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                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
   
                                   FORM 10-KA
    

    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                                   ACT OF 1934
                   For the fiscal year ended December 31, 1997

                         Commission file number 0-14905

                  AMERICAN INTERNATIONAL PETROLEUM CORPORATION
                  --------------------------------------------
             (Exact name of registrant as specified in its charter)

         Nevada                                         13-3130236
-------------------------------             ------------------------------------
(State of other jurisdiction of             (I.R.S. Employer Identification No.)
incorporation or organization

 444 Madison Avenue, New York, NY                          10022
----------------------------------------    ------------------------------------
(Address of principal executive offices)                 (Zip Code)

Registrant's telephone number, including area code      (212) 688-3333
--------------------------------------------------      --------------

        Securities registered pursuant to Section 12(b) of the Act: NONE

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

                     Common Stock, par value $.08 per share
                                Class A Warrants
                     ---------------------------------------
                              (Title of Each Class)

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

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

The aggregate market value of the voting stock of the Registrant held by
non-affiliates as of April 6, 1998 was approximately $187,000,000 (assuming
solely for purposes of this calculation that all directors and officers of the
Registrant are "affiliates").

The number of shares of Common Stock of the Registrant outstanding as of April
6, 1998 was 48,994,257.


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                                     PART I

Item 1.  BUSINESS

General

American International Petroleum Corporation ("AIPC" or the "Company"), was
organized on April 1, 1929 under the laws of the State of Nevada under the name
Pioneer Mines Operating Company. The Company's name was changed to its current
name in 1982. The Company implemented the production and processing of asphalt,
vacuum gas oil and other products at its subsidiary's Lake Charles, Louisiana
refinery the first quarter of 1998 utilizing low-cost, low-gravity, high-sulpher
crudes from Mexico and Venezuela and is engaged in oil and gas exploration and
development in western Kazkastan. The Company is also seeking other oil and gas
projects in the United States, Russia and Central Asia.

   
The Company's wholly-owned subsidiary, American International Refinery, Inc.
("AIRI") is the owner of a refinery in Lake Charles, Louisiana (the "Refinery").
A certain portion of the Refinery, a 30,000 barrel-per-day crude distillation
tower (the "Crude Unit") was leased by AIRI to Gold Line Refining Ltd. ("Gold
Line"), an independent refiner, from 1990 to March 20, 1997 under a lease
agreement (the "Lease Agreement") between AIRI and Gold Line. See "Domestic
Operations - Refinery" below. The Company is now operating the Refinery with its
own personnel to produce asphalt and other products. See "Domestic Operations -
Refinery" below. The Company's wholly-owned subsidiary, American International
Petroleum Kazakstan ("AIPK") is the owner of a 70% working interest in a 20,000
square kilometer exploration block in western Kazakstan. See "International
Exploration and Development" below. 1229329 Ontario ("Ontario"), a wholly-owned
subsidiary of the Company organized under the laws of the Province of Ontario,
Canada, was created specifically to enable the Company to margin or sell in
Canada shares of common stock of Mercantile International Petroleum Inc.
("MIP"), which the Company received as partial proceeds from an asset sale,
which occurred on February 25, 1997 when the Company sold all of the issued and
outstanding shares of common stock of its wholly-owned oil and gas exploration
and production subsidiaries, American International Petroleum Corporation of
Colombia ("AIPCC") and Pan American International Petroleum Corporation
("PAIPC"), in an arms length transaction (the "MIP Transaction"). See
"International Exploration and Development - Sale of South American
Subsidiaries" below. In February 1998, the Company organized another
wholly-owned subsidiary, American Eurasia Petroleum Corporation ("AEPC"), to
conduct business in Russia and in Central Asia. The term the "Company" includes
AIPC, AIRI, AIPCC, PAIPC, AIPK, Ontario, and AEPC, unless the context otherwise
requires.
    

Prior to the MIP Transaction and the implementation of its Kazakstan operations,
the Company's principal oil and gas properties consisted of (i) between 40% and
80% of the working interest in all oil and/or gas wells drilled on approximately
33,000 acres in the Puli Anticline and the Toqui-Toqui fields, located in the
Middle Magdalena Region of Colombia, South America and (ii) 65% of the working
interest in approximately 27,000 acres of exploratory and development contract
rights in the Talara Basin in Peru, South America.

The discussions included herein contain forward-looking statements that involve
risks and uncertainties, including the Company's continuing losses, working
capital deficits, the marketability of the Company's securities obtained from
MIP in connection with the MIP Transaction, the ability to enter into profitable
contracts to utilize the Refinery, completion of construction projects and
financing of refinery operations, the timely development and financing of new
oil and gas projects, the impact of competitive products and pricing, and other
risks detailed from time to time in the Company's SEC reports.

Domestic Operations

     Refinery

In July 1988, AIRI acquired the Refinery, which is located on 30 acres of land
bordering the Calcasieu River near Lake Charles, Louisiana. The Company also
owns 22 acres of vacant waterfront property adjacent to the Refinery and another
45 acres of vacant land across the highway from the Refinery. The river connects
with the Port of Lake Charles, the Lake Charles Ship Channel and the
Intercoastal Waterway. Most of the Refinery's feedstock and refined products are
handled through the Refinery's barge dock at the river.

The Company recommissioned and tested the Refinery during operations between
February and July 1989. During that time it processed up to 24,000 barrels of
oil per day. Numerous modifications were designed and implemented to bring the
Refinery into compliance with new and existing environmental regulations and to
facilitate production of higher value 

                                       2

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products. Completion of most environmental compliance projects and a military
specification jet fuel ("JP-4") upgrade project at the Refinery occurred in
1990.

The main unit of the Refinery is the Crude Unit, which is capable of producing
light naptha overhead and the following side cuts: heavy naptha, kerosene (for
jet fuel), #2 diesel, atmospheric gas oil and reduced crude oil sold as special
#5 fuel oil. The Crude Unit is also suitable for adaptation to process sour
crude oil.

In 1989, the Company purchased a 16,500 barrel per day vacuum distillation unit
(the "VDU") which was dismantled and moved to the Refinery. Construction of the
VDU on the Refinery site was completed in 1993 and, for various economic
reasons, the VDU has been idle since then. However, the Company recently
completed the expansion of, and certain enhancements to, the Crude Unit, VDU,
and other components of the Refinery to enable the Company to produce
conventional and polymerized asphalt, vacuum gas oil ("VGO"), diesel, and other
products.

   
Total petroleum storage capacity at the Refinery is 725,000 barrels. Storage
tanks on the Refinery's land include 275,000 barrels of crude storage, 370,000
barrels of storage for finished product sales and 80,000 barrels of product
rundown storage. The Refinery also has 20,000 barrels of waste water storage
capacity.
    

The Crude Unit was leased by AIRI to Gold Line from 1990 to March 20, 1997 under
the Lease Agreement. The Lease Agreement was terminated because Gold Line was in
default under the terms thereof. The Company filed suit for damages and received
a judgment in its favor of $1.5 million. However, since Gold Line has filed for
protection under Chapter 11 of the Bankruptcy Code, and there are certain
secured creditors who have made significant claims against Gold Line, the total
of which claims may exceed the total value of Gold Line's assets, the
collectability of this judgment by the Company is uncertain.

With the recent termination of the Lease Agreement on March 20, 1997, the
Company has staffed and operates the Refinery with its own employees and all
operations are now under the direct control of its management. Although the
primary focus at the Refinery will be the production of conventional and
polymerized asphalt and VGO, it will also produce roofing flux and smaller
quantities of light-end products such as naphtha, fuel oil, diesel, and jet
kerosene. With the completion of the Refinery expansion, the Company now has a
basic foundation upon which to build its planned asphalt business.

In addition to the manufacturing and sale of asphalt, VGO, roofing flux, and
other products, the Company is capable of utilizing its facility as a toll
processing terminal to provide a service to blend and polymerize asphalt for
other companies. The Company's VGO can be sold to major gasoline refining
companies and other refiners, which are prevalent in the Gulf Coast and use VGO
as a feedstock for their catalytic cracking units. Although the Company has not
signed any long-term agreements to sell VGO, there is a continuous demand for
VGO, and the Company has received, and continues to receive, numerous inquiries
from local and out-of-state refiners interested in purchasing VGO from the
Refinery. Marketing of VGO and other non-asphalt products produced in the
Refinery (constituting approximately 40% of the Refinery's production) is to be
handled directly by Refinery personnel.

   
The Company's anticipated asphalt terminalling and marketing operations for
conventional and polymerized asphalt will initially be applicable only to the
local truck rack paving market within an approximate 100 mile radius of the
Refinery. This market segment represents approximately 25% of the total capacity
of the Refinery. All other asphalt manufacturing and marketing opportunities,
wholesale barge and rail car, or retail truck for roofing asphalts, industrial
grade asphalts, and all other conventional and polymerized asphalt products will
be developed by the Company beginning in 1998. The Company has engaged Materials
Resources, Inc. ("MRI") as exclusive sales representative to market the
Refinery's truck rack paving asphalt in Louisiana. MRI is an established
supplier of asphalt, emulsions and aggregates in Louisiana, Mississippi and east
Texas. In February 1998, the Company hired an asphalt sales manager for business
in the State of Texas.
    

     Recent Developments

   
In February 1998, the construction necessary to expand and enhance the Refinery
was completed and the sale of asphalt commenced. The Company has not completed
negotiations of any feedstock crude oil supply agreements, but it is currently
in the midst of separate supply agreement negotiations with the Mexican and
Venezuelan governments and major oil companies for the upcoming processing
season.
    

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     St. Marks Refinery
   
In March 1998, the Company signed an agreement, subject to certain conditions,
to purchase the 20,000 barrels per day St. Marks Refinery and product storage
terminal located on the St. Marks River near Tallahassee, Florida in a tax free
exchange of stock worth up to $4.5 million. If the Company decides not to
purchase the 55-acre facility, it has agreed to an annually-renewable lease of
the Refinery under specific terms and conditions.
    

The primary advantage to the Company of the St. Marks acquisition or lease, is
the immediate increase of its retail presence from two to five states along the
U.S. Gulf Coast, plus a 50% increase in storage tank capacity by adding 33 more
tanks totaling more than 460,000 barrels to the Company assets. This transaction
provides an opportunity for the Company to double the retail sales capacity of
petroleum products manufactured at its Lake Charles, Louisiana Refinery through
access to new asphalt product markets plus jet fuel, diesel and industrial fuel
oil sales in Florida, Georgia and Alabama.

     Refinery Financing Activities

Subsequent to the purchase of the Refinery, the Company entered into a series of
transactions with MG Trade Finance Corp. ("MGTF") to finance the upgrade and
operations of the Refinery. In 1990, AIRI entered into a loan and security
agreement (the "Loan Agreement") with MGTF whereby MGTF loaned AIRI $9,855,000
to (i) repay certain of AIRI's prior obligations; (ii) fund certain improvements
related to environmental regulations and production of J-4 jet fuel; and (iii)
provide working capital.

In order to secure AIRI's obligations under the Loan Agreement, AIRI granted
MGTF a first priority security interest in the Refinery and in substantially all
of the remainder of AIRI's assets. The Company also guaranteed AIRI's
obligations under the Loan Agreement and pledged to MGTF all of the capital
stock of AIRI. Pursuant to the Loan Agreement, the Company granted MGTF warrants
to purchase 516,667 shares (as adjusted) of the Company's common stock, par
value $.08, (the "Common Stock") at an exercise price of $7.50 per share,
exercisable at any time prior to June 30, 1994 (the "MGTF Warrants"). The
expiration dates of 246,667 of the MGTF Warrants were extended to June 30, 1997,
and the exercise price was adjusted to $15.63 per share of common stock.

   
In April 1993, the Company negotiated an amendment to the Loan Agreement whereby
MGTF reduced the balance of the loan by $750,000 through the exercise of 100,000
warrants to purchase common stock of the Company. Also, in consideration for
rescheduling the loan, MGTF received a fee of $100,000 and a warrant to acquire
100,000 shares of the Company's common stock at $16.88 per share. Such warrant
was exercisable at any time prior to June 30, 1997. In July 1995, MGTF released
all of its then-existing warrants for cancellation and received new warrants to
purchase 150,000 shares of the Company's common stock at $2.00 per share anytime
prior to March 31, 1998. These warrants were exercised by MGTF in October 1997.
    

As part of certain negotiations related to the MIP Transaction, the Company and
MGTF agreed to change the due date of the unpaid balance of the Loan Agreement
of $2,108,000 to September 30, 1997 from March 31, 1998. In October 1997, the
Company paid the total balance due on the Loan Agreement.

International Exploration and Production

Generally, oil and gas exploration is extremely speculative, involving a high
degree of risk. Even if reserves are found as a result of drilling, profitable
production from reserves cannot be assured.

     Recent Developments

     Zao Nafta

On March 18, 1998, the Company signed an agreement with Zao Nafta ("ZN") a
Russian closed stock company (the "Option") in which the Company received a
90-day option to acquire a 75% working interest in a joint venture for the
development of 17 oil and gas licenses (the "Licenses") in the Samara and
Saratov regions of European Russia, covering approximately 877,000 acres.
   
    

                                       4
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Should the Company decide to complete the transaction, pending confirmation of
proven reserves and modification of certain license conditions, the Company
would become Operator and would have complete control of all operations. It
would also be required to make a minimum investment during the first 24 months
of $25 million for the rework of 16 existing wells (which tested an aggregate
rate of 6,200 barrels of oil per day), construction of all necessary
infrastructure, seismic investigations, and processing and drilling of new
wells. ZN agreed to use its best efforts to have the minimum investment
requirement reduced by approximately 25% to $17.6 million, although such
reduction is not a requirement for completion of the transaction.

The Company agreed to pay $11 million for the 75% working interest, $4.7 million
in cash and stock and $6 million from 25% of its future net production,
including a refundable $300,000 cash payment for the option. After closing, the
Company intends to commence a $2 million rework program on the 16 existing
shut-in wells on the Samara license and place the wells in a productive mode of
operation as soon as practicable. These shut-in wells are located in a developed
area, with the necessary productive infrastructure in place to enable prompt
sale of oil production, if and when this occurs.

     Sale of South American Subsidiaries

On February 25, 1997, the Company sold all of the issued and outstanding shares
of common stock of its wholly-owned subsidiaries, American International
Petroleum Corporation of Colombia ("AIPCC") and Pan American International
Petroleum Corporation ("PAIPC") (the "Purchased Shares") to MIP in an arms
length transaction.

The assets of AIPCC and PAIPC consisted of oil and gas properties and equipment
in South America with an aggregate net book value of approximately $17.9
million. The total aggregate purchase price payable by MIP for the Purchased
Shares was valued (giving account to the contingent portion thereof which,
pursuant to GAAP, was not recorded by the Company) at up to approximately $20.2
million, determined as follows:

      (a)  Cash payments of approximately $3.9 million, of which approximately
           $2.2 million was paid simultaneously with the closing to retire the
           Company's 12% Secured Debentures due December 31, 1997, which were
           secured by the Company's shares of AIPCC.
      (b)  Assumption of AIPCC and PAIPC debt of an aggregate amount of
           $634,000.
      (c)  4,384,375 shares of MIP Common Stock (the "MIP Shares").
      (d)  A two-year $3 million 5% exchangeable subordinated debenture of
           AIPCC (the "Exchangeable Debenture"), exchangeable into shares of
           common stock of MIP on the basis of $3 principal amount of such
           debenture for one share of MIP on or after February 25, 1998; or the
           Company may demand payment on that date of $1.5 million of the
           principal balance thereof.
      (e)  A $1.4 million "performance earn-out" from future production in
           Colombia, plus interest at 8% per annum.
      (f)  Up to $2.5 million (reduced proportionately to the extent the Net
           Operating Loss and Deferred Cost Deductions accrued by AIPCC through
           December 31, 1996 ("Accrued Tax Benefit Deductions") is less than $50
           million but more than $20 million) payable from 25% of AIPCC's future
           tax savings related to Accrued Tax Benefit Deductions, if any,
           available to AIPCC on future tax filings in Colombia.

   
The Company utilized a substantial portion of the cash proceeds of the sale to
repay the outstanding balance to MGTF on its 12% Secured Debentures, due
December 31, 1997, to pay other debts, expand its refinery, and for general
corporate use.
    

     Kazakstan Agreement

On May 12, 1997, the Company, through its wholly-owned subsidiary, American
International Petroleum Kazakstan ("AIPK"), entered into an agreement with MED
Shipping and Trading S.A. ("MED"), a Liberian corporation with offices in
Frankfurt, Germany, to buy from MED, in exchange for a combination of cash and
stock, 70% of the stock of MED 


                                       5
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Shipping Usturt Petroleum Ltd. ("MSUP"), a Kazakstan corporation which owns 100%
of the working interest in a Kazakstan Concession (the "License Area"). The
Concession is located approximately 125 kilometers from Chevron's
multi-billion-barrel Tengiz Oil field near the Caspian Sea, and is bordered to
the west by both Oryx/Exxon and Amoco licenses and to the south by an ELF
Acquitane license. Independent, preliminary, evaluation indicates potential
recoverable reserves from 8 structures in the Concession area from Jurassic Age
sandstones. Eight additional structures have been identified but have not been
evaluated.

The Company paid $100,000 in cash and 300,000 shares of its Common Stock to MED
in return for the option to acquire a 40% working interest in the License Area.
Further negotiations resulted in an increase in the working interest to 70%. As
consideration for its 70% interest in MSUP, the Company issued an additional
2,950,000 shares of its Common Stock, and warrants to purchase an aggregate of
500,000 shares of its Common Stock at an exercise price of $2.00 per share.

The definitive agreement under which MSUP is to explore and evaluate hydrocarbon
reserves in the License Area provides for the payment of a commercial bonus of
0.5% of reserve value, a subscription bonus of $975,000, and grants MSUP the
exclusive right to a production license upon commercial discovery. The term of
the license is five years and may be extended for an additional 4 years. The
five-year minimum work program required by the license calls for MSUP to acquire
and process 3,000 kilometers of new seismic data, reprocess 500 kilometers of
existing seismic data, and drill 6,000 linear meters. Initial production up to
650,000 barrels is exempt from royalty, which otherwise ranges between 6% and
26%, to be negotiated in conjunction with a production agreement with the
government. Income tax has been set at 30% and social programs payments at
$200,000 annually during exploration. MSUP will be required to expend a minimum
of $14.75 million over five years, of which $6.3 million is required in the
initial three years. In addition, MSUP assumed an obligation to pay the
Kazakstan government three annual payments of $200,000 each, beginning in July
1998, for the purchase of existing seismic and geological data on the License
Area. AIPK recently contracted with two geophysical companies to acquire 2D
seismic data on the License Area. One geophysical company is to concentrate on
the Chikuduk, a 60 kilometer-long structure previously identified in the eastern
section of the License Area, and the other will focus on areas west of the
Chikuduk. The seismic is intended to assist in a determination of the
feasibility of further exploration and potential siting of future exploratory
drilling.

Other Financings

In March 1994, the Company completed an offering of rights to its shareholders.
Each right was exercised for $3.00, and the holder received two shares of common
stock and one redeemable warrant to acquire an additional share of common stock
at any time prior to March 1, 1996 at an exercise price of $4.00 per share. The
expiration date of these warrants was extended to April 9, 1998, but the
exercise price remained at $4.00 per share.

Since the MIP Transaction and the termination of its Lease Agreement with Gold
Line, the Company has had no revenues from operations. Although it has utilized
some of the proceeds from the MIP Transaction to fund the Refinery expansion and
start-up processes, its activities in Kazakstan and other operations, such
proceeds were inadequate to satisfy all of the Company's debt obligations and
capital requirements. Therefore, during 1997, the Company issued various
promissory notes, common stock, and convertible debentures in exchange for an
aggregate of approximately $20.5 million through certain private placement and
agreements, most of which were issued in reliance upon the safe harbor provided
by Regulation S as promulgated under the Securities Act of 1933, as amended (the
"Act"). The Company utilized most of the cash proceeds from these private
placements to fund its operations and activities at the Refinery and in
Kazakstan, for payment of debt, and for general corporate purposes.

