockholders who exercised repricing rights
under the Amended and Restated Securities Purchase Agreement dated as of July 8,
1998 among the Company and the buyers signatory thereto. The repricing rights
were issued in connection with the July 1998 private placement and permit the
holders to acquire shares of Common


                                     - 15 -
<PAGE>   16


Stock without the payment of additional consideration if the Company's Common
Stock does not achieve certain price thresholds in excess of the original
issuance of the shares purchased by the holders in the July 1998 private
placement. The resale of these shares of Common Stock is registered pursuant to
a Registration Statement on Form S-3 filed by the Company and declared effective
by the Securities and Exchange Commission.

     During the quarter ended December 31, 1998, the Company issued an aggregate
of 395,351 shares of Common Stock upon conversion of 2,290 shares of the
Company's Series C Convertible Preferred Stock by the holders thereof and
17,284 shares of Common Stock as payment of dividends at the time of the
conversion. The resale of these shares of Common Stock is registered pursuant to
a Registration Statement on Form S-3 filed by the Company and declared effective
by the Securities and Exchange Commission.

     Due to the current market price of the Company's Common Stock, it is likely
that additional shares of Common Stock will be issued upon exercise of Repricing
Rights and upon conversion of the Series C Convertible Preferred Stock.

     Pursuant to a Securities Purchase Agreement dated November 10, 1998 among
the Company and the buyers signatory thereto, the Company issued on November 24,
1998, to the buyers, an aggregate of (i) 416,667 shares of Common Stock, (ii)
certain repricing rights to acquire additional shares of Common Stock and (iii)
warrants to purchase an aggregate of 50,000 shares of Common Stock in exchange
for aggregate cash consideration of $2.5 million. The Company used the net
proceeds from this equity placement to repurchase an aggregate of 2,152 shares
of Series C Convertible Preferred Stock from two holders thereof.

     During the quarter ended December 31, 1998, in reliance on Section 4(2) of
the Securities Act, the Company issued warrants to purchase an aggregate of
1,545,578 shares of Common Stock to Joint Energy Development Investments Limited
Partnership ("JEDI"). The exercise prices of the warrants range from $3.541 to
$6.00. These warrants were issued to JEDI for no consideration pursuant to
JEDI's "maintenance rights" under the Securities Purchase Agreement dated as of
March 27, 1997.

     During the quarter ended December 31, 1998 the Company extended the expiry
date on 100,000 Series A warrants and 1,000,000 Series B warrants to June 30,
1999. Each of these warrants can be exercised by paying $2.50 for 1 share of
common stock.

     The Company periodically reviews its portfolio of oil and natural gas
properties with a view to identifying and divesting properties that no longer
fit the Company's strategic focus, including fitting within the Company's core
geographic areas of interest. The Company is actively pursuing the sale of
certain non-core properties. However, there can be no assurance the Company will
complete any divestment of non-core properties.

     The Company believes that it can generate sufficient cash flow from
operations to pay the interest charges on all of its interest-bearing debt. The
gas price-hedging program currently in place provides a degree of protection
against significant decreases in gas prices. Furthermore, 87% of the Company's
interest-bearing debt is at fixed rates for extended periods, providing an
effective hedge against increases in prevailing interest rates.



                                     - 16 -
<PAGE>   17
Uses of Capital

     Since commencing its oil and natural gas operations in August 1994 the
Company has completed 20 acquisitions of oil and natural gas producing
properties. Through December 31, 1998, the Company had expended a total of $184
million in acquiring, developing and exploiting oil and natural gas producing
properties. Initially, the operations of the Company represented a net use of
funds. The Company generated positive cash flow from operations during the six
months ended December 31, 1998. The Company initially expected to spend $17
million on the development and exploitation of its oil and natural gas
properties during the fiscal year ended June 30, 1999. During the six months
ended December 31, 1998 the Company spent $7.4 million on the development and
exploitation of its oil and natural gas properties. Due to low oil and natural
gas prices the Company has deferred some development and exploitation projects
and has extended others over a longer period of time. The Company now expects to
spend between $2 million and $8 million between January 1 and June 30, 1999. The
Company exercises a fair degree of control over the timing of the individual
projects that comprise development and exploitation program.