Competition

The geographic location of the Refinery in Lake Charles, La. gives the Company a
distinct freight advantage over other asphalt suppliers in the area. Most of the
Company's competition in its planned asphalt manufacturing business will come
from those refiners that do not have downstream processing choices such as the
Company's. The major competitor in the local truck rack market is a blending
plant operation over 75 miles away. The average distance from the Company's
refinery to the nearest competing truck rack asphalt producing refinery ranges
from 150 to over 200 miles away. The Company's major competitor for barge sales
is located over 400 miles farther away from the Company's major markets than the
Refinery. This distance equates to more than $1.30 per barrel freight advantage
to the Company into the same markets.


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Due to highly volatile crude oil prices and environmental regulation, many small
oil refineries have ceased or curtailed production. The Company also believes,
although no assurance of this can be given, that the high costs of constructing
new refineries, as well as the cost of updating and modifying inactive existing
refineries will discourage new competition in the asphalt and refining
businesses.

The oil and gas industry, including oil refining, is highly competitive. The
Company is in competition with numerous major oil and gas companies and large
independent companies for prospects, skilled labor, drilling contracts,
equipment and product sales contracts. Many of these competitors have greater
resources than the Company's.

Revenues generated by the Company's oil and gas operations and the carrying
value of its oil and gas properties are highly dependent on the prices for oil
and natural gas. The price which the Company receives for the oil or natural gas
it may produce is dependent upon numerous factors beyond the control of the
Company's management, the exact effect of which cannot be predicted. These
factors include, but are not limited to, (i) the quantity and quality of the oil
or gas produced, (ii) the overall supply of domestic and foreign oil or gas from
currently producing and subsequently discovered fields, (iii) the extent of
importation of foreign oil or gas, (iv) the marketing and competitive position
of other fuels, including alternative fuels, as well as other sources of energy,
(v) the proximity, capacity and cost of oil or gas pipelines and other
facilities for the transportation of oil or gas, (vi) the regulation of
allowable production by governmental authorities, (vii) the regulations of the
Federal Energy Regulatory Commission governing the transportation and marketing
of oil and gas, and (viii) international political developments, including
nationalization of oil wells and political unrest or upheaval. All of the
aforementioned factors, coupled with the Company's ability or inability to
engage in effective marketing strategies, may affect the supply or demand for
the Company's oil, gas and other products and, thus, the price attainable
therefor.

    Financial Information Relating to Foreign and Domestic Operations
    and Export Sales

The table below sets forth, for each of the last three fiscal years, the amounts
of revenue, operating profit or loss and assets attributable to each of the
Company's geographical areas, and the amount of its export sales.

Sales to unaffiliated customers:               1997         1996        1995

    United States                           $   23,298   $2,596,917  $1,403,668
    Colombia                                   292,947    1,508,260   1,214,213
    Peru                                         *            *         166,069
    Kazakstan                                    -            -           -

Sales or transfers between geographic areas:
    United States                                -            -           -
    Colombia                                     -            -           -
    Peru                                         -            -           -
    Kazakstan                                    -            -           -

Operating profit or (loss):
    United States                           (1,165,890)     980,874    (518,462)
    Colombia                                  (170,424)      39,595    (299,188)
    Peru                                         *         (200,000)    100,928
    Kazakstan                                    -            -           -

Identifiable assets:
    United States                           21,159,627   12,895,332  13,565,280
    Colombia                                     -       14,641,646  14,136,257
    Peru                                         -        4,860,559   4,247,975
    Kazakstan                               11,724,477        -           -

Export sales:                                    -            -           -

*Information was not available due to dispute with partner, which dispute was
settled subsequent to the MIP Transaction. See Item 1 "Business - General".



                                       7

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Insurance; Environmental Regulations

The Company's operations are subject to all risks normally incident to (i) the
refining and manufacturing of petroleum products; and (ii) oil and gas
exploratory and drilling activities, including, but not limited to, blowouts,
extreme weather conditions, pollution and fires. Any of these occurrences could
result in damage to or destruction of oil and gas wells, related equipment and
production facilities and may otherwise inflict damage to persons and property.
The Company maintains comprehensive and general liability coverage, as is
customary in the oil and gas industry and coverage against customary risks,
although no assurance can be given that such coverage will be sufficient to
cover all risks, be adequate in amount, or that any damages suffered will not be
governed by exclusionary clauses, thereby rendering such coverage incomplete or
non-existent to protect the Company's interest in specific property. The Company
is not fully covered for damages incurred as a consequence of environmental
mishaps. The Company believes it is presently in compliance with government
regulations and follows safety procedures which meet or exceed industry
standards.

Marketing

After satisfactorily completing the qualification requirements and asphalt
facility inspection, the Company has received approval from the Louisiana
Department of Transportation ("LADOT") Materials Inspection Division to have its
paving asphalt products placed on the QPL-41 list of eligible suppliers. This
enables the Company to bid on state and federal highway projects in the State of
Louisiana and provides an asphalt quality assurance endorsement for non-state
and federal projects as well. The Company has begun an aggressive campaign to
secure asphalt supply sales agreements with Louisiana hot mix manufacturers both
at recent highway bid lettings and through private conventional paving projects.

In the Texas market, the Company has begun to expand its truck rack retail
asphalt marketing efforts with the recent hiring of an asphalt sales manager
with over 30 years experience in the Texas asphalt market. A recent inspection
by the Texas Department of Transportation ("TXDOT") materials division resulted
in an approval for the Company to bid on state and federal highway projects
throughout Texas.

The Company has been very successful in recent with its initial lettings in both
Louisiana and Texas and has already secured orders and sales agreements in
excess of several million dollars for its polymerized and conventional asphalt
products. 

In addition, the Company is investigating the possibility of establishing two
more truck rack retail locations outside the 100 mile radius of its current
facility. These market opportunities have the potential to increase the
Company's expansion into new profitable retail sales outlets at greater net-back
margins than can be achieved in the wholesale barge markets.

The Company is committed to continue an aggressive, expanding, retail market
growth program across the Gulf Coast and into other various profitable
geographic areas.

Lease fees from Gold Line accounted for approximately 0%, 60% and 42% of the
Company's 1997, 1996 and 1995 revenues, respectively. On March 20, 1997, the
Company terminated the Lease Agreement with Gold Line.

     Oil and Gas

   
Effective May 1, 1994, AIPCC entered into an agreement with Carbopetrol S.A. to
sell all of its crude oil produced in Colombia. This contract was a 6-month
renewable fixed-price sales contract for all crude oil produced by the Company
from the Toqui-Toqui field. Payments were made in Colombian Pesos adjusted for
expected exchange fluctuation. Prices were based on the price of local fuel oil
and had an average price, net of transportation costs, an for 1997 and 1996
average price to the Company less transportation cost, of approximately $11.81
and $9.98 and $8.40 per barrel of oil in each of 1997 and 1996, respectively. In
Peru, PAIPC's contract with PetroPeru provided for a flexible royalty rate based
on the amount of production and world basket price for this contract area
providing a net sales price to PAIPC of approximately 65% of the world basket
price for the field, which, based on an average gross price of $16.53 per barrel
of oil in each of 1997 and 1996, respectively, provided a net price to the
Company of approximately $10.75 and $10.75 per barrel of oil, respectively.
    

Sales of the Company's crude oil to Carbopetrol S.A. in Colombia accounted for
29%, 24%, and 39% of the Company's 1997, 1996 and 1995 revenues, respectively.
Sales to Ecopetrol accounted for approximately 11%, 9%, and 10% of the Company's
1997, 1996 and 1995 revenues, respectively.


                                       8

<PAGE>

A continuing market for any oil and gas that the Company may produce will depend
upon numerous factors, many beyond the control of the Company, and most of which
are not predictable. These factors include regulation of oil production, price
controls on petroleum and petroleum products, the amount of oil and gas
available for sale, the availability of adequate pipeline and other
transportation facilities, the marketing of competitive fuels, and other matters
affecting the availability of a ready market, such as fluctuating supply and
demand.

Sources and Availability of Raw Materials

The Company plans to purchase all raw materials needed for its operations from
suppliers and manufacturers located throughout the United States and
internationally. The Company believes that these materials are in good supply
and are available from multiple sources.

Employees

As of April 1, 1998, the Company employed 73 persons on a full-time basis,
including 11 persons who are engaged in management, accounting and
administrative functions for AIPC and 60 who are employed by AIRI on a full-time
basis, including 10 persons who are engaged in management and administrative
functions, and 2 who are employed by AIPK in management and administrative
positions. The Company frequently engages the services of consultants that are
experts in various phases of the oil and gas industry, such as petroleum
engineers, refinery engineers, geologists and geophysicists. The Company
believes that relations with its employees are satisfactory.

Item 2.  PROPERTIES

Office Facilities

   
The Company leases approximately 2,900 square feet of office space at 444
Madison Avenue, New York, N.Y. 10022. This space comprises the Company's
principal executive office. The space was leased effective November 1, 1994 for
a period of four years at a monthly rental rate of $7,325. In addition, the
Company leases approximately 3,400 square feet of office space in Houston, Texas
at a monthly rental of $3,607 This lease expires in November 30, 1998.

The Company also owns 87 acres of land in Lake Charles, Louisiana where the
Refinery is located. In addition to the structures and equipment comprising the
Refinery facility (See "Item 1 - Business - Domestic Operations - Refinery"),
the Refinery assets include an approximately a 4,400 square foot office
building, a new 2,200 square foot asphalt plant office, and a state-of-the-art
laboratory, and two metal building structures serving as work shops, maintenance
and storage facilities with an aggregate square footage of approximately 4,300
square feet.
    

Oil and Gas Acreage and Wells

Gross acreage presented below represents the total acreage in which the Company
owned a working interest on December 31, 1997, and net acreage represents the
sum of the fractional working interests owned by the Company in such acreage.

The table below indicates the Company's developed and undeveloped acreage as of
December 31, 1997.

                Gross            Gross             Net               Net
              Developed       Undeveloped       Developed        Undeveloped
               Acreage          Acreage          Acreage           Acreage
              ---------       -----------       ---------        -----------

Kazakstan         -            4,734,097            -             3,313,868

The table below indicates the Company's gross and net oil and gas wells as of
December 31, 1997. Gross wells represents the total wells in which the Company
owned a working interest, and net wells represents the sum of the fractional
working interests owned by the Company in such wells.

                                       9


<PAGE>

                                           Productive Wells
                          --------------------------------------------------
                             Total               Oil                Gas
                          -------------     -------------     --------------
                          Gross     Net     Gross     Net     Gross      Net

Kazakstan                   --       --       --      --        --       --
Oil and Gas Production

The table below indicates the Company's net oil and gas production, by country,
for each of the three years in the periods ended December 31, 1997, 1996, 1995,
along with the average sales prices for such production during these periods.

                                             Production
                     -----------------------------------------------------------
                     Oil (in     Average Net Sales       Gas        Sales Price
                     Barrels)    Price (per Barrel)    (in mcf)      (per mcf)
                     --------    ------------------    --------     -----------

1997-Colombia         18,625          $11.81              --            --
     -Peru              *                *                *             *
     -Kazakstan         --               --               --            --

1996-Colombia        130,433          $10.46              --            --
     -Peru              *                *                --            --

1995-Colombia        137,821           $8.01              --            --
     -Peru            17,794            9.29              --            --

Average foreign lifting costs in 1997, 1996 and 1995 were approximately $5.31,
$4.69 and $2.75 per equivalent barrel of oil, respectively.

*Information not available due to dispute with partner, which dispute was
 resolved subsequent to the MIP Transaction.

Reserves

Huddleston & Co., Inc., petroleum and geological engineers, performed an
evaluation to estimate proved reserves and future net revenues from oil and gas
interests owned by AIPCC as of January 1, 1997. As of January 1, 1997, all of
the Company's proved reserves were located in Colombia. The report, dated
February 6, 1997, is summarized below. Future net revenues were calculated after
deducting applicable taxes and after deducting capital costs, transportation
costs and operating expenses, but before consideration of Federal income tax.
Future net revenues were discounted at a rate of ten percent to determine the
"present worth". The present worth was shown to indicate the effect of time on
the value of money and should not be construed as being the fair market value
for the Company's properties. Estimates of future revenues did not include any
salvage value for lease and well equipment or the cost of abandoning any
properties.

                               Colombian Reserves
                                                                       Future
                                                                      Revenues
                         Net Oil                       Future        Discounted
                        (Barrels)   Net Gas (mmcf)    Revenues          at 10%
                        ---------   --------------    --------       ----------

Proved Developed
     Producing            917,522      1,121.1       $9,379,548      $5,899,502

Proved Developed
     Non-Producing         31,199      5,200.0        4,070,584       2,274,369

Proved Undeveloped      3,061,698      8,358.3       28,474,585      14,183,770
                        ---------      -------       ----------      ----------

          TOTAL         4,010,419     14,679.4      $41,924,717     $22,357,641
                        =========     ========      ===========     ===========

Huddleston & Co., Inc. used the net market price, exclusive of transportation
cost, of $12.20 per average barrel of oil, $0.40 per MCF for Toqui gas and $1.00
per MCF for Puli gas in their report. The oil prices utilized were the prices
received by AIPCC as of December 31, 1996 for oil produced from AIPCC's
leaseholds. The gas prices utilized were based on the Ecopetrol spot price at
December 31, 1996. The prices were held constant throughout the report except
for where contracts provide for increases.

Operating costs for AIPCC's and PAIPC's leaseholds included direct leasehold
expenses only. Capital expenditures were included as required for new
development wells, developed non-producing wells and current wells requiring
restoration to operational status on the basis of prices supplied by the
Company.



                                       10
<PAGE>

The report indicates that the reserves were estimates only and should not be
construed as being exact quantities.

In evaluating the information at their disposal concerning the report,
Huddleston & Co. excluded from consideration all matters as to which legal or
accounting interpretation may be controlling. As in all aspects of oil and gas
evaluation, there are uncertainties inherent in the interpretation of
engineering data and such conclusions necessarily represent only informed
professional judgments.

The data used in the Huddleston & Co. estimates were obtained from the Company
and were assumed to be accurate by Huddleston & Co.. Basic geologic, engineering
and field performance data are now maintained on file by MIP.

Drilling

   
The Company sold all of it's oil and gas producing properties in February, 1997,
as previously discussed, and therefore had no exploration or development wells
during the current year. The following table sets forth the gross and net
exploratory and development wells which were completed, capped or abandoned in
which the Company participated during the years indicated.
    

                              1997             1996                 1995      
                         -------------    --------------       --------------
                         Gross     Net    Gross      Net       Gross      Net
                         -----     ---    -----      ---       -----      ---
Exploratory Wells:
     South America
     Oil                   -        -      1.00      1.00       2.00      2.00
     Gas                   -        -        -         -          -         -
     Dry                   -        -        -         -        1.00      1.00
                          ---      ---     ----      ----       ----      ----
     TOTAL                 -        -      1.00      1.00       3.00      3.00

Development Wells:
     South America
     Oil                   -        -      1.00       .65       2.00      1.30
     Gas                   -        -        -         -          -         -
     Dry                   -        -        -         -          -         -
     TOTAL                 -        -      1.00       .65       2.00      1.30
                          ---      ---     ----      ----       ----      ----

TOTAL                      -        -      2.00      1.65       5.00      4.30
                          ===      ===     ====      ====       ====      ====

Item 3.  LEGAL PROCEEDINGS

Except as described below, there is no material litigation pending to which the
Company is a party or to which any of its properties is subject. Further, except
as described below, there are no proceedings known to be contemplated by United
States or foreign persons or governmental authorities relating to either the
Company or its properties.

In May 1992, AIRI was advised by the Internal Revenue Service ("IRS") that the
IRS was considering an assessment of excise taxes, penalties and interest of
approximately $3,500,000 related to the sale of fuel products during 1989. The
IRS claims that AIRI failed to comply with an administrative procedure that
required sellers and buyers in tax-free transactions to obtain certification
from the IRS. The Company believes that AIRI complied with the substance of the
then existing requirements and that such sales were either tax-free or such
excise taxes were paid by the end-users of such products. AIRI offered to
negotiate a settlement of this matter with IRS Appeals since early 1993. Such
negotiations included face-to-face meetings, numerous phone calls and written
transmittals and several offers of settlement by both the Company and the IRS.
During these negotiations, the IRS Appeals officers offered to waive all of the
penalties and 75% of the amount of the proposed tax liability. However, AIRI
rejected this offer and requested the IRS' National Office to provide technical
advice to its Appeals officers. After numerous conferences and discussions with
the National Office in 1995, the National Office issued an adverse Technical
Advice Memorandum ("TAM") to its Appeals Office in Dallas, Texas, to the effect
that AIRI should be liable for the tax on the sale of diesel fuel for the first
three quarters of 1989. However, subsequent to the issuance of the TAM, the IRS
Appeals officer indicated to AIRI that the IRS still wanted to negotiate a
settlement. In November 1997, the Company reached an agreement (the "IRS
Agreement") with the IRS to settle this matter by agreeing to pay an aggregate
of $646,633 in tax, plus interest accrued for the applicable periods involved.
The method and timing of such payment is now being discussed with IRS
Collections in Houston, Texas. The Company's proposal calls for the payment of
the tax and interest over a period of approximately one year. In the IRS
Agreement, the IRS waived all



                                       11

<PAGE>

penalties and 75% of the amount of the originally proposed tax liability. The
Company continues to maintain that it is not liable for the excise taxes at
issue, but agreed to settle the dispute at a significantly lower amount of
liability in order to bring this long-running issue to conclusion.

In January 1994, a lawsuit captioned Paul R. Thibodeaux, et al. (the
"Plaintiffs") v. Gold Line Refinery Ltd. (a limited partnership), Earl Thomas,
individually and d/b/a Gold Line Refinery Ltd., American International Refinery,
Inc., Joseph Chamberlain individually (collectively, the "Defendants") (Docket
No. 94-396), was filed in the 14th Judicial District Court for the Parish of
Calcasieu, State of Louisiana. Subsequently, several parties were joined as
plaintiffs or defendants in the lawsuit. The lawsuit alleged, among other
things, that the defendants, including AIRI, caused or permitted the discharge
of hazardous and toxic substances from the Lake Charles Refinery into the
Calcasieu River. The plaintiffs sought an unspecified amount of damages,
including special and exemplary damages. In October 1997 the Plaintiffs and
Defendants agreed upon a cash settlement, of which the Company's share of
$45,000 was placed into escrow in October 1997. The plaintiffs attorneys are
preparing the necessary release forms in order to disburse the funds, which
release is expected to be completed soon.

Neste Trifinery V. American International Refinery, Inc. Etc. Cause No.
98-11453; in the 269th Judicial District; in and For Harris County, Texas

Plaintiff, Neste Trifinery ("Neste"), has filed suit in a Harris County District
Court against the Company and its wholly-owned subsidiary, American
International Refinery, Inc. ("AIRI"). Neste has asserted claims for recovery of
compensatory and punitive damages based on the following theories of recovery;
(1) breach of contract, (2) disclosure of confidential information; and (3)
tortious interference with existing contractual relations. Generally, Neste has
alleged that in connection with the due diligence conducted by the Company and
AIRI of the business of Neste, the Company and AIRI had access to confidential
or trade secret information and that the Company and AIRI have exploited that
information, in breach of an executed Confidentiality Agreement, to the
detriment of Neste. Neste seeks the recovery of $20,000,000 in compensatory
damages and an undisclosed sum in connection with its claim for the recovery of
punitive damages.

In addition to seeking the recovery of compensatory and punitive damages, Neste
sought injunctive relief. Specifically, Neste sought to enjoin the Company and
AIRI form: (1) offering employment positions to the key employees of Neste; (2)
contacting the suppliers, joint venture partners and customers of Neste in the
pursuit of business opportunities; (3) interfering with the contractual
relationship existing between Neste and St. Marks Refinery, Inc.; and (4)
disclosing or using any confidential information obtained during the due
diligence process to the detriment of Neste. The Company and AIRI have asserted
to a general denial to the allegations asserted by Neste. The Company and AIRI
also moved the district court to refer the matter to arbitration, as provided
for in the Confidentiality Agreement, and to stay the pending litigation. On
March 27, 1998, the district court referred the matter to arbitration, as
requested by the Company and AIRI, and stayed litigation. At present, the
dispute existing between the Company, AIRI and Neste in Texas will be decided by
a panel of three arbitration judges under the American Arbitration Association
rules for commercial disputes.

On February 26, 1998, the Company entered into a Letter Agreement with DSE,
Inc., the parent corporation of St. Marks Refinery, Inc., whereby the Company
agreed to purchase or lease the refinery and terminals facility located at St.
Marks, Florida. Thereafter, St. Marks Refinery, Inc. elected to terminate its
storage agreement with Neste. On March 10, 1998, Neste sued St. Marks Refinery,
Inc. in the United states District Court for the Northern District of Florida,
Case No. 4:98cv86-WS, and sought an injunction to prevent immediate termination
of its storage agreement. Following an evidentiary hearing, the District Judge
denied Neste's application for injunctive relief and adopted the recommendations
of the Magistrate, who found in part that Neste had failed to prove a
substantial likelihood of success on the merits. The District Court's order was
appealed by Neste to the United States Court of Appeals for the Eleventh
Circuit, but the Appellate Court denied Neste's motion for injunction pending
appeal. The federal court action remains pending, but Neste has agreed to remove
its product from the St. Marks facility by April 25, 1998. The Company presently
plans to deliver product to the St. Marks, Florida facility and begin marketing
operations during the last week of April 1998.

The Company and AIRI are vigorously defending the Texas matter, and the
Company's counsel does not anticipate an unfavorable outcome, although a
definitive outcome is not yet determinable.

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

                  None



                                       12
<PAGE>


                                     PART II

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

The Company's Common Stock and its Class A Warrants are traded on NASDAQ/NMS
under the symbols "AIPN" and "AIPNW", respectively (the Class A Warrants expired
on April 9, 1998). The following table sets forth, for the periods indicated,
the range of closing high and low bid prices of the Common Stock and the Class A
Warrants as reported by NASDAQ. These quotations represent prices between
dealers, do not include retail markups, markdowns or commissions and do not
necessarily represent actual transactions.

                             Common Stock             Class A Warrants
                        --------------------       ----------------------
                         High Bid    Low Bid       High Bid       Low Bid
                         --------    -------       --------       -------

1998   First Quarter       $4.91      $3.19         $2.19          $0.75

1997   First Quarter       $0.73      $0.31         $0.22          $0.06
       Second Quarter       0.69       0.41          0.66           0.06
       Third Quarter        7.13       0.44          4.00           0.13
       Fourth Quarter       6.50       3.19          3.75           1.31

1996   First Quarter       $0.88      $0.50         $0.19          $0.13
       Second Quarter       0.69       0.44          0.16           0.06
       Third Quarter        0.59       0.38          0.16           0.06
       Fourth Quarter       0.73       0.31          0.12           0.06

At April 6, 1998, the Company had approximately 1,633 shareholders of record of
its Common Stock. The Company estimates that an additional 12,000 shareholders
hold Common Stock in street name.

Dividend Policy

The policy of the Board of Directors is to retain earnings to finance the
operations and development of the Company's business. Accordingly, the Company
has never paid cash dividends on its Common Stock, and no cash dividends are
contemplated to be paid in the foreseeable future.


Item 6.  SELECTED FINANCIAL INFORMATION

The following selected financial data for each of the five years in the period
ended December 31, 1997 have been derived from the audited consolidated
financial statements for those respective years. The selected financial data
should be read in conjunction with the consolidated financial statements of the
Company and the related notes included elsewhere herein:

<TABLE>
<CAPTION>


                                                                     For the Years Ended December 31,                            
                                             ------------------------------------------------------------------------------------
                                                   1997            1996              1995              1994             1993
                                                   ----            ----              ----              ----             ----
<S>                                              <C>             <C>               <C>               <C>              <C>
Condensed consolidated statement of operations:
     Revenues                                  $    827,964    $  4,003,006     $  2,811,308     $   3,508,514     $   3,990,156
     Net loss(1)                                 17,953,621      (4,652,207)      (4,338,322)      (10,966,914)      (14,139,737)
     Net loss per share(2)                            (0.43)          (0.16)           (0.20)            (0.65)            (2.23)

                                                                             At December 31,
                                             ------------------------------------------------------------------------------------
                                                  1997             1996              1995             1994             1993
                                                  ----             ----              ----             ----             ----
Condensed consolidated balance sheet:
     Working capital                           $  (693,676)    $(9,823,229)     $ (3,402,543)    $     (28,462)    $  (7,507,056)
     Total assets                               41,839,860      34,492,431        32,640,362        32,229,713        34,996,925
     Total liabilities                           9,335,479      13,164,713        11,349,670        10,255,687        18,878,148
     Long-term debt                                    -0-       6,766,592         7,302,671         7,770,171        12,034,691
     Stockholders' equity                       32,504,381      21,327,718        21,290,692        21,974,626        16,118,777
     Cash Dividends declared                           -0-             -0-               -0-               -0-               -0-
</TABLE>

-----------------------
1) Net loss in 1996, 1994 and 1993 included a provision for the write down of
   the carrying costs of oil and gas properties of $200,000, $6,904,000 and
   $9,975,000, respectively.

2) Adjusted, as applicable, to give effect to the one-for-10 reverse stock split
   effectuated by the Company on   October 28, 1993.



                                       13
<PAGE>

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

Liquidity and Capital Resources

At December 31, 1997, the Company had unrestricted cash of $3,721,000 and
$735,000 worth of marketable securities. During the year ended December 31,
1997, approximately $7,441,000 was used in operations. Net loss for the period
totaled $17,954,000 (including $12,775,000 in non-cash elements, primarily:
$774,000 in depletion and depreciation costs, $2,568,000 in certain bond and
loan costs, loss on marketable securities of $6,053,000, adjustment of restated
stock options of $745,000, adjusted loss on the sale of subsidiaries of
$564,000, and inputed interest expenses of $1,899,000 related to the discount of
certain convertible debentures. (See "Results of Operations - Interest Expense"
below). Approximately $2,028,000 was used during the period to increase current
assets other than cash, mostly for oil feedstock inventory, and approximately
$17,000 was used to decrease accounts payable and accrued liabilities.
Additional uses of funds during 1997 included additions to oil and gas
properties of $2,664,000 and additions to refinery property and equipment of
$5,582,000. Cash for operations during 1997 was provided, in part, by the
issuance of Common Stock and convertible debentures in an aggregate amount of
approximately $20,503,000, and from proceeds derived from the exercise of
warrants and options of $1,272,000.

   
In addition, since Gold Line has filed for protection under Chapter 11 of the
Bankruptcy Code (see Item 1. "Business - Domestic Operations - Refinery"), and
there are certain secured creditors who have made significant claims against
Gold Line, the total of which claims may exceed the total value of Gold Line's
assets, the collectibility of this judgement by the Company is uncertain.
Therefore, the company has provided an aggregate allowance for doubtful accounts
of $1,920,877 which fully reserves all amounts due AIRI from Gold Line as of
December 31, 1997.
    

During the years ended December 31, 1996 and December 31, 1995, the Company
generated net losses of $4,652,000 and $4,338,000, respectively. Cash flow
provided by and used in operations in 1996 and 1995, totaled $551,000 and
$274,000, respectively. Cash flow from operations was adjusted for depreciation,
depletion and amortization of $2,552,000 and $1,502,000 in 1996 and 1995,
respectively, and non-cash provisions for bad debts in 1996 and 1995 of $682,000
and $711,000, respectively. Additionally, $1,007,000 and $189,000 in 1996 and
1995, respectively, were invested in current assets other than cash. Accounts
payable increased by $2,352,000 and $1,985,000 in 1996 and 1995, respectively.
Additional uses of funds included investments in oil and gas properties during
1996 and 1995 of $1,590,000 and $3,194,000, respectively, net of certain
recoverable costs, and additions to refinery property and equipment of
$1,713,000 in 1996. Total cash used in operations and investment activity during
the years ended December 31, 1996 and 1995 was $2,763,000 and $3,481,000,
respectively. Cash was provided primarily from outside sources, including
$3,810,000 and $3,112,000 from the issuance of Common Stock and/or convertible
debentures during 1996 and 1995, respectively.

   
On February 25, 1997, the Company sold all of the issued and outstanding shares
of common stock of its wholly-owned subsidiaries, American International
Petroleum Corporation of Colombia ("AIPCC") and Pan American International
Petroleum Corporation ("PAIPC") (the "Purchased Shares") in an arms length
transaction (the "MIP Transaction") to Mercantile International Petroleum Inc.
("MIP"). The assets of AIPCC and PAIPC consisted of oil and gas properties and
equipment in South America with an aggregate net book value of approximately
$17.9 million. The total aggregate purchase price payable by MIP for the
Purchased Shares was valued, giving account to the contingent portion thereof,
which was not recorded by the Company pursuant to GAAP, at up to approximately
$20.2 million, determined as follows:
    

(a)  Cash payments of approximately $3.9 million, of which approximately $2.2
     million was paid simultaneously with the closing to retire the Company's
     12% Secured Debentures due December 31, 1997, which were secured by the
     Company's shares of AIPCC.
(b)  Assumption of AIPCC and PAIPC debt of an aggregate amount of $634,000.
(c)  4,384,375 shares of MIP common stock (the "MIP Shares").
(d)  A two-year $3 million 5% exchangeable subordinated debenture of AIPCC (the
     "Exchangeable Debenture"), exchangeable into shares of common stock of MIP
     on the basis of $3 principal amount of such debenture for one share of MIP
     on or after February 25, 1998; or the Company may demand payment on that
     date of $1.5 million of the principal balance thereof.
(e)  A $1.4 million "performance earn-out" from future production in Colombia,
     plus interest at 8% per annum.
(f)  Up to $2.5 million (reduced proportionately to the extent the Net Operating
     Loss and Deferred Cost Deductions accrued by AIPCC through December 31,
     1996 ("Accrued Tax Benefit Deductions") is less than $50 million but more
     than $20 million) payable from 25% of AIPCC's future tax savings related to
     Accrued Tax Benefit Deductions available to AIPCC on future tax filings in
     Colombia.


                                       14

<PAGE>

Since the MIP Transaction, the Company has sold approximately 1.4 million MIP
Shares for total net proceeds of approximately $2 million. These proceeds were
used primarily for working capital needs and payment of debt. In January 1998,
the Company exercised its right, pursuant to the Exchangeable Debenture, to
demand payment from MIP on February 25, 1998 of $1.5 million of the principal
balance thereof, which payment, along with accrued interest, was paid to the
Company by MIP in February 1998. Since the closing of the MIP Transaction and
the termination of its Lease Agreement with Gold Line in the first quarter of
1997, the Company has had no revenues from operations, until late in the first
quarter of 1998 when it implemented product sales at the Refinery. Although it
has utilized some of the proceeds from the MIP Transaction to fund the Refinery
expansion and start-up processes, its activities in Kazakstan and other
operations, such proceeds were inadequate to satisfy all of the Company's debt
obligations and capital requirements. Therefore, during 1997, the Company issued
various promissory notes and convertible debentures in exchange for an aggregate
of approximately $20.5 million through certain private placement and agreements,
most of which were issued in reliance upon the safe harbor provided by
Regulation S as promulgated under the Act. In addition, the Company received
approximately $1.3 million and $794,000 from the exercise of Company's warrants
during 1997, and during the first quarter of 1998, respectively. The Company
utilized most of the cash proceeds from these transactions to fund its
operations and activities at the Refinery and in Kazakstan, for payment of debt,
and for general corporate purposes.

The Company's recent agreement with the IRS (See "Item 3 - Legal Proceedings")
calls for the Company to pay $646,633 in excise taxes, plus interest occurred
for the applicable periods. The Company has submitted a proposal to the IRS
which would enable the Company to pay the tax and interest due over a period of
approximately one year; the tax would be paid in four equal quarterly
installments and the interest would be paid in a lump sum at the end of the
annual payment period. Should the Company utilize the entire proposed pay-off
period to pay the tax and interest, the total amount paid would be approximately
$1.5 million.

During the next twelve months, excluding its pending acquisitions in Florida and
Russia, discussed above, the Company expects to expend up to $25 million, of
which approximately $9 million is expected to be spent on costs associated with
its Kazakstan project, $12 million for debt payment and other corporate uses,
and the remainder for its refinery activities. However, if the Company obtains a
joint venture partner in Kazakstan, its capital expenditure requirements there
would be significantly less than $9 million during the next twelve months.

In February 1998, the construction necessary to expand and enhance the Refinery
was essentially completed and the Company began the processing of crude oils to
produce asphalt and other products. The Company was very successful with its
January and February 1998 bids in Texas and Louisiana in recent lettings for
asphalt. In essentially one month it secured several million dollars worth of
orders for polymerized and conventional asphalt products. Beginning in the
second quarter of 1998, it plans to process an average of approximately 10,000
barrels of crude oil feedstock per day.

The Company has warrants outstanding which, if exercised, would provide it with
approximately $14 million to fund its capital and other commitments. However,
there can be no assurance that a sufficient number of warrants will be exercised
to provide the Company with all of the capital it requires. In addition, the
Company is having discussions with various companies who have expressed an
interest in participating with the Company in its endeavors in Kazakstan and in
Louisiana.

In April 1998, the Company reached an Agreement with certain institutional
investors which will provide it with up to $52 million in private debt and
equity financing (the "Debt and Equity Financing") to be used by the Company on
an as needed basis over a two year period. Initial funding could start as early
as April 20, 1998, pending the execution of definitive documents scheduled for
April 15, 1998. Depending on its needs, the Company could use a portion or all
of the facility. The closing of the Debt and Equity Financing will ensure that
the Company has the capital necessary to fund its obligations and operations, at
least through the year ended December 31, 1999.

The Company plans to utilize its existing working capital and proceeds from the
exercise of warrants until the cash flows anticipated from its asphalt
operations in 1998 are sufficient in nature to satisfy its needs. In the event
the Debt and Equity Financing is not consummated, or a sufficient number of
warrants are not exercised, or if the Company is unable to obtain sufficient
alternative financing, or if its asphalt operations are less successful than
anticipated, certain projects may be delayed or canceled.


                                       15

<PAGE>

Impact of Changing Prices

   
The Company's revenues, its ability to repay indebtedness and the carrying value
of its oil and gas properties owned are affected from time to time by changes in
oil and gas prices. Oil and natural gas prices are subject to substantial
seasonal, political and other fluctuations that are beyond the ability of the
Company to control. Since crude oil prices are an important determining factor
in the carrying value of oil and gas assets, significant reductions in the price
of crude oil could require non-cash write-downs of the carrying value of those
assets.
    

                                       16
<PAGE>


Results of Operations

The following table highlights the results of operations for the years ended
December 31, 1997, 1996 and 1995.

                                           For the Years Ended December 31,
                                           ---------------------------------
                                              1997        1996         1995
Exploration and Production Activity:

Colombia Properties(1):
     Revenue - Oil Sales (000's)              $261       $1,365       $1,104
     Lease Operating Expenses (000's)          $99         $612         $364
     Production Volume - Barrels           318,625      130,433      137,821
     Average Price per Bbl                  $14.01       $10.46        $8.01
     Production Cost per Bbl                 $5.31        $4.69        $2.65
     DD&A per Bbl (2)                        $3.77        $3.77        $3.86
Peru Properties (3)(4):
     Revenue - Oil Sales (000's)                 -            -         $166
     Lease Operating Expenses (000's)            -            -          $65
     Production Volume - Bbls                    -            -       17,794
     Average Price per Bbl                       -            -        $9.29
     Production Cost per Bbl                     -            -        $3.66
     DD&A per Bbl                                -            -            -

Refinery Operations(5):
     Refinery Lease Fees (000's)                 -        $2,468      $1,185
     Average Daily Throughput (Bbls)             -        13,138       8,116
     Average Throughput Fee                      -          $.50       $0.40

-----------------
(1) Reflects activity through the closing of the MIP Transaction on February 25,
    1997.

(2) Excludes provision for reduction of oil and gas properties of $200,000 in
    1996.

(3) Information for 1996 was not available due to a dispute with a joint
    venture partner.

(4) No DD&A was calculated since all properties and related capital expenditures
    in Peru were considered as unevaluated and therefore were excluded from the
    DD&A calculation in each of 1997, 1996 and 1995.

(5) Earned lease fees of $442,714 in 1997 were not recorded as revenues due to
    circumstances surrounding the cancellation of the Lease Agreement. See
    "Business - Domestic Operations - Lease Agreement".

Refinery Operations

For the Year Ended December 31, 1997 compared to the Year Ended
December 31,  1996

The Company leased the Refinery to Gold Line from 1990 until March 20, 1997 when
the Company terminated the Lease Agreement. As lessee, Gold Line was responsible
for all operating costs of the refinery. The Company charged Gold Line a fee for
each barrel of feedstock processed at the Refinery. The fee during 1995 was
$0.40 per barrel of throughput, which increased to $0.50 per barrel on January
1, 1996 and continued at this level until the Lease was terminated.

During the short period of time in which Gold Line operated the Refinery in
1997, it processed approximately 885,000 barrels of product, creating a
liability of approximately $443,000 in lease fees due to the Company. Because of
previous non payment of lease fees and other items of default under the terms of
the Lease Agreement, Gold Line was evicted from the Refinery premises on March
20, 1997, and subsequently filed for protection under Chapter 11 of the
Bankruptcy Code. See "Business - Domestic Operations Refinery". Due to these
circumstances no refinery lease fee revenues were recorded for 1997.

For the Year Ended December 31, 1996 compared to the Year Ended 
December 31, 1995

Refinery lease fee revenue increased by approximately 108% in 1996 to $2,468,000
compared to $1,185,000 in 1995. The increase was due to the increase in the
throughput processing fee from $0.40 to $0.50 per barrel processed and in the
increase in its throughput barrels by 62% during 1996, primarily due to Gold
Line having its feedstock financing in place throughout 1996 compared to being
shutdown for the first quarter of 1995 due to a lack of financing.


                                       17
<PAGE>

Oil and Gas Production Activity

For the Year ended December 31, 1997 compared to the Year Ended December 31,
1996

The results of operations for Colombia and Peru for 1997 reflect results for the
period through February 25, 1997, the date of the sale of the Colombia and Peru
subsidiaries, compared to twelve full months of operations in 1996.

For the Year ended December 31, 1996 compared to the Year ended December 31,
1995.

Oil production in 1996 decreased to 130,433 barrels of oil from 155,615 in 1995,
a 16% decrease. Approximately 11% of the 16% decrease was attributed to the lack
of any production from the Peru properties during 1996. Average oil prices, net
of transportation, increased, however, by 25% or $1.97 per barrel to $9.98 in
1996, as compared to $8.01 in 1995 due to renegotiated oil sales contracts and
higher oil prices in 1996. The increase in oil prices during 1996 more than
offset the decline in oil production for period, resulting in a 7% increase in
oil revenues in 1996 compared to 1995.

Production costs had a net increase of $181,000 or 42% in 1996 compared to 1995.
Transportation costs of $63,000 accounted for 17% of the increase in 1996.
During 1996, an increase in G&A overhead allocation of $107,000 to production
costs accounted for 29% of the increase. This increase in overhead allocation is
directly related to a corresponding decrease in total G&A expenses.