     The Company does not have sufficient liquidity or capital to undertake
significant potential acquisition prospects. Therefore, the Company will
continue to be dependent on raising substantial amounts of additional capital
through any one or a combination of institutional or bank debt financing, equity
offerings, debt offerings and internally generated cash flow, or by forming
sharing arrangements with industry participants. Although the Company has been
able to obtain such financings and to enter into such sharing arrangements in
certain of its projects to date, there can be no assurance that it will continue
to be able to do so. Alternatively, the Company may consider issuing additional
securities in exchange for producing properties. There can be no assurance that
any such financings or sharing arrangement can be obtained. Therefore,
notwithstanding the Company's need for substantial amounts of additional
capital, there can be no assurance that it can be obtained.

     Further acquisitions and development activities in addition to those for
which the Company is contractually obligated are discretionary and depend to a
significant degree on cash availability from outside sources such as bank debt
and the sale of securities or properties.

INFLATION

     During the past several years, the Company has experienced some inflation
in oil and natural gas prices with moderate increases in property acquisition
and development costs. During the fiscal year ended June 30, 1998, the Company
received somewhat lower commodity prices for the natural resources produced from
its properties. Oil and gas prices have decreased further since June 30, 1998.
The results of operations and cash flow of the Company have been, and will
continue to be, affected to a certain extent by the volatility in oil and
natural gas prices. Should the Company experience a significant increase in oil
and natural gas prices that is sustained over a prolonged period, it would
expect that there would also be a corresponding increase in oil and natural gas
finding costs, lease acquisition costs, and operating expenses.

CHANGES IN PRICES AND HEDGING ACTIVITIES

     Annual average oil and natural gas prices have fluctuated significantly
over the past two years. The table below sets out the Company's weighted average
price per barrel and the weighted average price per Mcf, the impact of its
hedging programs and the NYMEX indices.

<TABLE>
<CAPTION>
                                                             Three months ended      Six months ended
                                                                December 31             December 31
                                                             1998          1997       1998       1997
                                                           --------      --------   --------   --------
<S>                                                        <C>           <C>        <C>        <C>     
Gas (per mcf)
  Price received at wellhead                               $   2.03      $   2.84   $   2.03   $   2.41
  Effect of hedge contracts                                    0.06            --       0.10         --
                                                           --------      --------   --------   --------
  Effective price received, including hedge contracts      $   2.09      $   2.84   $   2.13   $   2.41

  Average NYMEX Henry Hub                                  $   2.13      $   3.14   $   2.08   $   2.72
  Average basis differential including hedge contracts     $  (0.04)     $  (0.30)  $   0.05   $  (0.31)
  Average basis differential excluding hedge contracts     $  (0.10)     $  (0.30)  $  (0.05)  $  (0.31)

Oil (per barrel)
  Average price received at wellhead per barrel            $  11.77      $  18.00   $  11.91   $  18.07
  Average effect of hedge contract                             1.20         (0.04)      0.84       0.07
                                                           --------      --------   --------   --------
  Average price received, including hedge contracts        $  12.97      $  17.96   $  12.75   $  18.14

  Average NYMEX Sweet Light Oil                            $  12.92      $  19.94   $  13.53   $  19.87
  Average basis differential including hedge contracts     $   0.05      $  (1.98)  $  (0.78)  $  (1.73)
  Average basis differential excluding hedge contracts     $  (1.15)     $  (1.94)  $  (1.62)  $  (1.80)
</TABLE>





                                     - 17 -
<PAGE>   18
     The table below sets out volume of natural gas hedged with a floor price of
$1.90 per MMBtu with Enron. The volumes presented in this table are divided
equally over the months during the period:


<TABLE>
<CAPTION>
                                             Volume
      Period Beginning     Period Ending     (MMBtu)
     -----------------   -----------------  ---------
     <S>                 <C>                <C>      
       January 1, 1999   December 31, 1999  1,080,000

       January 1, 2000   December 31, 2000    880,000

       January 1, 2001   December 31, 2001    740,000

       January 1, 2002   December 31, 2002    640,000

       January 1, 2003   December 31, 2003    560,000
</TABLE>


     The table below sets out volume of natural gas hedged with a swap at $2.40
per MMBtu with Enron. The volumes presented in this table are divided equally
over the months during the period:

<TABLE>
<CAPTION>
                                             Volume
      Period Beginning     Period Ending     (MMBtu)
     -----------------   -----------------  ---------
     <S>                 <C>                <C>      
     January 1, 1999     December 31, 1999  2,710,000

     January 1, 2000     December 31, 2000  2,200,000

     January 1, 2001     December 31, 2001  1,850,000

     January 1, 2002     December 31, 2002  1,600,000

     January 1, 2003     December 31, 2003  1,400,000
</TABLE>

         Effective May 1, 1998 through December 31, 2003 the Company has a
contract involving the hedging of a portion of its future natural gas production
involving floor and ceiling prices as set out in the table below. The volumes
presented in this table are divided equally over the months during the period.