Other Income

For the Year ended December 31, 1997 compared to the Year Ended December 31,
1996

   
Other income increased during 1997 to approximately $567,000 from $171,000 in
1996, due primarily to a $446,000 increase in interest income in 1997 to
$465,000, compared to $19,000 in 1996. This improvement is attributable to an
increase in funds on deposit during 1997 compared to 1996 and to an accretion of
interest on notes receivable of $168,000 during 1997. An additional increase of
approximately $50,000 was attributable to a non-cash income item as a result of
a negotiated reduction in certain accounts payable. These increases were
partially offset by decreases of approximately $102,000 in foreign exchange rate
gains and other income in Colombia and Peru in 1997 compared to 1996.
    

For the Year ended December 31, 1996 compared to the Year Ended December 31,
1995

Other income decreased by approximately $185,000 (52%) during 1996 to $171,000
compared to $356,000 in 1995. This was due primarily to a decrease in interest
income of 92% to $19,000, compared to $228,000 in 1995, related to a decrease in
funds on deposit during 1996, and to the Company not recognizing $108,000 of
interest income during 1996, related to notes due from Gold Line.

General and Administrative

For the Year ended December 31, 1997 compared to the Year ended December 31,
1996

Total General and Administrative expenses (G&A) increased during 1997 by
approximately $1,551,000 or 50% compared to 1996, primarily due to non-cash
charges of $745,000 from the extension of expiration dates on certain
outstanding employee stock options and $225,000 for stock options issued for
investor relations costs. A non-recurring $695,000 payroll expense to partially
compensate key employees whose salaries had remained unchanged for the past five
years was also incurred. Property insurance and property taxes increased by
$123,000 and $167,000, respectively, which costs were previously paid by Gold
Line prior to its eviction from the Refinery in March 1997. Legal fees increased
by approximately $87,000, primarily related to certain legal matters involving
Gold Line during the year. During the expansion of the Company's Refinery, which
commenced during 1996, approximately $622,000 of G&A expenses were capitalized
to the project in 1997, compared to $275,000 capitalized in 1996.

For the Year ended December 31, 1996 compared to the Year ended December 31,
1995

Total General & Administrative Expenses ("G&A") decreased during 1996 by
$496,000 or 14% compared to 1995. There was an additional $400,000 increase in
1996 in the provision for excise tax compared to the $250,000 provision charged
in 1995. Decreases in other G&A expenses during 1996 compared to 1995 were:
decrease in payroll expense of $95,000, decrease in professional and consulting
fees of $93,000, decrease in insurance costs of $56,000, and an increase in the



                                       18

<PAGE>

capitalized and reimbursed G&A expenses of $137,000. During the expansion of the
Company's Refinery, approximately $275,000 of G&A expenses were capitalized.

Depreciation, Depletion and Amortization

For the Year ended December 31, 1997 compared to the Year ended December 31,
1996

Depreciation, Depletion, and Amortization declined approximately $491,000 during
1997 compared to 1996, which was directly related to the sale of all of the
Company's oil and gas subsidiaries on February 25, 1997.

For the Year ended December 31, 1996 compared to the Year ended December 31,
1995

Depreciation, Depletion, and Amortization declined slightly during 1996 as
compared to 1995, primarily due to a slight decrease in oil production during
1996 versus 1995.

Interest

For the Year ended December 31, 1997 compared to the Year ended December 31,
1996

Interest expense increased by $3,846,000 in 1997 compared to 1996, due primarily
to $1,899,000 in imputed interest, recorded for discounted convertible
debentures, discussed below, and a $2,964,000 increase in bond costs expensed in
1997.

   
Interest expense of $1,899,000 and $1,216,000 for 1997 and 1996, respectively,
was related to the presumed incremental yield the investor may derive from the
discounted conversion rate of such instruments issued by the Company during
these years. Management believes that the related amount of interest recorded by
the Company is not necessarily the true cost to the Company of the instruments
it issued and that it may be reasonable to conclude that the fair value of the
Common Stock into which these securities may be converted was less than such
stock's quoted market price at the date the convertible securities were issued
(considering factors such as the period for which sale of the stock is
restricted, which in certain cases was as long as six months, large block
factors, lack of a sufficiently-active market into which the stock can be
quickly sold, time value, etc.). However, generally accepted accounting
principles requires that an "intrinsic value" of the conversion feature at the
date of issuance should be accounted for and that such incremental yield should
be measured based on the stock's quoted market price at the date of issuance,
regardless if such yield is assured.

The Company expenses and also capitalizes certain other costs associated with
the offering and sale of debentures. Capitalized costs are amortized as interest
expense over the life of the related debt instrument. These costs include the
accounting for Common Stock warrants issued with and related to certain
convertible debentures, commissions paid, and certain legal expenses. Sales of
debentures and notes in 1997 were $20,537,000 compared to $3,065,000 in 1996. As
a result, debenture costs incurred and amortized in 1997 increased by $2,964,282
to $3,253,035, compared to a total of $289,000 in 1996.
    

For the Year Ended December 31, 1996 compared to the Year ended December 31,
1995

Interest expense increased by $1,781,000 in 1996 compared to 1995, due primarily
to $1.2 million in imputed interest recorded for discounted convertible
debentures and to $450,000 in interest expense related to a pending Excise Tax
dispute with the IRS.

Debenture costs incurred and amortized in 1996 increased by $183,000 to $289,000
as compared to 1995. These costs were related to debentures outstanding at
December 31, 1995.

Realized and Unrealized Loss on Marketable Securities

As partial proceeds from the MIP Transaction, the Company received approximately
4.4 million shares of MIP common stock valued at $2.00 per share. However, since
the closing, the market value of MIP's shares have declined to $0.56 per share
at December 31, 1997. The Company sold and disposed of approximately 1,441,000
shares of the MIP shares during 1997 for proceeds of approximately $1,979,000.
The Company has recorded an aggregate net realized and unrealized loss of
$6,053,298 as of December 31, 1997.



                                       19

<PAGE>

Loss on Sale of Assets

The Company recorded an aggregate $564,000 loss on the sale of two of its'
wholly-owned subsidiaries which includes the current discount to fair value of
the $3 million Exchangeable Debenture and the $1.4 million performance earn-out,
both received in the MIP Transaction.


Item 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The financial information required by Item 8 follows Item 14 of this Report and
is hereby incorporated herein by reference.


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

None.




















                                       20

<PAGE>



                                    PART III.

Item 10.   DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The following table sets forth information concerning the Company's executive
officers and directors.

                                                                  Year First
    Name              Age        Position(s)                   Became a Director
---------------       ---        -----------                   -----------------

George N. Faris       57         Chairman of the Board and            1981
                                 Chief Executive Officer

William R. Smart      77         Director                             1987

Daniel Y. Kim         73         Director                             1987

Donald G. Rynne       75         Director                             1992

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

Biographical Information

Dr. George N. Faris has been Chairman of the Board of Directors and Chief
Executive Officer of the Company since 1981. Dr. Faris was the founder of ICAT,
an international engineering and construction company, and served as its
President from ICAT's inception in 1972 until October 1985. Prior to 1972, Dr.
Faris was the President and Chairman of the Board of Directors of Donbar
Development Corporation, a company engaged in the patent development of rotary
heat exchangers, devices which exchange heat from medium to medium and on which
Dr. Faris was granted a number of patents. Dr. Faris received a Ph.D. in
Mechanical Engineering from Purdue University in 1968.

   
Mr. William R. Smart has served as a member of the Company's Board of Directors
since June 1987. Since November 1, 1983, Mr. Smart has been Senior Vice
President of Cambridge Strategic Management Group, a management consulting firm.
Mr. Smart was Chairman of the Board of Directors of Electronic Associates, Inc.,
a manufacturer of electronic equipment, from May 1984 until May 1992. He has
served on the Board of Directors of Apollo Computer Company and Executone
Information Systems, Inc. Mr. Smart is presently a director of National
Datacomputer Company and Hollingsworth and Voss Company. Mr. Smart received a
B.S. degree in Electrical Engineering from Princeton University in 1941.
    

Dr. Daniel Y. Kim has served as a member of the Company's Board of Directors
since July 1987. Dr. Kim is a Registered Professional Geophysicist in California
and Colorado. From 1981 until 1984, Dr. Kim was President and Chief Executive
Officer of Kim Tech, Inc., a research and development company. In 1984, Kim
Tech, Inc. was merged into Bolt Industries, a public company engaged in the
manufacture of air guns and auxiliary equipment used to generate shock waves in
seismic exploration for oil, gas and minerals. Dr. Kim has been a director of
Bolt Industries since 1984. From 1977 to 1980, Dr. Kim was Chief Consulting
Geophysicist for Standard Oil Company of Indiana. Dr. Kim received a B.S. degree
in Geophysics and a Ph.D. degree in Geophysics from the University of Utah in
1951 and 1955, respectively.

Mr. Donald G. Rynne has served as a member of the Company's Board of Directors
since September 1992. Mr. Rynne has been Chairman of the Board of Directors of
Donald G. Rynne & Co., Inc., a privately owned company engaged in international
consulting and trading, since founding that company in 1956. Mr. Rynne is
involved in international maritime trading and consulting, dealing primarily in
the Middle East in hydrocarbon products and capital equipment. Mr. Rynne
received a B.A. degree from Columbia University in 1949.

The business background of each executive officer of the Company, to the extent
not set forth above, is described below.

Mr. Denis J. Fitzpatrick, 53, joined the Company in August 1994 as Vice
President, Secretary and Chief Financial Officer. During the previous five
years, Mr. Fitzpatrick was the Chief Financial Officer of Nahama & Weagant
Energy Company, a publicly traded independent exploration and production
company. Mr. Fitzpatrick has held various accounting and financial management
positions during his 24 years in the oil and gas industry. He has also served as
a Director or Officer of the Council of Petroleum Accountants Society; served on
the Tax Committee of the American Petroleum Institute and as




                                       21


<PAGE>

a member of the American Management Association. Mr. Fitzpatrick received a B.S.
degree in Accounting from the University of Southern California in 1974.

Mr. William L. Tracy, 50, has been employed by the Company since February 1992
and has been Treasurer and Controller of the Company since August 1993. From May
1989 until February 1992, Mr. Tracy was self-employed as an energy consultant
with the Commonwealth of Kentucky. From June 1985 until May 1989, Mr. Tracy
served as President of City Gas and Transmission Corp., a public oil and gas
production and refining company. He received his BBA from Bellarmine College in
Louisville, Kentucky in 1974.

The Company's executive officers are appointed annually by the Board to serve
until their successors are duly elected and qualified.


Item 11.   EXECUTIVE COMPENSATION

The following table discloses compensation for services rendered by the
Company's Chief Executive Officer and all other executive officers of the
Company whose compensation exceeded $100,000 in 1997, 1996, and 1995.
<TABLE>
<CAPTION>
    
                   Annual Compensation                                       Long Term Compensation
------------------------------------------------------         ----------------------------------------------------
Name and Principal                                               Other Annual                          All Other
Position                 Year          Salary       Bonus        Compensation       0ptions(#)        Compensation
-----------              ----          ------       -----        ------------       ----------        ------------
<S>                      <C>          <C>        <C>            <C>                <C>                 <C>

George N. Faris          1997     $    312,000     $257,000       $  7,200(3)         750,000           $193,000(1)
Chairman of the          1996          292,000       15,000          9,600(3)       1,202,500(4)         422,000(5)
Board and Chief          1995          240,000            -         45,000(2)         202,500                  -
Executive Officer

Denis J. Fitzpatrick     1997     $    118,000     $102,000       $      -            125,000           $ 25,000(8)
Secretary, Vice          1996          105,000        5,000          15,000(6)        120,000(4)               -
President and Chief      1995          105,000            -          18,000(6)(7)      20,000                  -
Financial Officer

William L. Tracy         1997     $     88,000    $  62,000                              75,000           $ 23,000(8)
Treasurer and            1996              (9)            -              -                  -                  -
Controller               1995              (9)            -              -                  -                  -

Kenneth N. Durham        1997             (10)            -              -                  -                  -
President and Chief      1996             (10)            -              -                  -                  -
Operating Officer        1995     $145,000(10)            -              -                  -                  -

</TABLE>

(1)   Includes deferred salary payment of $109,000 and income tax reimbursement
      of $84,000.

(2)   $35,500 of this amount constituted forgiveness of interest on a debt owed
      to the Company, the principal of which was repaid to the Company; the
      remaining $9,600 was paid as a vehicle allowance.

(3)   Vehicle allowance.

(4)   The number of options shown for 1995 was issued in substitution for
      previously outstanding options and re-issued in 1996. The exercise price
      is now $.50 per share. See Ten Year Option Repricings table below.

(5)   On October 13, 1995, the Company and Dr. Faris executed an amendment to
      Dr. Faris' employment agreement, pursuant to which Dr. Faris relinquished
      certain rights in exchange for 900,000 shares of Common Stock. See
      "Employment Contract" below.

(6)   Mr. Fitzpatrick is reimbursed up to $15,000 per year in living expenses
      incurred while working in the New York office.


                                       22


<PAGE>

(7)   Mr. Fitzpatrick was awarded 5,000 restricted shares of Common Stock as a
      signing bonus, which shares were issued in 1995.

(8)   Deferred salary payment.

(9)   Mr. Tracy's compensation was less than $100,000 in each of 1996 and 1995.

(10)  Mr. Durham resigned from employment with the Company effective on November
      3, 1995.

Stock Option Plans

The Company has established a 1995 Stock Option Plan (the "1995 Plan"). The 1995
Plan was approved by the Board of Directors on November 8, 1995 and by the
Company's shareholders on July 11, 1996. The 1995 Plan is administered by the
Board of Directors of the Company or a Committee designated by them. Under the
1995 Plan employees, including officers and managerial or supervising personnel,
are eligible to receive Incentive Stock Options ("ISO's") or ISO's in tandem
with stock appreciation rights ("SAR's"), and employees, Directors, contractors
and consultants are eligible to receive non-qualified stock options ("NQSO's")
or NQSO's in tandem with SAR's. Options may be granted under the 1995 Plan to
purchase an aggregate of 3,500,000 shares of Common Stock. If an option granted
under the 1995 Plan terminates or expires without having been exercised in full,
the unexercised shares subject to that option will be available for a further
grant of options under the 1995 Plan. Options may not be transferred other than
by will or the laws of descent and distribution and, during the lifetime of the
optionee, may be exercised only by the optionee.

Options may not be granted under the 1995 Plan after November 7, 2005. The
exercise price of the options granted under the 1995 Plan cannot be less than
the fair market value of the shares of Common Stock on the date the option is
granted. ISO's granted to shareholders owning 10% or more of the outstanding
voting power of the Company must be exercised at a price equal to at least 110%
of the fair market value of the shares of Common Stock on the date of grant. The
aggregate fair market value of Common Stock, as determined at the time of the
grant with respect to which ISO's are exercisable for the first time by any
employee during any calendar year, shall not exceed $100,000. Any additional
Common Stock as to which options become exercisable for the first time during
any such year are treated as NQSO's. The total number of options granted under
the 1995 Plan, as of March 31, 1998 was 3,333,750, which included 302,500
repriced options granted in substitution for options previously held.

Option Grants in Last Fiscal Year

The table below includes the number of stock options granted to certain
executive officers during the year ended December 31, 1997, exercise information
and potential realizable value.

<TABLE>
<CAPTION>
                         Individual Grants                                      
                         -----------------                                            Potential Realizable
                    Number of         Percent of                                      Value at Assumed
                    Securities        Total Options                                   Annual Rates of Stock
                    Underlying        Granted to                                      Price Appreciation
                    Options           Employees in     Exercise       Expiration      for Option Term
  Name              Granted(#)        Fiscal Year      Price($/sh)       Date           5%($)          10%($)
  ----              ----------        -----------      -----------    ----------      ---------       ------
<S>                  <C>                <C>              <C>           <C>             <C>            <C>

George Faris           750,000              45%          $1.05         12/31/02         $ -0-          $ -0-

Denis Fitzpatrick      125,000               8%          $1.05         12/31/02         $ -0-          $ -0-

William L. Tracy        75,000               5%          $1.05         12/31/02         $ -0-          $ -0-

</TABLE>




                                       23

<PAGE>


Aggregate Option Exercises in 1997 and Option Values at December 31, 1997

The table below includes the number of shares covered by both exercisable and
non-exercisable stock options owned by certain executive officers as of December
31, 1997. Also reported are the values for "in-the-money" options which
represent the positive spread between exercise price of any such existing stock
options and the year-end price.

<TABLE>
<CAPTION>
                                     Shares
                                     ------ 
                           Acquired or     Value         Number of Unexercised           Value of Unexercised
Name                        Exercised      Realized       Options at Year End            In-the-money Options
----                      -------------    --------    ---------------------------      -------------------------     
                                                       Exercisable    Unexercisable     Exercisable    Unexercisable
                                                       -----------    -------------     -----------    ------------- 
<S>                         <C>              <C>         <C>          <C>              <C>             <C>    
George N. Faris                --             --        1,764,000         187,500       $4,771,495       $436,875

Denis J. Fitzpatrick           --             --          202,500          42,500         $537,825        $99,025

William L. Tracy               --             --          101,000          25,000         $263,380        $59,415


</TABLE>

Employment Contract

   
Effective May 1, 1989, the Company entered into an employment agreement with
George N. Faris at an annual salary of $200,000, which agreement is renewed
annually. In 1992, the Board increased Dr. Faris' salary to $300,000 per year.
In April 1994, Dr. Faris voluntarily reduced his salary to $240,000 per year. In
February 1996, Dr. Faris' salary was reinstated to $300,000 per year.
    

Compensation Committee Interlocks and Insider Participation

No member of the Compensation Committee was an officer or employee of the
Company or of any of its subsidiaries during the prior year or was formerly an
officer of the Company or any of its subsidiaries. During the last fiscal year,
none of the executive officers of the Company has served on the Board or
Compensation Committee of any other entity whose officers served either on the
Board of Directors of the Company or on the Compensation Committee of the
Company.


Item 12.   SECURITIES OWNERSHIP OF MANAGEMENT AND PRINCIPAL SHAREHOLDERS

The following table sets forth certain information, as of the Record Date,
regarding the beneficial ownership of Common Stock of (i) each person known by
the Company to be the beneficial owner of more than 5% of the Common Stock; (ii)
each Director; (iii) each executive officer named in the Summary Compensation
Table below; and (iv) all Directors and executive officers as a group.

Name and Address               Amount and Nature of               Percent
of Beneficial Holder(1)        Beneficial Ownership               of Class
-----------------------        --------------------               ---------

George N. Faris                      3,370,000(2)                    6.6%
Daniel Y. Kim                          163,500(3)                      *
Donald G. Rynne                        756,122(4)                    1.5%
William R. Smart                       302,594(5)                      *
Denis J. Fitzpatrick                   202,500(6)                      *
William L. Tracy                       121,240(7)                      *
All officers and Directors
as a group (consisting of
6 persons)                           4,915,956(8)                    9.1%
Infinity Investors Ltd.              3,006,987                       5.9%

* Less than 1% of class

(1)  All officers and Directors have an address c/o the Company, 444 Madison
     Avenue, Suite 3203, New York, NY 10022.



                                       24
<PAGE>


(2)  Includes 1,764,500 shares of common stock issuable upon the exercise of
     stock options owned by Dr. Faris. Excludes 187,500 unexercisable options.

(3)  Includes 155,500 shares of common stock issuable upon the exercise of
     stock options owned by Dr. Kim. Excludes 50,000 unexercisable options.

(4)  Includes 160,000 shares of common stock issuable upon the exercise of
     stock options and warrants to purchase 89,260 shares of common stock owned
     by Mr. Rynne. Excludes 50,000 unexercisable options.

(5)  Includes 192,000 shares of common stock issuable upon the exercise of
     stock options and warrants to purchase 19,986 shares of common stock owned
     by Mr. Smart. Excludes 50,000 unexercisable options.

(6)  Includes 202,500 shares of common stock issuable upon the exercise of
     stock options owned by Mr. Fitzpatrick. Excludes 42,500 unexercisable
     options.

(7)  Includes 101,000 shares of common stock issuable upon the exercise of
     stock options owned by Mr. Tracy. Excludes 25,000 unexercisable options.

(8)  Includes all of the shares of common stock issuable upon the exercise
     of options and warrants described in Notes (2) through (7) above.

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
officers and Directors, and persons who own more than 10 percent of a registered
class of the Company's equity securities, to file reports of ownership and
changes in ownership with the Securities and Exchange Commission. Such reporting
persons are required by regulation to furnish the Company with copies of all
Section 16(a) reports that they file.

Based solely on its review of the copies of such reports received by it, or
written representations from certain reporting persons that no Form 5 was
required for those persons, the Company believes that, during the period from
January 1, 1997 through December 31, 1997, all filing requirements applicable to
its officers, Directors and greater than 10 percent beneficial owners were
complied with, except that


Item 13.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

In April 1997, Dr. George Faris and Mr. Donald Rynne purchased certain
convertible debentures (the "Debentures") of the Company, originally issued in
August 1996, for their face values of $225,000 and $75,000, respectively, from a
foreign investor and subsequently converted the Debentures, pursuant to the
original terms thereof, for 895,349 shares and 298,342 shares of Common Stock,
respectively, which shares are still held by Dr. Faris and Mr. Rynne.

In July 1997, the Company's Chairman and CEO, Dr. George Faris, loaned the
Company $500,000 on an interest-free basis, which loan was repaid in full by the
Company in August 1997.

In April 1997, the Company issued as a bonus, 25,000 shares of Common Stock to
each of Dr. Faris, Mr. Fitzpatrick, Mr. Tracy, and Mr. Lorrie Olivier, a Vice
President of the Company. Such issuance is subject to ratification by the
Shareholders at the Company's Annual Meeting. Absent such ratification, 75% of
such shares will be returned to the Company.






 
                                      25

<PAGE>

                                     PART IV

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

(a)  Documents Filed as Part of the Report

(1)  Financial Statements.                                          Page No.

        Reports of Independent Accountants                            F-1
        Consolidated Balance Sheets
           December 31, 1997 and 1996                                 F-3
        Consolidated Statement of Operations
           Years Ended December 31, 1997, 1996 and 1995               F-4
        Consolidated Statement of Cash Flows
           Years Ended December 31, 1997, 1996 and 1995               F-5
        Consolidated Statement of Changes in
           Stockholders' Equity - Years Ended
           December 31, 1997, 1996 and 1995                           F-6
        Notes to Consolidated Financial Statements                    F-7
           Supplementary Oil and Gas Information                      F-26

(2)  Financial Statement Schedules.

None.

(3) Exhibits.

2.1  Share Purchase Agreement dated February 25, 1997, among Registrant and
     AIPCC, PAIPC and MIP. (8)

3.1  Restated Articles of Incorporation of the Registrant. (6)

3.2  By-laws of the Registrant, as amended. (11)

4.1  Form of Class A Warrant. (3)

4.2  1995 Stock Option Plan and Form of related Option Agreements of the
     Registrant. (5)

4.3  Form of 8% Convertible Subordinated Debentures due August 1, 1999. (9)

4.4  Form of Subscription Agreement used in connection with the offering of the
     Registrants' debentures referenced in Exhibit 4.3. (9)

4.5  Form of Warrant to purchase shares of the Registrants' Common Stock issued
     in connection with the offering of the Registrants' debentures referenced
     in Exhibit 4.3. (9)

4.6  Form of Registration Agreement used in connection with the offering of the
     Registrants' debentures referenced in Exhibit 4.3. (9)

4.7  Form of 14% convertible Notes due October 15, 1999. (10)

4.8  Form of Subscription Agreement used in connection with the offering of the
     Registrants' debentures referenced in Exhibit 4.7. (10)

4.9  Form of Warrant to purchase shares of the Registrants' common Stock issued
     in connection with the offering of the Registrants' debentures referenced
     in Exhibit 4.7. (10)



                                       26



<PAGE>

4.10 Form of Registration Rights Agreement used in connection with the offering
     of the Registrants' debentures referenced in Exhibit 4.7. (10)

4.11 Form of Subscription Agreement used in connection with the repayment of
     debt to a foreign individual. (10)

4.12 Form of Subscription Agreement used in connection with the Registrant's
     purchase of a 70% interest of MED Shipping Usturt Petroleum Company
     Ltd.(10)

4.13 Form of Warrant to purchase shares of the Registrant's common Stock issued
     in connection with the purchase referenced in Exhibit 4.12. (10)

4.14 1998 Stock Option Plan of the Registrant.

4.15 1998 Stock Award Plan of the Registrant.

10.1 Employment Agreement dated May 1, 1989 by and between George N. Faris and
     the Registrant. (1)

10.2 Amendment #1 to Employment Agreement, dated October 13, 1995, between
     George N. Faris and the Registrant. (6)

10.3 Registration Rights Agreement dated July 11, 1996 between George N. Faris
     and the Registrant. (6)

10.4 $3 million Exchangeable Debenture, granted by AIPCC to the Registrant due
     February 25, 1999. (8)

10.5 Agreement dated April 22, 1997 between the Registrant and MED Shipping and
     Trading S.A. used in connection with the Registrant's purchase of a 70%
     interest of MED Shipping Usturt Petroleum Company Ltd. (10)

10.6 Amendment dated May 9, 1997 to the Agreement attached hereto as Exhibit
     10.5. (10)

16.1 Letter dated August 19, 1996 regarding change in certifying accountant. (6)

21.1 Subsidiaries of the Registrant.

27.1 Financial Data Schedule.

--------------------
(1)  Incorporated herein by reference to the Registration Statement on Form S-1
     declared effective on February 13, 1990.

(2)  Incorporated herein by reference to the Registrant's form 8-K, dated
     December 4, 1990.

(3)  Incorporated herein by reference to the Registration Statement on Form S-3,
     declared effective January 15, 1998.

(4)  Incorporated herein by reference to Amendment #19 to Schedule 13D of George
     N. Faris for October 13, 1995.

(5)  Incorporated herein by reference to the Registrant's Annual Report on Form
     10-K for the fiscal year ended December 31, 1995.

(6)  Incorporated herein by reference to the Registrant's Quarterly Report on
     Form 10-Q for the quarter ended June 30, 1996.

(7)  Incorporated herein by reference to the Registrant's Form 8-K dated August
     19, 1996.

(8)  Incorporated herein by reference to the Registrant's Form 8-K dated March
     12, 1997.

(9)  Incorporated herein by reference to the Registrant's Quarterly Report on
     Form 10-Q for the quarter ended June 30, 1997.

(10) Incorporated herein by reference to the Registrant's Quarterly Report on
     Form 10-Q for the quarter ended September 30, 1997.

(11) Incorporated herein by reference to the Registrant's Annual Report on Form
     10-K for the year ended December 31, 1997.

(b)  Reports on Form 8-K

     None.


                                       27
<PAGE>

                          INDEPENDENT AUDITOR'S REPORT

To the Board of Directors and Stockholders American International Petroleum
Corporation


We have audited the accompanying consolidated balance sheets of American
International Petroleum Corporation and Subsidiaries as of December 31, 1997 and
1996, and related consolidated statements of operations, stockholders' equity
and cash flows for the years then ended. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.

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

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

The Company reported a net loss of approximately $18.0 million during 1997, of
which approximately $12.5 million represented non-operating or non-cash items,
and has commitments to fund the operations of its Kazakstan subsidiary (see Note
10) and has convertible debentures totaling $10,000,000 (see Note 6), which may
or may not be converted to common stock, that mature in October 1998. The
Company had virtually no revenue-generating operating activities during 1997 and
does not, as of December 31, 1997, have the resources to fulfill these
commitments. These matters raise substantial doubt about the Company's ability
to continue as a going concern. Management's plans in regards to these matters
are discussed in Note 2 to the financial statements.



HEIN + ASSOCIATES LLP
Certified Public Accountants
Houston, Texas
March 17, 1998















                                       F-1


<PAGE>

                        REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Stockholders of American International Petroleum
Corporation

In our opinion, based upon our audit and the report of other auditors, the
consolidated financial statements for 1995 listed in the Index appearing under
items 14(a)(1) on page 25 present fairly, in all material respects, the results
of operations and cash flows of American International Petroleum Corporation and
its subsidiaries for the year ended December 31, 1995, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audit. We did not audit the
financial statements for the year ended December 31, 1995 of American
International Petroleum Corporation of Colombia (AIPC-Colombia), a wholly-owned
subsidiary, which statements were prepared in accordance with generally accepted
accounting principles in Colombia and which statements reflect total revenues of
$1,214,213 for the year ended December 31, 1995. Those statements were audited
by other auditors whose report thereon has been furnished to us, and our opinion
expressed herein, insofar as it relates to the amounts included for
AIPC-Colombia, is based solely on the report of the other auditors. We conducted
our audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts (including the conversion of the financial statements of
AIPC-Colombia to generally accepted accounting principles in the United States)
and disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit and the report of
other auditors provide a reasonable basis for the opinion expressed above.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Notes 2 and 11 to the
financial statements, the Company has suffered recurring losses from operations,
has a working capital deficiency and is in the process of trying to resolve
certain contingencies, all of which raise substantial doubt about its ability to
continue as a going concern. Management's plans in regard to these matters are
also described in Note 2. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.

PRICE WATERHOUSE LLP
Houston, Texas
April 9, 1996


















                                       F-2

<PAGE>

Bogota, March 15, 1996

To the Members of the Board of Directors
American International Petroleum Corporation


I have audited the balance sheet of the Colombian Branch of American
International Petroleum Corporation of Colombia as of December 31, 1995, and the
corresponding statements of income, changes in the net worth of the Branch,
changes in the financial position and cash flows for the year 1995. The
presentation of those financial statements and their corresponding notes is the
responsibility of the Branch's administration and they reflect its performance.
It is among my functions to audit them and to render an opinion about them. The
financial statements of the Company for the year 1994 were audited by a
different Auditor, who expressed his opinion in his Report.

I obtained the necessary information to comply with my functions as Auditor and
conducted my work in accordance with generally accepted auditing standards which
require that the audit be planned and carried out to make sure that the
financial statements reasonably reflect the financial condition of the company
and the results of its operations. An audit of financial statements implies,
among other things, to conduct an examination based on selective tests of the
evidence that support the figures and disclosures of the financial statements,
as well as to evaluate the accounting principles used, the accounting estimates
made by the Administration, and the presentation of the financial reports as a
whole. I consider that my audit provides a reasonable basis for the opinion
regarding the financial reports as expressed below.

In its accounting and in the presentation of the financial statements, the
Branch follows accounting principles generally accepted for oil companies,
established by the Superintendency of Companies and the Colombian law. In my
opinion, the financial statements previously mentioned, which were faithfully
taken from the books present fairly the financial position of the Colombian
Branch of American International Petroleum Corporation of Colombia at December
31, 1995, the results of its operations, changes in its financial position and
its cash flows for the year then ended, in accordance with and based on
accounting principles generally accepted in Colombia.

Furthermore, it is also my opinion that the Branch's accounting for the year
ended on December 31, 1995, was kept in compliance with the legal norms and
accounting practices; the operations registered in the books and the
administrator's actions complied with the statutes and the decisions of the
Board of Directors of its Home Office, the correspondence and vouchers of the
accounts were duly carried out and kept, and adequate measures of internal
control and maintenance and custody of the Branch's and third parties' assets in
its possession were observed.



/s/Bernard Villages Perez
-------------------------
Bernard Villages Perez
Professional Card No. 4962-A



                                      F-3
<PAGE>


         AMERICAN INTERNATIONAL PETROLEUM CORPORATION AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                                        December 31,
                                                                           ------------------------------------

                                                                                1997                1996
                                                                                ----                ---- 
<S>                                                                           <C>                   <C>    
                                  Assets
                                  ------
Current assets:
  Cash and cash equivalents                                                 $ 3,721,350            $ 11,058
  Cash - restricted                                                                   -             161,022
  Marketable securities, at market                                              735,958                   -
  Accounts and notes receivable, net                                          1,831,008           1,073,140
  Inventory                                                                     755,720             459,961
  Deferred financing costs                                                      353,490             125,353
  Prepaid expenses                                                            1,244,277             712,751
                                                                            -----------          ----------
       Total current assets                                                   8,641,803           2,543,285
                                                                            -----------          ----------
Property, plant and equipment:                                                                 
  Unevaluated oil and gas property                                           11,724,477           5,648,630
  Oil and gas properties                                                              -          32,506,656
  Refinery property and equipment                                            22,816,897          17,235,183
  Other                                                                         216,803             499,971
                                                                            -----------          ----------
                                                                             34,758,177          55,890,440
Less - accumulated depreciation, depletion                                                    
 and amortization and impairments                                            (3,894,015)        (23,959,191)
                                                                            -----------          ----------
       Total property, plant and equipment                                   30,864,162          31,931,249
Notes receiviable, less current portion                                       2,333,895                   -
Other long-term assets, net                                                           -              17,897
                                                                            -----------          ----------
                                                                                               
       Total assets                                                        $ 41,839,860        $ 34,492,431
                                                                           ============        ============
                                                                                               
                   Liabilities and Stockholders' Equity
                   ------------------------------------
Current liabilities:                                                                           
  Notes payable                                                            $          -           $ 237,162
  Current portion of long-term debt                                           6,075,931           5,968,393
  Accounts payable                                                            1,452,642           3,636,765
  Accrued liabilities                                                         1,806,906           2,524,194
                                                                            -----------          ----------
       Total current liabilities                                              9,335,479          12,366,514
Long-term debt                                                                        -             798,199
                                                                            -----------          ----------
       Total liabilities                                                      9,335,479          13,164,713
                                                                            -----------          ----------
Stockholders' equity:                                                                          
  Preferred stock, par value $0.01, 7,000,000 shares                                           
    authorized, none issued                                                                    
  Common stock, par value $.08, 100,000,000 shares                                             
    authorized, 48,436,576 shares issued and outstanding                                      
    at December 31, 1997 and 34,458,921 shares at                                              
    December 31, 1996                                                         3,874,926           2,756,714
  Additional paid-in capital                                                106,689,337          78,677,265
  Stock purchase warrants                                                     1,297,754           1,297,754
  Accumulated deficit                                                       (79,357,636)        (61,404,015)
                                                                            -----------          ----------
       Total stockholders' equity                                            32,504,381          21,327,718
                                                                            -----------          ----------
Commitments and contingent liabilities (Note 10)                                      -                   -
                                                                            -----------          ----------
                                                                                               
Total liabilities and stockholders' equity                                  $41,839,860         $34,492,431
                                                                            ===========         ===========

</TABLE>
                       The accompanying notes are an integral part of these 
statements.

                                      F-4
<PAGE>

          AMERICAN INTERNATIONAL PETROLEUM CORPORATION AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF OPERATIONS
 

<TABLE>
<CAPTION>

                                                                      For the years ended December 31,
                                                              ---------------------------------------------------
                                                                    1997              1996               1995
                                                                    ----              ----               ----
<S>                                                                 <C>               <C>               <C>    
Revenues:
  Oil and gas production and
   pipeline fees                                                   $ 260,579       $ 1,364,581        $ 1,270,164
  Refinery lease fees                                                      -         2,467,606          1,184,864
  Other                                                              567,385           170,819            356,280
                                                                 -----------      ------------        -----------
       Total revenues                                                827,964         4,003,006          2,811,308
                                                                 -----------      ------------        -----------
Expenses:                                                                                          
  Operating                                                           98,766           613,336            432,440
  General and administrative                                       4,627,598         3,076,357          3,572,337
  Depreciation, depletion and                                                                      
   amortization                                                      774,264         1,265,230          1,396,423
  Interest                                                         6,663,992         2,818,218          1,037,308
  Realized  and unrealized loss on marketable securities           6,053,298                 -                  -
  Loss on sale of subsidiaries                                       563,667                 -                  -
  Provison for bad debts                                                   -           682,072            711,122
  Write-down of oil and gas properties                                     -           200,000                  -
                                                                 -----------      ------------        -----------
       Total expenses                                             18,781,585         8,655,213          7,149,630
                                                                 -----------      ------------        -----------

Net loss                                                        $(17,953,621)     $ (4,652,207)       $(4,338,322)
                                                                 ===========     =============        ===========

Net loss per share of common stock                                   $ (0.43)          $ (0.16)           $ (0.20)
                                                                 ===========     =============        ===========

Weighted-average number of shares
 of common stock outstanding                                      41,309,102        29,598,832         21,746,719
                                                                 ===========     =============        ===========
</TABLE>







        The accompanying notes are an integral part of these statements.


                                      F-5
<PAGE>

          AMERICAN INTERNATIONAL PETROLEUM CORPORATION AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>


                                                                             For the years ended December 31,
                                                                 ---------------------------------------------------------
                                                                       1997                 1996               1995
                                                                       ----                 ----               ----
<S>                                                                  <C>                 <C>                 <C>   
Cash flows from operating activities:
  Net loss                                                         $ (17,953,621)        $ (4,652,207)       $ (4,338,322)
  Adjustments to reconcile net loss to net                                                               
   cash provided (used) by operating activities:                                                         
     Depreciation, depletion, amortization and accretion of
          discount on debt                                             5,125,934            2,551,504           1,502,435
     Accretion of premium on notes receivable                           (167,167)                   -                   -
     Write-down of oil and gas properties                                      -              200,000                   -
     Provision for bad debts                                                   -              682,072             711,122
     Realized and unrealized loss on marketable securities             6,053,298                    -                   -
     Loss on sale  of subsidiaries                                       563,667                    -                   -
     Issuance of stock for compensation expense                           40,000              424,063              55,814
     Forgiveness of debt                                                 (50,342)                   -                   -
     Employee stock based compensation                                   744,700                    -                   -
     Stock based compensation for services                               247,607                    -                   -
     Changes in assets and liabilities:                                                                  
        Accounts and notes receivable                                     57,835             (681,659)           (537,569)
        Inventory                                                       (698,746)              44,992             446,519
        Prepaid and other                                             (1,387,484)            (370,274)            (98,359)
        Accounts payable and accrued liabilities                         (16,688)           2,352,361           1,984,574
                                                                   -------------         ------------        ------------
            Net cash provided by (used in) operating activities       (7,441,007)             550,852            (273,786)
                                                                   -------------         ------------        ------------
Cash flows from investing activities:
  Additions to oil and gas properties                                 (2,663,694)          (1,590,165)         (3,194,454)
  Additions to refinery property and equipment                        (5,581,714)          (1,713,188)             14,284
  Proceeds from sales of marketable securities                         1,979,494                    -                   -
  Proceeds from sale of subsidiaries                                   1,764,548                    -                   -
  Other                                                                  (94,191)             (10,176)            (26,753)
                                                                   -------------         ------------        ------------
             Net cash used in investing activities                    (4,595,557)          (3,313,529)         (3,206,923)
                                                                   -------------         ------------        ------------
Cash flows from financing activities:
  Cash - restricted, loan collateral                                           -               65,201             (11,593)
  Net increase (decrease) in notes payable                              (237,162)             170,403              66,759
  Repayments of long-term debt                                        (5,791,420)          (1,434,278)           (467,500)
  Proceeds from issuance of common stock and
    warrants, net                                                        447,810              745,302           3,111,858
  Proceeds from exercise of stock warrants                                                               
    and options (before related expenses paid                          
    in 1997 of $478,807)                                               1,272,333                    -                  32
  Proceeds from issuance of debentures, net                           20,055,295            3,064,889                   -
                                                                   -------------         ------------        ------------
             Net cash provided by financing activities                15,746,856            2,611,517           2,699,556
                                                                   -------------         ------------        ------------
Net increase (decrease) in cash and                                                                      
  cash equivalents                                                     3,710,292             (151,160)           (781,153)
Cash and cash equivalents at beginning of year                            11,058              162,218             943,371
                                                                   -------------         ------------        ------------

Cash and cash equivalents at end of year                             $ 3,721,350             $ 11,058         $   162,218
                                                                   =============         ============        ============

</TABLE>


        The accompanying notes are an integral part of these statements.