<TABLE>
<CAPTION>
                                                 Volume    Floor   Ceiling
     Period Beginning     Period Ending         (MMBtu)    Price    Price
     ----------------     -----------------   ---------    -----  ----------
     <S>                  <C>                 <C>          <C>    <C>
     January 1, 1999      December 31, 1999   4,330,000    2.00     2.70

     January 1, 2000      December 31, 2000   3,520,000    2.00     2.70

     January 1, 2001      April 30, 2001        990,000    2.00     2.70

     May 1, 2001          December 31, 2001   1,980,000    2.00     2.80

     January 1, 2002      April 30, 2002        850,000    2.00     2.80

     May 1, 2002          December 31, 2002   1,700,000    2.00     2.90

     January 1, 2003      December 31, 2003   2,250,000    2.00     2.90
</TABLE>

     Effective October 1, 1998 the Company entered into a swap agreement on
12,000 barrels of crude oil per month with Enron at $17.00 per barrel. This
agreement expired on December 31, 1998.

     The Company was under contract with an affiliate of Enron for 10,000 Bbls
of oil per month with a floor of $18.00 per Bbl and a ceiling of $20.40 per Bbl
with the Company participating on 50% of the price of WTI Nymex over $20.40 for
the period from September 1, 1997 through August 31, 1998. The Company also had
a contract for 50,000 MMBtu of natural gas per month with an affiliate of Enron,
with a floor price of $1.90 per MMBtu and a ceiling price of $2.66 per MMBtu,
with the Company participating on 50% of the price of Henry Hub Nymex Index over
$2.66 per MMBtu for the period from September 1, 1997 through August 31, 1998.

INTEREST RATE HEDGING

         The Company entered into a forward LIBOR interest rate swap effective
for the period June 30, 1998 through June 29, 2009 at a rate of 6.30% on $125.0
million. On July 9, 1998, the Company unwound this swap at a cost to the Company
of approximately $3.5 million with borrowings drawn under the Credit Agreement.


                                     - 18 -
<PAGE>   19


YEAR 2000 COMPUTER ISSUE

     GENERAL. The Company is addressing the potential impact of the Year 2000
("Y2K") issue on its operations. A review of internal systems has been initiated
and a review of the state of readiness of significant suppliers and customers
will be undertaken over the next few months. It is believed that appropriate
remedial action can be completed in advance of the year 2000 and the costs of
such action will not have a material affect on the financial condition or
results of operations of the Company.

     STATE OF READINESS. The Company currently uses commercially available
software for its management information ("IT") systems including accounting,
engineering evaluation, acquisition analysis and word processing. This software
is warranted by the suppliers/manufacturers to be Y2K compliant. The Company has
not taken any steps to independently verify the truth of such warranties but has
no reason to believe that the software is not as warranted. The Company has
begun a review of non-IT systems, which it expects to complete in the next few
months.

     COSTS OF COMPLIANCE. Management believes that the cost of compliance will
be minimal. As its IT systems were warranted to be compliant when purchased, the
Company has not incurred, nor does it expect to incur any significant
incremental costs to modify or replace such systems to make them compliant.
Non-IT systems are currently being evaluated to determine whether and to what
extent they may be non-compliant. Management does not currently believe that the
amount of non-compliant equipment will be found to be significant nor will the
cost to modify or replace such equipment be material.


     The Company is seeking written verification from its major operators,
suppliers and customers that they will be Y2K compliant. The costs of seeking
verification are minimal. Management believes that it will not be practical to
independently verify the responses because it does not believe that the Company
would be given access to carry out such verification or that the costs of doing
so would be affordable. The cost of replacing non-compliant or non-responsive
suppliers and customers will not be possible to determine until the review
process has progressed.

     RISK. Any Y2K problems that do occur will likely manifest themselves in
reduced production through equipment shut down or impaired liquidity through
inability of customers to take delivery or process payment.

     CONTINGENCY. The Company plans to establish contingency plans once its
verification program is complete and the risks have been more fully quantified.


ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

See Item 2. "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Changes in Prices and Hedging Activities".

                           PART II - OTHER INFORMATION

ITEM 2.  CHANGES IN SECURITIES AND USE OF PROCEEDS.

         November 1998 Placement. Pursuant to a Securities Purchase Agreement
dated November 10, 1998 among the Company and the buyers signatory thereto (the
"November Purchase Agreement"), the Company issued on November 24, 1998, to the
buyers, an aggregate of (i) 416,667 shares of Common Stock, (ii) certain
repricing rights to acquire additional shares of Common Stock ("Repricing
Rights") and (iii) warrants to purchase an aggregate of 50,000 shares of Common
Stock in exchange for aggregate cash consideration of $2.5 million (the
"November 1998 Placement"). For a more complete


                                     - 19 -
<PAGE>   20


description of this private placement, including, without limitation, a
description of the terms of exercise of the Repricing Rights and the terms of
exercise of the warrants, see "Item 5. Other Events" in the Company's Current
Report on Form 8-K dated November 24, 1998, which report is incorporated herein
by reference.

         In connection with the November 1998 Placement, the Company paid
$187,500 cash and issued warrants to purchase 50,000 shares of the Company's
Common Stock in consideration for Jesup & Lamont Securities Corp. acting as a
placement agent and Wellington Capital Corporation acting as a consultant. In
addition, we also issued rights to acquire an aggregate of 60,876 shares of
Common Stock to certain persons to obtain their participation in the November
1998 Placement. These rights were exercised immediately after they were granted.

         Each of the issuances in the November 1998 Placement was made in
reliance on Section 4(2) of the Securities Act of 1933, as amended (the
"Securities Act") and Regulation D promulgated under the Securities Act. The
Company has filed a Registration Statement on Form S-3 with the Securities and
Exchange Commission to register the resale of the shares of Common Stock issued
and issuable pursuant to the November 1998 Placement.

         The net proceeds received by the Company from this private equity
placement were used to repurchase an aggregate of 2,152 shares of the Company's
Series C Convertible Preferred Stock from two holders thereof.

         The warrants issued in the November 1998 Placement are exercisable for
three years commencing November 10, 1998 at an exercise price of $6.60. The
warrants provide for customary adjustments to the exercise price and number of
shares to be issued in the event of certain dividends and distributions to
holders of Common Stock, stock splits, combinations and mergers. The warrants
also include customary provisions with respect to, among other things, transfer
of the warrants, mutilated or lost warrant certificates, and notices to
holder(s) of the warrants.

         Other Issuances of Common Stock

         During the quarter ended December 31, 1998, pursuant to Section 3(a)(9)
of the Securities Act, the Company issued an aggregate of 814,619 shares of
Common Stock to stockholders who exercised repricing rights under the Amended
and Restated Securities Purchase Agreement dated as of July 8, 1998 among the
Company and the buyers signatory thereto. The repricing rights were issued in
connection with the July 1998 private placement and permit the holders to
acquire shares of Common Stock without the payment of additional consideration
if the Company's Common Stock does not achieve certain price thresholds in
excess of the original issuance of the shares purchased by the holders in the
July 1998 private placement. The resale of these shares of Common Stock is
registered pursuant to a Registration Statement on Form S-3 filed by the Company
and declared effective by the Securities and Exchange Commission.

         During the quarter ended December 31, 1998, pursuant to Section 3(a)(9)
of the Securities Act, the Company issued an aggregate of 412,635 shares upon
conversion of 2,290 shares of the Company's Series C Convertible Preferred Stock
by the holders thereof. The resale of these shares of Common Stock is registered
pursuant to a Registration Statement on Form S-3 filed by the Company and
declared effective by the Securities and Exchange Commission.

                                     - 20 -

<PAGE>   21


         Due to the current market price of the Company's Common Stock, it is
likely that additional shares of Common Stock will be issued upon exercise of
Repricing Rights and upon conversion of the Series C Convertible Preferred
Stock.

         Warrants

         During the quarter ended December 31, 1998, in reliance on Section 4(2)
of the Securities Act, the Company issued warrants to purchase an aggregate of
1,545,578 shares of Common Stock to Joint Energy Development Investments Limited
Partnership ("JEDI"). The exercise prices of the warrants range from $3.541 to
$6.00. These warrants were issued to JEDI for no consideration pursuant to
JEDI's "maintenance rights" under the Securities Purchase Agreement dated as of
March 27, 1997.