                                      F-6

<PAGE>

          AMERICAN INTERNATIONAL PETROLEUM CORPORATION AND SUBSIDIARIES

            CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
                                                      Common stock          Additional       Stock
                                                      ------------           paid-in        purchase     Accumulated
                                                   Shares       Amount       capital        warrants       deficit         Total
                                                ----------    --------     -----------     ----------   -------------     -------
<S>                                              <C>            <C>          <C>            <C>           <C>             <C>
Balance, January 1, 1997                         34,458,921  $ 2,756,714   $ 78,677,265  $ 1,297,754   $ (61,404,015)  $ 21,327,718
                                                                                               
Conversions of debentures                         7,246,882      579,751      8,763,271        -               -          9,343,022
Issuance of stock in lieu of current                                                                               
    liabilities                                     243,459       19,477        214,082        -               -            233,559
Issuance of stock for compensation                  100,000        8,000         32,000        -               -             40,000
Issuance of stock  for services                     260,000       20,800        226,807        -               -            247,607
Issuance of stock - Reg S Offering                1,635,593      130,847        314,465        -               -            445,312
Issuance of stock for oil and gas properties - 
    Reg S Offering                                3,250,000      260,000      8,275,938        -               -          8,535,938
Issuance of stock warrants for oil and gas 
    properties                                         -            -           718,750        -               -            718,750
Issuance of stock warrants                             -            -         6,264,411        -               -          6,264,411
Options and warrants exercised                    1,241,721       99,337        694,189        -               -            793,526
Imputed interest on debentures
    convertible at a discount to market                -            -         1,763,459        -               -          1,763,459
Compensatory stock options                             -            -           744,700        -               -            744,700
Net loss for the year                                  -            -              -           -          (17,953,621)  (17,953,621)
                                                 ----------    ---------    -----------    ----------    ------------   -----------
                                                                                                                   
Balance, December 31, 1997                       48,436,576  $ 3,874,926   $106,689,337   $ 1,297,754    $(79,357,636)  $32,504,381
                                                 ==========  ===========   ============   ===========    ============   ===========
</TABLE>

 


         The accompanying notes are an integral part of this statement.




                                      F-7
<PAGE>


          AMERICAN INTERNATIONAL PETROLEUM CORPORATION AND SUBSIDIARIES

            CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
                                                      Common stock          Additional       Stock
                                                      ------------           paid-in        purchase     Accumulated
                                                   Shares       Amount       capital        warrants       deficit         Total
                                                ----------    --------     -----------     ----------   -------------     -------
<S>                                              <C>            <C>          <C>            <C>           <C>             <C>
Balance, January 1, 1996                         24,705,926   $ 1,976,474   $74,768,272    $ 1,297,754   $(56,751,808)  $21,290,692
                                                                                              
Conversions of Debentures                         6,535,122       522,810     1,477,190          -              -         2,000,000
Issuance of stock in lieu of current                                                                             
    liabilities                                     479,540        38,363       130,539          -               -          168,902
Issuance of stock for compensation                  905,000        72,400       351,663          -               -          424,063
Issuance of stock - Regulation S Offering         1,833,333       146,667       598,635          -               -          745,302
Imputed interest on debentures
    convertible at a discount to market               -              -        1,350,966          -               -        1,350,966
Net loss for the year                                 -              -            -              -         (4,652,207)   (4,652,207)
                                                 ----------   -----------   -----------    -----------   ------------    ----------
                                                                                                                 
Balance, December 31, 1996                       34,458,921   $ 2,756,714   $78,677,265    $ 1,297,754   $(61,404,015)  $21,327,718
                                                 ==========   ===========   ===========    ===========   =============  ===========

</TABLE>
 







         The accompanying notes are an integral part of this statement.



                                      F-8


<PAGE>

          AMERICAN INTERNATIONAL PETROLEUM CORPORATION AND SUBSIDIARIES

            CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
                                                                                             Notes
                                             Common stock        Additional    Stock       receivable
                                             ------------         paid-in     purchase    for issuance   Accumulated
                                         Shares       Amount      capital     warrants      of stock       deficit       Total
                                       ----------    --------   -----------  ----------   -------------  ------------   -------
<S>                                     <C>           <C>          <C>          <C>           <C>        <C>            <C>
                                                                               
                                                                               
Balance, January 1, 1995               19,099,048   $1,527,924   $71,595,370   $1,297,754   $ (32,936)  $(52,413,486)  $21,974,626
                                                                               
Warrants exercised                              8            1            31            -           -              -            32
Issuance of stock in lieu of
  current liabilities                     728,205       58,256       430,994            -           -              -       489,250
Issuance of stock for compensation         10,000          800        19,512            -      32,936              -        53,248
Issuance of  stock - 
  Reg S Offering                        4,868,665      389,493     2,722,365            -           -              -     3,111,858
Net loss for the year                           -            -             -            -           -     (4,338,322)   (4,338,322)
                                       ----------   ----------   -----------   ----------   ---------   ------------    ----------
                                                                                                                
Balance, December 31, 1995             24,705,926   $1,976,474   $74,768,272   $1,297,754    $      -   $(56,751,808)  $21,290,692
                                       ==========   ==========   ===========   ==========    ========   ============   ===========
</TABLE>







         The accompanying notes are an integral part of this statement.




                                      F-9
<PAGE>


                AMERICAN INTERNATIONAL PETROLEUM CORPORATION AND
                                  SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - GENERAL, ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES: 

American International Petroleum Corporation (the "Company") was incorporated in
the State of Nevada and, through its wholly-owned subsidiaries, is the owner of
a refinery in Lake Charles, Louisiana and a 70% working interest in an oil and
gas concession in Kazakstan. The Company is also seeking domestic and
international oil and gas properties and projects.

Sale of Subsidiaries 

On February 25, 1997, the Company sold all of the issued and outstanding common
stock of two of its wholly-owned subsidiaries, American International Petroleum
Corporation of Colombia ("AIPCC") and Pan American Petroleum Corporation
("PAIPC") to Mercantile International Petroleum Inc. ("MIP"). Consequently, all
references to these subsidiaries herein are presented in the past tense.

The assets of AIPCC and PAIPC consisted of oil and gas properties and equipment
in South America with an aggregate net book value of approximately $17.9
million. The total aggregate purchase price payable by MIP for the Purchased
Shares was valued at up to approximately $20.2 million, determined as follows:

   
(a) Cash payments of approximately $3.9 million, of which approximately $2.2
million was paid simultaneously with the closing to retire the company's 12%
Secured Debentures due December 31, 1997, which were secured by the Company's
shares of AIPCC, (b) assumption of AIPCC and PAIPC debt of an aggregate amount
of $634,000, (c) 4,384,375 shares of MIP Common Stock (the "MIP Shares") with a
trading price of approximately $2.00 per share on the date the parties agreed in
principle to the sale, (d) a two-year $3 million 5% exchangeable subordinated
debenture of AIPCC (the "Exchangeable Debenture"), exchangeable into shares of
common stock of MIP on the basis of $3 principal amount of such debenture for
one share of MIP on or after February 25, 1998; or Registrant may demand payment
on that date of $1.5 million of the principal balance thereof, (e) a $1.4
million "performance earn-out" from future production in Colombia, plus interest
at 8% per annum, (f) up to $2.5 million (reduced proportionately to the extent
the Net Operating Loss and Deferred Cost Deductions accrued by AIPCC through
December 31, 1996 ("Accrued Tax benefit Deductions") is less than $50 million
but more than $20 million (payable from 25% of AIPCC's future tax savings
related to Accrued Tax Benefit Deductions, if any, available to AIPCC on future
tax filings in Colombia. In January 1998, the Company demanded payment of $1.5
million in principal, which was received by the Company in February 1998.

The purchase price included an aggregate of approximately $2.5 million in
payments from MIP in connection with MIP's future potential tax savings in
Colombia and $3 million of long and short term notes at face value (not
discounted to present value). Taking the $2.5 million tax payments, which were
not recorded because of their contingent nature, and the discounted portion of
the notes of approximately $452,000 into consideration, the Company recorded an
aggregate loss of approximately $564,000 on the sale of the subsidiaries.
    

Principles of consolidation 

The consolidated financial statements of the Company include the accounts of the
Company and its wholly-owned subsidiaries, American International Refinery, Inc.
("AIRI"), American International Petroleum Kazakstan ("AIPK"), AIPCC and PAIPC.

Intercompany balances and transactions are eliminated in consolidation.

Cash and cash equivalents 

All liquid short-term instruments purchased with original maturity dates of
three months or less are considered cash equivalents. Restricted cash represents
cash utilized as collateral for the Company's borrowings in Colombia and
drilling commitments in Peru.

Marketable Securities

Marketable securities classified as available-for-sale are stated at market
value, with unrealized gains and losses reported as a separate component of
stockholders' equity, net of deferred income taxes. If a decline in market value
is determined to be other than temporary, any such loss is charged to earnings.
Trading securities are stated at fair value, with unrealized gains and losses
recognized in earnings. The Company records the purchases and sales of
marketable securities and records realized gains and losses on the trade date.
Realized gains or losses on the sale of securities are recognized on the
specific identification method.

                                       F-10


<PAGE>


The Company held 2,943,818 shares of MIP at December 31, 1997. During the year
the Company sold or dispersed 1,440,557 shares for net cash proceeds of
$1,979,494. The gross losses on shares disposed of was $901,616. The unrealized
loss on shares available for sale at December 31, 1997 was $5,151,682. There
were no gains on sale of any of the MIP stock. The MIP stock was deemed impaired
at December 31, 1997 and the carrying value was reduced from a carrying value of
$1,648,542 to $735,958. The impairment is reflected in the gross unrealized loss
on marketable securities in the accompanying Statement of Operations.

Inventory 

Inventory consists of crude oil and asphalt feedstock and oil and gas equipment.
Crude oil and asphalt feedstocks are stated at the lower of cost or market value
by using the first-in, first-out method. Oil and gas equipment is stated at the
lower of average cost or market.

Property, plant and equipment 

Oil and gas properties

The Company follows the full cost method of accounting for exploration and
development of oil and gas reserves, whereby all costs incurred in acquiring,
exploring and developing properties are capitalized, including estimates of
abandonment costs, net of estimated equipment salvage costs. Individual
countries are designated as separate cost centers. All capitalized costs plus
the undiscounted future development costs of proved reserves are depleted using
the unit-of-production method based on total proved reserves applicable to each
country. Under the full cost method of accounting, unevaluated property costs
are not amortized. A gain or loss is recognized on sales of oil and gas
properties only when the sale involves significant reserves. Costs related to
acquisition, holding and initial exploration of concessions in countries with no
proved reserves are initially capitalized and periodically evaluated for
impairment.

Costs not subject to amortization:

The following table summarizes the categories of cost which comprise the amount
of unproved properties not subject to amortization.
<TABLE>
<CAPTION>

                                                                              December 31,
                                                   ------------------------------------------------------------------ 
                                                      1997                         1996                         1995
                                                      ----                         ----                         ----
<S>                                                    <C>                       <C>                           <C>  
Colombia:
     Acquisition costs                           $       -                      $1,101,277                  $1,101,277
     Exploration costs                                   -                           -                            -   
                                                 -----------                    ----------                  ----------
                                                         -                       1,101,277                   1,101,277
Peru:
     Exploration costs                                   -                       4,457,964                   3,832,041

Kazakstan:
     Acquisition Cost                              11,724,477                        -                            -

Other
     Acquisition cost                                    -                          89,389                      65,506
                                                  -----------                   ----------                  ----------
                                                  $11,724,477                   $5,648,630                  $4,998,824
                                                  ===========                   ==========                  ==========

</TABLE>


Acquisition costs of unproved properties not subject to amortization at December
31, 1997, 1996 and 1995, respectively, consists mainly of lease acquisition
costs related to unproved areas. On February 25, 1997 the Company sold all of
its wholly owned subsidiaries operating in Columbia and Peru. The period in
which the amortization cost of the Kazakstan properties will commence is subject
to the results of the Company's exploration program which will begin in 1999.

Certain geological and general and administrative costs are capitalized into the
cost pools of the country cost centers. Such costs include certain salaries and
benefits, office facilities, equipment and insurance. Capitalized general and
administrative costs are directly related to the Company's exploration and
development activities in Colombia and Peru and totaled $48,404, $331,355 and
$472,606 for the years ended December 31, 1997, 1996 and 1995, respectively.



                                      F-11


<PAGE>

The net capitalized costs of oil and gas properties for each cost center, less
related deferred income taxes, are expensed to the extent they exceed the sum of
(i) the estimated future net revenues from the properties, discounted at 10%,
(ii) unevaluated costs not being amortized; and (iii) the lower of cost or
estimated fair value of unproved properties being amortized; less (iv) income
tax effects related to differences between the financial statement basis and tax
basis of oil and gas properties. The independent reservoir engineer's report of
Estimated Future Reserves and Revenues is based on information available "as of"
the date of such Report. Upward or downward revisions to the estimated value and
volume of oil and gas reserves may occur based on circumstances occurring, and
information obtained, subsequent to the date of the engineer's report. (See
"Supplementary Oil and Gas Information for the Years Ended December 31, 1997,
1996 and 1995 - Oil and Gas Reserves.

   
The portion of the Company's oil and gas properties held in AIPCC and PAIPC,
were reduced as of December 31, 1996, to the amount realized from the sale of
AIPCC and PAIPC on February 25, 1997, resulting in an impairment loss of
$200,000 during 1996.
    

Property and equipment - other than oil and gas properties

   
Property and equipment are carried at cost and included interest on funds
borrowed to finance construction. Capitalized interest was $341,000 and $43,427
in 1997 and 1996, respectively. Depreciation and amortization are calculated
under the straight-line method over the anticipated useful lives of the assets
which range from 5 to 25 years. Major additions are capitalized. Expenditures
for repairs and maintenance are charged against earnings. Depreciation,
depletion and amortization expense on property and equipment were $774,264,
$1,265,230 and $1,396,423 for the years ended December 31, 1997, 1996 and 1995,
respectively. At December 31, 1997, the Company's Refinery was undergoing
modifications to its processing system and was not operational.

Revenue recognition

Oil and gas production revenues are recognized at the time and point of sale
after the product has been extracted from the ground. Pipeline fees are
recognized at the time and point of expulsion of the product from the pipeline.

Discounts and premiums

Discounts and premiums on Accounts and Notes receivables are amortized as
interest expense or income over the life of the instrument or computed using 
the interest method.
    

Earnings per share 

Earnings per share of common stock are based on the weighted-average number of
shares outstanding. Common stock equivalents are not presented because they are
anti-dilutive. The FASB issued Statement of Financial Accounting Standards No.
128, entitled Earnings Per Share, during February 1997. The new statement, which
is effective for financial statements issued after December 31, 1997, including
interim periods, establishes standards for computing and presenting earnings per
share. The new statement requires retroactive restatement of all prior-period
earnings per share data presented. The new statement did not have a material
impact upon previously presented earnings per share information. Earnings per
share in the accompanying statements of operations were determined in accordance
with SFAS 128.

               
                                          For the Year Ended 1997
                                  ----------------------------------------
                                                     Shares       Per Share
                                    Income        Weighted Avg      Amount
                                  (Numerator)     (Denominator)
                                  -----------     -------------   ----------

Loss                             $(17,953,621)

Basic
EPS

Loss available to
  Common stockholders            $(17,953,621)      41,309,102      $ (0.43)

Effect of Dilutive Securities
Warrants and Options(1)                                 13,834

Diluted EPS
Loss available to
  Stockholders                   $(17,953,621)      41,322,936      $ (0.43)
                                 ============       ==========      =======

<PAGE>

Options to purchase 7,774,707 shares of common stock at various prices were
outstanding during 1997, but were not included in the computation of diluted EPS
because the options' Exercise price was greater than the average market price of
the common shares. 

The options, which expire after December 31, 1997 were still outstanding at
December 31, 1997. 

(1)  The effect of these shares in the Diluted EPS were not reflected in the
     original 10-K Filing as they were anti-dilutive in accordance with
     paragraph 13 of SFAS 123.

Foreign currency 

Foreign currency transaction gains and losses are included in the consolidated
statement of operations. The Company does not engage in hedging transactions to
reduce the risk of foreign currency exchange rate fluctuations and has not
experienced significant gains or losses related to such events. The Company
anticipates little, if any, currency and exchange risks during the initial three
to five years of its operations in Kazakstan. Any revenues generated from
Kazakstan during this period are planned to be reinvested in the Company's
projects in Kazakstan. Subsequently, the Company will be exposed to the currency
and exchange risks which typically present themselves in the Confederate of
Independent States ("CIS") countries. The Company collected sales of oil and gas
in Colombia and Peru in local currency and utilized those receipts for local
operations. Periodically, funds were transferred from U.S. accounts to Columbia
or Peru and converted into pesos or soles, respectively, when local currency was
insufficient to meet obligations payable in local currency. Foreign exchange
losses in 1997 were $75,878. Foreign exchange gains were $63,763 and $12,544 in
1996 and 1995, respectively.

Deferred charges 

The Company capitalizes certain costs, primarily commissions and legal fees,
associated with the offering and sale of debentures. Such costs are amortized as
interest expense over the life of the related debt instrument. Sales of
debentures and notes in 1997 were $20,537,000 compared to $3,065,000 in 1996. As
a result, debenture costs incurred and amortized in 1997 increased by $2,964,282
to $3,253,035, compared to a total of $289,000 in 1996.



                                      F-12

<PAGE>


Stock-based compensation 

Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for
Stock-Based Compensation" defines a fair value based method of accounting for an
employee stock option or similar equity instrument or plan. However, SFAS No.
123 allows an entity to continue to measure compensation costs for these plans
using the current method of accounting. The Company has elected to account for
employee stock compensation plans as provided under APB 25.

Estimates 

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of certain assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the related reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates. Management believes
that the estimates are reasonable.

The Company's financial statements are based on a number of significant
estimates including the valuation of unevaluated oil and gas properties and oil
and gas reserve quantities which are the basis for the calculation of
depreciation, deletion, and impairment of oil and gas properties. The Company's
reserve estimates are determined by an independent petroleum engineering firm.
However, management emphasizes that reserve estimates are inherently imprecise
and that estimates of more recent discoveries and reserves associated with
non-producing properties are more imprecise than those for producing properties
with long production histories.

Reclassifications 

Certain prior year amounts have been reclassified to conform to the current year
presentation.

New Accounting Standards

On March 31, 1995, the Financial Accounting Standard Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be disposed
of". SFAS No. 121 addresses the accounting for the impairment of long-lived
assets, identified intangibles and goodwill related to those assets and requires
that the carrying amount of impaired assets be reduced to fair value. The
Company adopted SFAS No. 121 in the fourth quarter of 1995 and determined that
it has no effect on the financial statements for the years ended December 31,
1997, 1996 and 1995.

The FASB also issued SFAS No. 130 "Reporting Comprehensive Income" and SFAS No.
131 "Disclosures About Segments of an Enterprise and Related Information". SFAS
No. 130 establishes standards for reporting and display of comprehensive income,
its components and accumulated balances. Comprehensive income is defined to
include all changes in equity except those resulting from investments by owners
and distributions to owners. Among other disclosures, SFAS No. 130 requires that
all items that are required to be recognized under current accounting standards
as components of comprehensive income be reported in a financial statement that
is displayed with the same prominence as other financial statements. SFAS No.
131 supersedes SFAS No. 14, "Financial Reporting for Segments of a Business
Enterprise". SFAS No. 131 establishes standards on the way that public companies
report financial information about operating segments in annual financial
statements and requires reporting of selected information about operating
segments in interim financial statements issued to the public. It also
establishes standards for disclosures regarding products and services,
geographic areas and major customers. SFAS No. 131 defines operating segments as
components of a company about which separate financial information is available
that is evaluated regularly by the chief operating decision maker in deciding
how to allocate resources and in assessing performance.