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

         The Annual Meeting of Stockholders of the Company was held on November
12, 1998,at which the election of five directors, the appointment of Ernst &
Young LLP as the Company's independent public accountants for 1999, the adoption
of the Company's Directors' Nonqualified Stock Option Plan and the ratification
of the issuance of Common Stock pursuant to the Amended and Restated Securities
Purchase Agreement dated as of July 8, 1998 among the Company and the buyers
named therein were considered. Edward J. Munden was re-elected as a director and
received 28,901,241 votes for his election, with 0 votes withheld. Bruce I. Benn
was re-elected as a director and received 28,901,241 votes for his election,
with 0 votes withheld. Robert P. Lindsay was re-elected as a director and
received 28,901,241 votes for his election, with 0 votes withheld. Ted Collins,
Jr. was re-elected as a director and received 28,901,241 votes for his election,
with 0 votes withheld. Eli Rebich was re-elected as a director and received
28,901,241 votes for his election, with 0 votes withheld. Ernst & Young LLP was
ratified as independent accountants for the Company for the fiscal year ending
June 30, 1999 and received 28,898,241 votes for their ratification, 3,000 votes
against and 0 votes abstaining. The adoption of the Company's Directors'
Nonqualified Stock Option Plan was approved with 28,884,841 votes in favor of
approval, 10,000 votes against and 5,400 votes abstaining. The ratification of
the issuance of Common Stock pursuant to the Amended and Restated Securities
Purchase Agreement dated as of July 8, 1998 among the Company and the buyers
named therein was approved with 27,987,567 votes in favor of approval, 10,600
votes against and 3,300 votes abstaining.

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K.


         (a) Exhibits.

         4.1      Form of Warrant dated as of November 10, 1998 for the purchase
                  of shares of Common Stock issued by the Company to the persons
                  named on Schedule A, filed as an Exhibit to the Company's
                  Current Report on Form 8-K dated November 24, 1998 and
                  incorporated by reference herein.



                                     - 21 -
<PAGE>   22



         10.1     Securities Purchase Agreement dated as of November 10, 1998
                  among Queen Sand Resources, Inc. and the buyers signatory
                  thereto, filed as an Exhibit to the Company's Current Report
                  on Form 8-K dated November 24, 1998 and incorporated by
                  reference herein.

         10.3     Registration Rights Agreement dated as of November 10, 1998
                  among the Company and the buyers signatory thereto, filed as
                  an Exhibit to the Company's Current Report on Form 8-K dated
                  November 24, 1998 and incorporated by reference herein.

         27.1     Financial Data Schedule.

         (b)      Reports on Form 8-K.

                  1.       Current Report on Form 8-K dated November 24, 1998,
                           disclosing certain matters under Item 5.



                                     - 22 -
<PAGE>   23



                                   SIGNATURES

Pursuant to the requirements 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.


                                      QUEEN SAND RESOURCES, INC.



                                      By:  /s/      Edward J. Munden 
                                           ------------------------------------
                                           Edward. J. Munden
                                           President and Chief Executive Officer




                                      By:  /s/      Ronald Benn               
                                           ------------------------------------
                                           Ronald Benn
                                           Chief Financial Officer


Date:  February 15, 1999



                                     - 23 -


<PAGE>   24
                               INDEX TO EXHIBITS


<TABLE>
<CAPTION>
       EXHIBIT 
       NUMBER                 DESCRIPTION
       -------                ----------- 
       <S>        <C>
         4.1      Form of Warrant dated as of November 10, 1998 for the purchase
                  of shares of Common Stock issued by the Company to the persons
                  named on Schedule A, filed as an Exhibit to the Company's
                  Current Report on Form 8-K dated November 24, 1998 and
                  incorporated by reference herein.

         10.1     Securities Purchase Agreement dated as of November 10, 1998
                  among Queen Sand Resources, Inc. and the buyers signatory
                  thereto, filed as an Exhibit to the Company's Current Report
                  on Form 8-K dated November 24, 1998 and incorporated by
                  reference herein.

         10.3     Registration Rights Agreement dated as of November 10, 1998
                  among the Company and the buyers signatory thereto, filed as
                  an Exhibit to the Company's Current Report on Form 8-K dated
                  November 24, 1998 and incorporated by reference herein.

         27.1     Financial Data Schedule.
</TABLE>