SFAS Nos. 130 and 131 are effective for financial statements for periods
beginning after December 15, 1997 and require comparative information for
earlier years to be restated. Because of the recent issuance of these standards,
management has been unable to fully evaluate the impact, if any, the standards
may have on the future financial statement disclosures. Results of operations
and financial position, however, will be unaffected by implementation of these
standards.





                                      F-13

<PAGE>


The FASB issued Statement of Financial Accounting Standards No. 128, entitled
Earnings Per Share, during February 1997. The new statement, which is effective
for financial statements issued after December 15, 1997, including interim
periods, establishes standards for computing and presenting earnings per share.
The new statement requires retroactive restatement of all prior-period earnings
per share data presented. Earnings per share in the accompanying Statements of
Operations were determined in accordance with SFAS 128.


NOTE 2 - MANAGEMENT PLANS
-------------------------

   
The Company reported a net loss of approximately $18.0 million during 1997, of
which approximately $12.5 million represented non-operating or non-cash items,
and has commitments to fund the operations of its Kazakstan subsidiary (see Note
10) and has convertible debentures totaling $10,000,000 (see Note 6), which may
or may not be converted to common stock, that mature in October 1998. The
Company had virtually no revenue-generating operating activities during 1997 and
does not, as of December 31, 1997, have the resources to fulfill these
commitments. Management of the Company has been seeking sources of capital to
enable the Company to fund its operating activities and to fulfill these and
other commitments which may arise in 1998 and beyond. The Company expects to
enter into an agreement during April 1998 with certain institutional investors
which will provide for up to $52 million in private debt and equity financing to
be utilized by the Company on an as needed-basis over a two year period.
    

Management believes that this private financing will be sufficient in nature to
provide the necessary capital to fund its commitments during at least the next
two years. In the event this financing does not occur, and the Company is unable
to access adequate sources of capital, its plans and operations during 1998
would be substantially curtailed.


NOTE 3 - ACCOUNTS AND SHORT-TERM NOTES RECEIVABLE: 
-------------------------------------------------- 

Accounts and notes receivable are shown below:

                                                         December 31,
                                              --------------------------------
                                                 1997                  1996     
                                              ----------            ----------
 
Accounts receivable - trade                   $1,020,145            $1,942,946
Note receivable - Gold Line (See Note 8)         900,732               900,732
Current portion - Note receivable - MIP        1,537,808                  -
Other                                            293,200               150,980
                                              ----------            ----------
                                               3,751,885             2,994,658
Less - allowance for doubtful accounts        (1,920,877)           (1,921,518)
                                              ----------            ----------
                                              $1,831,008            $1,073,140
                                              ==========            ==========


NOTE 4 - OTHER LONG-TERM ASSETS: 

Other long-term assets consist of the following:

                                                          December 31,
                                              --------------------------------
                                                 1997                  1996 
                                              ----------            ----------  
Notes receivable - MIP (See Note 1),
   net of discount of $284,634               $ 3,871,703            $        -
Unamortized bond issue cost                            -                17,897
                                              ----------            ----------
Less - current portion - MIP                  (1,537,808)                    -
                                              ----------            ----------
                                             $ 2,333,895            $   17,897
                                              ==========            ==========







                                      F-14
<PAGE>

NOTE 5 - ACCRUED LIABILITIES: 
----------------------------- 

Accrued liabilities consist of the following:
                                                           December 31, 
                                                --------------------------------
                                                   1997                   1996 
                                                ----------            ----------

Accrued payroll                                 $   63,068            $  266,429
Accrued interest                                    47,206               282,076
Corporate taxes                                     99,484               330,024
Excise taxes                                     1,376,170             1,100,000
Property taxes                                        --                 219,345
Other                                              220,978               326,320
                                                ----------            ----------

                                                $1,806,906            $2,524,194
                                                ==========            ==========

NOTE 6 - SHORT TERM DEBT
------------------------
                                                           December 31, 
                                                --------------------------------
                                                   1997                   1996 
                                                ----------            ----------
14% - 10,000,000 Unsecured convertible 
  debenture net of unamortized discount of
  $3,924,069 - due October 15, 1998,
  effective interest  rate - 51%*               $6,075,931            $        -

*Convertible after April 15, 1998 into the Company's common stock at the lesser
of $6.25, 85% of market, or the lowest average market price for any five
consecutive trading days following April 15, 1998.


NOTE 7 - LONG-TERM DEBT:
                                                           December 31, 
                                                --------------------------------
                                                   1997                   1996 
                                                ----------            ----------
Note payable to MG Trade
     Finance Corporation                        $        -            $2,108,393
8% - $100,000 Convertible debentures -
     due February 14, 1997,
     effective interest rate - 8%                        -               100,000
9% - $150,000 Convertible Debentures -
     due December 9, 2000
     effective interest rate - 17.3%                     -               124,445
10% - $391,629 Convertible Debentures -
     due April 1, 1998
     effective interest rate - 34.7%                     -               293,040
12% Secured Debentures -
     due December 31, 1997,
     effective interest rate - 12%
     25% of original principal due on
     December 31, 1996                                   -             3,510,000
12.5% - $426,000 Convertible Debentures -
     due January 2, 1998
     effective interest rate - 49.2 to 51.7%             -               380,714
Senior Convertible Subordinated Debentures -
     due February 1, 1997, interest ranges from 
     8.5-10.5% per annum, payable quarterly, 
     convertible into common shares at $50.00
     per share.                                          -               250,000
                                                ----------            ----------
                                                         -             6,766,592
Less - Current portion                                   -             5,968,393
                                                ----------            ----------
                                                $        -            $  798,199
                                                ==========            ==========


                                      F-15
<PAGE>

The effective interest rate as stated for each of the debt instruments above
does not necessarily reflect the actual cash cost to the Company for that
specific debt instrument. The effective interest rate reflects presumed
incremental yield the holder of the debt instrument may derive from the
discounted conversion rate of such instrument and the fair value of warrants
issued to debt holders. During 1997, the Company sold convertible debentures
totaling $20,537,000, of which $9,343,000 were converted into the Company's
common stock at discounts to market ranging from 15% to 51%.

Note payable to MG Trade Finance Corporation 
-------------------------------------------- 

On December 4, 1990, AIRI entered into a loan and security agreement (the "Loan
Agreement") with MG Trade Finance Corp. ("MGTF"). Pursuant to the Loan
Agreement, MGTF loaned AIRI $9,855,392. As collateral for the borrowings,
substantially all of the assets of AIRI were pledged, payment was guaranteed by
the Company and the Company pledged 100% of the common stock of AIRI. In order
to induce MGTF to enter into the Loan Agreement, the Company granted MGTF
warrants to purchase 516,667 shares of the Company's $0.08 par value common
stock at $7.50 per share, exercisable at any time prior to June 30, 1994. Such
warrants outstanding at December 31, 1993 were adjusted to an exercise price of
$1.25 based on an anti-dilutive provision in the warrant agreements. In July
1995, all warrants previously held by MGTF were returned to the Company and
canceled and 150,000 new warrants were issued at an exercise price of $2.00 per
share of common stock, which warrants were exercised in October 1997. As part of
certain negotiations related to the MIP Transaction, the Company agreed to
pledge 1,000,000 shares of MIP common stock (partial consideration the Company
received in the MIP Transaction) as additional collateral for the Loan Agreement
and change the due date of the unpaid balance of the Loan Agreement of
$2,108,000 to September 30, 1997 from March 31, 1998, which balance was repaid
in full by the Company on October 1, 1997.


NOTE 8 - REFINERY LEASE: 
------------------------ 

In October 1990, the Company leased its refinery to Gold Line. All amounts owed
to AIRI by Gold Line on October 1, 1992 were restructured to a note totaling
$1,244,192, due on September 30, 1995 bearing interest at prime plus 2%. The
note was to be retired in monthly installments equal to 10% of Gold Line's
monthly operating cash flow, if such operating cash flow was positive. No
amounts were collected pursuant to the provision and the note was fully reserved
for during 1992. No interest was accrued with respect to this note.

On March 22, 1995, the term of the lease was extended through March 31, 1998. In
consideration for extending the lease, Gold Line executed a $1,801,464
promissory note (which amount includes the $1,244,192 note referred to above and
certain trade receivables owed the Company by Gold Line of $506,332 at December
31, 1994) payable in installments of principal and interest through June 15,
1997. The promissory note bears interest at prime plus 1%. The Company
established a reserve for doubtful accounts of $1,921,518 and $2,039,041 at
December 31, 1996 and 1995, respectively. In February, 1996, in order to enhance
the business strength of the lessee of its Refinery and to assist it in securing
a new government contract, the Company agreed to reduce the fully reserved
principal balance of its note receivable from the lessee to $900,732 from
$1,801,464.

During the third and fourth quarters of 1996, Gold Line began to fall behind in
their monthly lease fee payments to AIRI, even though it was processing an
average in excess of 400,000 barrels of feedstock per month during these
periods. On February 3, 1997, the Company delivered a Default Notice to Gold
Line informing Gold Line of various items of default under the Lease Agreement,
including non-payment of lease fees totaling approximately $567,000 and 1996
real estate taxes of approximately $208,000.

Subsequent Notices of Default were also delivered to Gold Line covering
additional items of default, including an additional $287,000 in unpaid lease
fees and $29,000 of unpaid insurance premiums (which premiums were paid by
AIRI). On February 18, 1997, the Company delivered a Termination Notice and
Notice to Vacate, pursuant to the Lease Agreement, whereby the Company gave
written notice to Gold Line to vacate the leased premises five days from the
date the Notice was delivered. Gold Line did not comply with the Company's
Notice to Vacate, so on February 26, 1997 the Company filed suit against Gold
Line. On March 20, 1997, the court terminated the Lease Agreement and ordered
Gold Line to vacate the refinery premises within 24 hours of the Order, with
which Gold Line complied.

In light of the events which occurred after December 31, 1996, the Company
reserved all lease fees due from Gold Line as of December 31, 1996 and did not
record earned lease fees of $443,000 during 1997. See Note 10 - "Commitments and
Contingent Liabilities - Gold Line Defaults".

                                      F-16
<PAGE>

NOTE 9 - STOCK OPTIONS AND WARRANTS: 
------------------------------------ 

Outstanding warrants and options

At December 31, 1997, 1996 and 1995, the following warrants and options for the
purchase of common stock of the Company were outstanding, which are exercisable
upon demand any time prior to the expiration date.

    Number of Shares Underlying
          Options and Warrants
              at December 31,
<TABLE>
<CAPTION>
                                                          Exercise                 Expiration
        1997            1996              1995            Price                    Date
        ----            ----              ----            -----                    ----
<S>    <C>           <C>                <C>               <C>                    <C>
             -              -              66,715          $32.500              February 26, 1996 (2)
             -              -               7,988          $15.000              March 10, 1996 (2)
             -              -               1,500          $36.250              April 1, 1996 (2)
             -              -               3,000          $30.000              August 28, 1996 (2)
             -      5,957,347           5,957,347           $4.000              March 1, 1997 (3)
             -         20,000              20,000          $30.625              July 14, 1997
             -              -             282,500           $1.000              December 31, 1997 (1) (2)
             -        282,500                   -            $0.50              December 31, 1997 (1) (2)
     5,957,207              -                   -           $4.000              March 1, 1998 (3)
             -        150,000             150,000           $2.000              March 31, 1998
             -              -              20,000           $1.000              August 3, 1998 (1) (2)
             -         20,000                   -           $0.500              August 3, 1998 (1) (2)
       100,000              -                   -           $0.487              January 31, 1999(4)
        22,681              -                   -           $2.131              July 22, 1999(4)
       960,000              -                   -           $2.713              August 6, 1999(4)
     1,500,000              -                   -           $6.250              October 9, 1999(4)
             -      1,550,000                   -           $0.500              October 21, 1999 (1) (2)
     1,852,500              -                   -           $0.500              December 31, 1999 (1)
        50,000         50,000                   -           $0.500              November 1, 2000 (1)
        61,547              -                   -           $0.469              July 15, 2001(4)
       100,000              -                   -           $1.000              July 15, 2001(4)
        10,500         10,500                   -           $0.475              July 16, 2001(4)
         8,333          8,333                   -           $0.415              August 19, 2001(4)
        16,667         16,667                   -           $0.413              August 20, 2001(4)
        18,519         18,519                   -           $0.406              October 31, 2001(4)
        20,000              -                   -           $0.500              November 11, 2001(4)
        10,000              -                   -           $0.500              November 12, 2001(4)
        30,000              -                   -           $0.398              April 1, 2002(4)
        60,000              -                   -           $0.398              June 6, 2002(4)
       200,000              -                   -           $2.000              July 30, 2002(4)
       197,500              -                   -           $6.250              October 14, 2002(4)
        10,000              -                   -           $0.500              November 5, 2002(4)
       100,000              -                   -            $4.28              December 1, 2002(1)
     1,518,750              -                   -           $1.050              December 31, 2002 (1)
     ---------      ---------           ---------
    12,804,204      8,083,866           6,509,050
    ==========      =========           =========
</TABLE>

     (1)  Represents options held by employees and directors of the Company. The
          exercise price and expiration date of such options reflects the
          adjustments approved by the Company's Board of Directors.

     (2)  These options and warrants were canceled or expired, as applicable, 
          in 1996 or 1995 as indicated in the table.

   
     (3)  Class A Warrants. In February 1998 the expiration date of these
          warrants was extended to April 9, 1998, and all unexercised warrants
          will expire on that date.
    

     (4)  Other non-employee warrants.


                                      F-17
<PAGE>

Stock option plans 
------------------ 

1995 Plan

Under the Company's 1995 Stock Option Plan (the "1995 Plan"), the Company's
employees, Directors, independent contractors, and consultants are eligible to
receive options to purchase shares of the Company's common stock. The Plan
allows the Company to grant incentive stock options ("ISOs"), nonqualified stock
options ("NQSOs"), and ISOs and NQSOs in tandem with stock appreciation rights
("SARs"; collectively "Options"). A maximum of 3,500,000 shares may be issued
and no options may be granted after ten years from the date the 1995 Plan is
adopted, or the date the Plan is approved by the stockholders of the Company,
whichever is earlier. The exercise price of the Options cannot be less than the
fair market value of the shares of common stock on the date the Option is
granted. Options granted to individuals owning 10% or more of the outstanding
voting power of the Company must be exercisable at a price equal to 110% of the
fair market value on the date of the grant.

Activity in the 1995 Stock Option Plan for the years ended December 31, 1996 and
1997 was as follows:

                                                              Weighted Average
                                           Number of           Exercise Price
                                            Shares                Per Share
                                            ------                ---------

Outstanding, December 31, 1995               305,500                $1.28
Canceled                                    (302,500)               $1.00
Granted                                    1,902,500                $0.50
Expired                                       (3,000)              $30.00

Outstanding, December 31, 1996             1,902,500                $0.50
Canceled                                  (1,852,500)               $0.50
Granted                                    3,471,250                $0.84
Expired                                       -                       -

Outstanding December 31, 1997              3,521,250                $0.83

   
As of December 31, 1997, options to acquire 2,773,333 shares of the Company's
common stock with exercise prices ranging from $0.50 to $1.05, were fully vested
and exercisable at a weighted average exercise price of $0.67 per share. The
remaining 747,917 options, with exercise prices ranging from $0.50 to $4.28,
having a weighted average exercise price of $1.51 per share, will vest through
2002.
    

If not previously exercised, options outstanding at December 31, 1997, will
expire as follows: 1,852,500 options expire on December 31, 1999; 50,000 options
expire on November 1, 2000; 1,518,750 options expire on December 31, 2002; and
100,000 options expire on December 1, 2002. The weighted average grant date fair
value of the options issued during 1997 and the weighted average exercise price
of those options amounted to $1.04 and $0.85, respectively. The weighted average
grant date fair value of the options issued during 1996 and the weighted average
exercise price of those options amounted to $0.34 and $0.50, respectively.

During 1997, 1,852,500 options were granted whose exercise price was less than
the stock price on grant date. These options were existing options issued in
prior years and whose expiration date was extended in 1997 to December 31, 1999.
The option exercise price was not changed during 1997. Under generally accepted
accounting practices, the extension of these expiration dates constitutes a new
issue of options. New issues in 1997 of 1,618,750 options were granted with
exercise prices greater than the stock price on grant date.

During 1996, all options granted, 1,902,500, were granted with exercise prices
greater than the stock price on grant date.

The fair value of each option grant was estimated on the date of grant using the
Black-Schools option pricing model with the following assumptions: risk- free
rates of 5.9% to 6.1%; volatility of 113.6%, no assumed dividend yield; and
expected lives of one to five years.

The 1995 Plan was submitted to and approved by the Company's stockholders at its
annual meeting in 1996.

                                      F-18
<PAGE>

In October 1995, the Financial Accounting Standards Board issued a new statement
titled "Accounting for Stock-Based Compensation" (SFAS 123). SFAS 123
encourages, but does not require, companies to recognize compensation expense
for grants of stock, stock options, and other equity instruments to employees
based on fair value. Fair value is generally determined under an option pricing
model using the criteria set forth in SFAS 123.

The Company applies APB Opinion 25, Accounting of Stock Issued to Employees, and
related Interpretations in accounting for its plans. Accordingly, no
compensation cost has been recognized for its fixed stock option plans. Had
compensation expense for the Company's stock based compensation plans been
determined based on the fair value at the grant dates for awards under those
plans consistent with the method of SFAS 123, the Company's net loss and loss
per common share would have been increased to the pro forma amounts indicated
below:

                                                      1996             1997
                                                      ----             ----

Net loss                       As reported      $(4,652,207)      $(17,953,621)
                               Pro forma         (4,851,124)       (19,325,148)

Net loss per common share      As reported            (0.16)             (0.43)
                               Pro forma              (0.16)             (0.47)

Options which were issued to employees during previous fiscal years at an
exercise price of $4.00 per share were revalued at $1.00 per share during 1995.
During 1996 the exercise price of these options was reduced to $0.50 per share.
During 1997, the expiration date of these options was extended from December 31,
1997 until December 31, 1999. In accordance with SFAS 123 the revaluation and/or
the extension of the expiration dates of the options constitutes a new issuance
of options. Accordingly, compensation expense of $174,020 was reflected in the
pro forma amounts for 1995 for those options revalued in 1995. No expense was
reflected in the 1996 pro forma amounts because the value of the options had
declined. In 1997, $744,000 was charged to compensation expense and is reflected
in the net loss as reported.

NOTE 10 - COMMITMENTS AND CONTINGENT LIABILITIES: 
------------------------------------------------- 

IRS Excise Tax Claim 
-------------------- 

In May 1992, AIRI was notified by the Internal Revenue Service ("IRS") that the
IRS was considering an assessment of excise taxes, penalties and interest of
approximately $3,500,000 related to the sale of fuel products during 1989. The
IRS claims that AIRI failed to comply with an administrative procedure that
required sellers, and buyers in tax-free transactions, to obtain certification
from the IRS. The Company believes that AIRI complied with the substance of the
existing requirements and such sales were either tax-free or such excise taxes
were paid by the end-users of such products.

AIRI has offered to negotiate a settlement of this matter with IRS Appeals since
early 1993. Such negotiations included face-to-face meetings, numerous phone
calls and written transmittals and several offers of settlement by both the
Company and the IRS. During these negotiations, the IRS Appeals officers offered
to waive all of the penalties and 75% of the amount of the proposed tax
liability. However, AIRI rejected this offer and requested the IRS' National
Office provide technical advice to its Appeals officers. After numerous
conferences and discussions with the National Office in 1995, the National
Office issued an adverse Technical Advice Memorandum ("TAM") to the effect that
AIRI should be liable for the tax on the sale of diesel fuel for the first three
quarters of 1989. However, subsequent to the issuance of the TAM, the IRS
Appeals officer indicated to AIRI that the IRS still wanted to negotiate a
settlement.

In November 1997, the Company reached an agreement with the IRS (the "IRS
Agreement") to settle this matter by paying an aggregate of $646,633 in tax,
plus interest accrued for the applicable period involved. The IRS has agreed to
a payment plan that calls for payment of the tax and interest over a period of
approximately one year. In the IRS Agreement, the IRS waived all penalties and
75% of the amount of the originally proposed tax liability.

   
The Company accrues an estimated loss from a loss contingency when a liability
has been incurred and the amount of such loss can be reasonably estimated. Such
accruals are based on developments to date and the Company's estimate of the
liability. Based on the status of ongoing discussions with the IRS during 1996
and 1997, the Company determined that it needed to increase the allowance for
this contingency from $250,000 (recorded in 1995) to $1.1 million and $1.4
million as of the years ended 1996 and 1997, respectively, which allowance is
recorded in the accrued Liability account on its Balance Sheet.
    


                                      F-19
<PAGE>

Environmental lawsuit 
--------------------- 

   
On January 25, 1994, a lawsuit captioned Paul R. Thibodeaux, et al. (the
"Plaintiffs") v. Gold Line Refinery Ltd. (a limited partnership), Earl Thomas,
individually and d/b/a Gold Line Refinery Ltd., American International Refinery,
Inc., Joseph Chamberlain individually (collectively, the "Defendants") (Docket
No. 94-396), was filed in the 14th Judicial District Court for the Parish of
Calcasieu, State of Louisiana. Subsequently, several parties were joined as
plaintiffs or defendants in the lawsuit. The lawsuit alleged, among other
things, that the defendants, including AIRI, caused or permitted the discharge
of hazardous and toxic substances from the Lake Charles Refinery into the
Calcasieu River. The plaintiffs sought an unspecified amount of damages,
including special and exemplary damages. In October 1997 the Plaintiffs and
Defendants agreed upon a cash settlement, of which the Company's share of
$45,000 was accrued in Accounts Payable and placed into escrow. The plaintiffs
attorneys are preparing the necessary release forms in order to disburse the
funds, which release is expected to be completed during the first quarter of
1998.
    

Employment agreements 
--------------------- 

The Company has an employment agreement with its chief executive officer under
which the officer receives a base salary of $300,000 annually.

Gold Line Defaults 
------------------ 

During the third and fourth quarters of 1996, Gold Line defaulted on their
obligations to pay lease fees, insurance premiums, property taxes and other
items to AIRI under the terms of the Lease Agreement totaling an aggregate of
$567,000. In addition, Gold Line paid no lease fees to AIRI during the first
quarter of 1997. On February 18, 1997, AIRI filed suit against Gold Line for
termination of the Lease Agreement and damages including unpaid processing fees,
real-estate taxes, insurance premium and other items which may be due under the
terms of the Lease Agreement. Notice to vacate was also sent to Gold Line, and
after the demand to vacate was not met, a pleading to evict Gold Line was filed
as an incident to the original suit. After a hearing on March 20, 1997, the
court granted the eviction and Gold Line vacated the Refinery premises. The
Company filed suit for damages and received a judgment in its favor of $1.5
million. However, since Gold Line has filed for protection under Chapter 11 of
the Bankruptcy Code, and there are certain secured creditors who have made
significant claims against Gold Line, the total of which claims may exceed the
total value of Gold Line's assets, the collectibility of this judgment by the
Company is uncertain. The Company has provided an allowance during 1996 of
$682,000, which fully reserves all amounts due AIRI from Gold Line as of
December 31, 1997.

Lease commitments 
----------------- 

The Company leases office space under various operating leases which all expire
in 1998. Future minimum payments under these operating leases are $112,032 as of
December 31, 1997.

Minimum lease payments have not been reduced by minimum sublease rentals due in
the future under noncancelable subleases. The composition of total rental
expense for all operating leases was as follows:

                                 1997             1996              1995
                                 ----             ----              ----

Minimum rentals                $158,313          $307,912         $297,502
Less - sublease rentals         (21,740)         (130,437)        (114,213)
                               --------         ---------       ----------

Total                          $136,573          $177,475         $183,289
                               ========         =========       ==========


Other Contingencies 
------------------- 

In addition to certain matters described above, the Company and its subsidiaries
are party to various legal proceedings, including environmental matters.
Although the ultimate disposition of these proceedings is not presently
determinable, in the opinion of the Company, any liability that might ensue
would not be material in relation to the consolidated financial position or
results of operations of the Company.

                                      F-20
<PAGE>


Transfer of Funds - U.S. and Foreign
------------------------------------

The Company currently operates in the Republic of Kazakstan and there are no
restrictions on the transfer of funds into and out of the country between the
Company's U.S. and foreign branch of its subsidiary, AIPK.

Neste Trifinery V. American International Refinery, Inc. Etc. Cause No.
98-11453; in the 269th Judicial District; in and For Harris County, Texas

Plaintiff, Neste Trifinery, has filed suit in a Harris County District Court
against the Company and its wholly-owned subsidiary, American International
Refinery, Inc. ("AIRI"). Neste Trifinery has asserted claims for recovery of
compensatory and punitive damages based on the following theories of recovery;
(1) breach of contract, (2) disclosure of confidential information; and (3)
tortious interference with existing contractual relations. Generally, Neste
Trifinery has alleged that in connection with the due diligence conducted by the
Company and AIRI of the business of Neste Trifinery, the Company and AIRI had
access to confidential or trade secret information and that the Company and AIRI
have exploited that information, in breach of an executed Confidentiality
Agreement, to the detriment of Neste Trifinery. Neste Trifinery seeks the
recovery of $20,000,000 in compensatory damages and an undisclosed sum in
connection with its claim for the recovery of punitive damages.

   
In addition to seeking the recovery of compensatory and punitive damages, Neste
Trifinery sought injunctive relief. Specifically, Neste Trifinery sought to
enjoin the Company and AIRI from: (1) offering employment positions to the key
employees of Neste Trifinery; (2) contacting the suppliers, joint venture
partners and customers of Neste Trifinery in the pursuit of business
opportunities; (3) interfering with the contractual relationship existing
between Neste Trifinery and St. Marks Refinery, Inc.; and (4) disclosing or
using any confidential information obtained during the due diligence process to
the detriment of Neste Trifinery. The Company and AIRI have asserted to a
general denial to the allegations asserted by Neste Trifinery. The Company and
AIRI also moved the district court to refer the matter to arbitration, as
provided for in the Confidentiality Agreement, and to stay the pending
litigation. If the district court refers the matter to arbitration, as
requested by the Company and AIRI, and stays litigation, the dispute existing
between the Company, AIRI and Neste Trifinery in Texas will be decided by a
panel of three arbitration judges under the American Arbitration Association
rules for commercial disputes.
    

The Company and AIRI are vigorously defending the Texas matter, and the
Company's counsel does not anticipate an unfavorable outcome, although a
definitive outcome is not yet determinable.

On February 26, 1998, the Company entered into a Letter Agreement with DSE,
Inc., the parent corporation of St. Marks Refinery, Inc., whereby the Company
agreed to purchase or lease the refinery and terminals facility located at St.
Marks, Florida. Thereafter, St. Marks Refinery, Inc. elected to terminate its
storage agreement with Neste Trifinery. On March 10, 1998, Neste sued St. Marks
Refinery, Inc. in the United states District Court for the Northern District of
Florida, Case No. 4:98cv86-WS, and sought an injunction to prevent immediate
termination of its storage agreement. Following an evidentiary hearing, the
District Judge denied Neste's application for injunctive relief and adopted the
recommendations of the Magistrate, who found in part that Neste had failed to
prove a substantial likelihood of success on the merits. The District Court's
order was appealed by Neste to the United States Court of Appeals for he
Eleventh Circuit, but the Appellate Court denied Neste's motion for injunction
pending appeal. The federal court action remains pending, but Neste has agreed
to remove its product from the St. Marks facility by April 25, 1998. The Company
presently plans to deliver product to the St. Marks, Florida facility and begin
marketing operations during the last week of April, 1998

Kazakstan
---------

On May 12, 1997, the Company, through its wholly-owned subsidiary, American
International Petroleum Kazakstan ("AIPK"), entered into an agreement with Med
Shipping and Trading S.A. ("MED"), a Liberian corporation to buy from MED, in
exchange for a combination of cash and stock, a 70% working interest in a
Kazakstan concession. As part of the acquisition, the Company is required to
perform certain minimum work programs over the next five years which consists of
the acquisition and processing of 3,000 kilometers of new seismic data,
reprocessing 500 kilometers of existing seismic data, and drill 6,000 linear
meters. In addition, the Company assumed an obligation to pay the Kazakstan
Government three annual payments of $200,000 each beginning July 1998 for the
purchase of existing seismic and geological data on the Kazakstan concession.

The Company has also entered into a consulting agreement with certain MSUP joint
venture partners. The consulting agreement requires monthly payments of $12,500
through July 31, 1998 and $23,000 monthly through April 22, 2000.

                                      F-21
<PAGE>

Year 2000 Issues
----------------

The Company is evaluating the potential impact of the nearly universal practice
in the computer industry of using two digits rather than four to designate the
calendar year, leading to incorrect results when computer software performs
arithmetic operations, comparisons or date field sorting involving years later
than 1999. Management believes that in light of the limited nature of the
computer software used by the Company and the limited scope of its electronic
interaction with other entities, issues relating to modification or replacement
of existing systems will not have a material effect on the operations or
financial condition of the Company. Although the Company is not aware of any
circumstances in which the failure of a supplier or customer to deal
successfully with such issues would have a material impact, there can be no
assurance that such will be the case.


NOTE 11 - INCOME TAXES: 
----------------------- 

The Company uses the asset and liability approach for financial accounting and
reporting 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. Valuation allowances are recorded to reduce
deferred tax assets when it is more likely than not that a tax benefit will not
be realized.

The Company reported a loss from operations during 1995, 1996, and 1997 and has
a net operating loss carryforward from prior years' operations. Accordingly, no
income tax provision has been provided in the accompanying statement of
operations. The Company has available unused tax net operating loss
carryforwards of approximately $58,000,000 which expire in years 1997 through
2009. Due to a change in control, as defined in Section 382 of the Internal
Revenue Code, which occurred in 1994, the Company's utilizable tax operating
loss carryforwards to offset future income have been restricted. These
restrictions will limit the Company's future use of its loss carryforwards. The
amount of the Company's net operating loss available at the end of 1997 is
approximately $26,900,000.

The components of deferred tax assets and liabilities are as follows:   
<TABLE>
<CAPTION>
                                                                                December 31,               
                                                                   -------------------------------------
                                                                       1997                     1996       
                                                                   --------------          -------------
<S>                                                                <C>                     <C>          
Deferred taxes:
     Net operating loss carryforwards                              $   10,088,000          $   6,942,000

     Unrealized loss on marketable securities                           1,932,000                   -
     Allowance for doubtful accounts                                      720,000                721,000

     Accrued liabilities                                                   13,000                   -

     Depreciation, depletion, amortization and impairment              (1,603,000)              (984,000)
                                                                   ---------------         -------------

Net deferred tax asset                                                 11,150,000              6,679,000
                                                                   ---------------         -------------

Valuation allowance                                                 $ (11,150,000)           $(6,679,000)
                                                                   ===============         =============

</TABLE>

The valuation allowance relates to the uncertainty as to the future utilization
of net operating loss carryforwards. The increase in the valuation allowance
during 1997 primarily reflects the increase in the Company's net operating loss
carryforwards during the year.


NOTE 12 - CONCENTRATIONS OF CREDIT RISK AND FAIR VALUE OF FINANCIAL INSTRUMENTS:
-------------------------------------------------------------------------------

Financial instruments which potentially expose the Company to concentrations of
credit risk consist primarily of trade accounts receivable and notes receivable.
Trade accounts receivable and notes receivable were $293,260 and $3,871,703 at
December 31, 1997, respectively. Refinery processing fees were earned through
lease of the Company's refinery to Gold Line. Trade accounts receivable and
notes receivable from Gold Line aggregated $1,920,877 at December 31, 1997, net
of reserves for uncollectible amounts of $1,920,877. The Company's ability to
collect outstanding amounts from Gold Line and restrictions thereon were subject
to agreements between MGTF, Gold Line, NationsBank (a Gold Line creditor), and
the Company (Notes 2 and 8). The Company has filed suit as discussed previously
in Note 10 to collect certain reserved amounts from Goldline.

                                      F-22
<PAGE>

The estimated fair value of the Company's financial instruments is as follows:
<TABLE>
<CAPTION>
                                              1997                                            1996                
                                ------------------------------------             --------------------------------
                                  Carrying                   Fair                 Carrying                Fair
                                   value                     value                  value                 value 
                                -----------                ----------            ----------            -----------  
<S>                              <C>                       <C>                    <C>                   <C>
MIP Notes Receivable             $3,871,703                $3,871,703                     -                     -

MIP Marketable Securities        $  735,958                $  735,958                     -                     -

Short-term debt                  $6,075,931                $6,075,931             $6,766,592            $6,766,592
</TABLE>

For investments, fair value equals quoted market price. Fair value of fixed-rate
long-term debt and notes receivable are determined by reference to rates
currently available for debt with similar terms and remaining maturities. As of
December 31, 1997, 100% of the Company's long-term debt matures during 1998. As
a result, the Company believes the carrying value of its long-term debt,
approximates fair value. The reported amounts of financial instruments such as
cash equivalents, accounts receivable, accounts payable and accrued liabilities
approximate fair value because of their short-term maturities. The MIP notes
receivable were recorded at a discount to yield a fair market interest rate. The
Company believes the effective interest rate on the MIP notes approximates
market rates at December 31, 1997.


NOTE 13 - GEOGRAPHICAL SEGMENT INFORMATION: 
------------------------------------------- 

The Company's operations involve a single industry segment, the exploration,
development, production, refining and marketing of oil and natural gas. Its
principal oil and gas activities are concentrated in foreign countries.
Operating in foreign countries subjects the Company to inherent risks such as a
loss of revenues, property and equipment from such hazards as exploration,
nationalization, war and other political risks, risks of increases of taxes and
governmental royalties, renegotiation of contracts with government entities and
changes in laws and policies governing operations of foreign- based companies.

The Company's oil and gas business is subject to operating risks associated with
the exploration, production and refining of oil and gas, including blowouts,
pollution and acts of nature that could result in damage to oil and gas wells,
production facilities or formations. In addition, oil and gas prices have
fluctuated substantially in recent years as a result of events which were
outside of the Company's control.

The Company periodically maintains cash balance in financial institutions which
exceed the FDIC limit. Management does not believe any significant credit risk
exists with respect to these balances.










                                      F-23



<PAGE>


Financial information, summarized by geographic area, is as follows:
<TABLE>
<CAPTION>
                                                                      Geographic Segment
                                                                      ------------------
                                                                                                            Consolidated
1997                                United States     Columbia             Peru          Kazakstan               Total   
----                                -------------     --------             ----          ---------          -------------
<S>                                <C>               <C>             <C>               <C>                <C>
Sales and other
     operating revenue             $     23,298      $   292,947     $        -        $         -        $     316,245
Interest income and other
     corporate revenues                                                                                         511,719

Total revenue                                                                                             $     827,964
Costs and operating
     expense                          1,189,188          463,371     $        -        $         -            1,652,559
                                   ------------      -----------     ----------        -----------        -------------

Operating profit (loss)            $(1,165,890)      $  (170,424)    $        -        $         -        $     824,595)
                                   ============      ===========     ==========        ===========


General corporate expense                                                                                    10,465,064
Interest expense                                                                                              6,663,992
                                                                                                          -------------

Net loss                                                                                                  $ (17,953,651)
                                                                                                          =============

Identifiable assets
     at December 31, 1997          $ 21,159,627      $         -     $        -        $11,724,477        $  32,884,104
                                   ------------      -----------     ----------        -----------


Corporate assets                                                                                              8,955,756
                                                                                                          -------------
   
Total assets at
     December 31, 1997                                                                                    $  41,839,860
                                                                                                          =============
    
Depreciation, depletion
     and amortization rate
     per equivalent barrel
     of oil                        $         -       $      3.77     $        -        $         -        $        3.77
                                   ============      ===========     ==========        ===========        =============


Capital Expenditures,
     net of cost recoveries        $  5.606,031      $        -      $        -        $11,724,477        $  17,330,508
                                   ============      ===========     ==========        ===========        =============


</TABLE>

                                      F-24


<PAGE>


<TABLE>
<CAPTION>
                                                                  Geographic Segment
                                                                  ------------------
                                                                                                            Consolidated
1996                                United States     Colombia          Peru          Kazakstan                Total   
----                                -------------     --------          ----          ---------                -----  
<S>                                  <C>              <C>            <C>             <C>                    <C>          
Sales and other
     operating revenue             $  2,596,917      $ 1,508,260     $       -       $        -            $  4,105,177
Interest income and other
     corporate revenues                                                                                           5,337

Total revenue                                                                                                 4,110,514
Costs and operating
     expense                          1,616,043        1,468,665        200,000      $        -               3,284,708
                                   ------------      -----------     ----------      ----------            ------------

Operating profit (loss)            $    980,874      $    39,595     $ (200,000)     $        -                 825,806
                                   ============      ===========     ==========      ==========


General corporate expense                                                                                     2,659,795
Interest expense                                                                                              2,818,218
                                                                                                           ------------

Net loss                                                                                                   $ (4,652,207)
                                                                                                           ============

Identifiable assets
     at December 31, 1996           $12,895,332      $14,641,646     $4,860,559      $        -            $ 32,397,537
                                    ===========      ===========     ==========      ==========


Corporate assets                                                                                              2,094,894

Total assets at
     December 31, 1996                                                                                     $ 34,492,431
                                                                                                           ============


Depreciation, depletion
     and amortization rate
     per equivalent barrel
     of oil                        $          -      $      3.77     $        -      $        -            $      3.77
                                   ------------      -----------     ----------      ----------            ===========


Capital Expenditures,
     net of cost recoveries        $  1,713,188      $   719,954     $  825,923      $        -            $ 3,259,065
                                   ============      ===========     ==========      ==========            ===========
</TABLE>







                                      F-25

<PAGE>

<TABLE>
<CAPTION>

                                                                       Geographic Segment
                                                                       ------------------
                                                                                                             Consolidated
1995                               United States     Colombia             Peru          Kazakstan                Total 
----                               -------------     --------             ----          ---------                -----   
<S>                                <C>              <C>                 <C>               <C>                  <C> 
Sales and other 
     operating revenue             $  1,403,668     $  1,214,213        $  166,069        $         -          $   2,783,950
Interest income and other
     corporate revenues                                                                                               27,358
                                                                                                               -------------

Total revenue                                                                                                      2,811,308
Costs and operating
     expense                          1,922,130        1,513,401            65,141        $         -              3,500,672
                                   ------------     ------------        ----------        -----------          -------------

Operating profit (loss)            $  (518,462)     $   (299,188)       $  100,928        $         -          $    (689,364)
                                   ============     ============        ==========        ===========          =============


General corporate expense                                                                                          2,611,650
Interest expense                                                                                                   1,037,308
                                                                                                               -------------

Net loss                                                                                                       $  (4,338,322)
                                                                                                               =============


Identifiable assets
     at December 31, 1995          $ 13,565,280     $ 14,136,257        $4,247,975        $         -          $  31,949,512
                                   ============     ============        ==========        ===========


Corporate assets                                                                                                     690,850
                                                                                                               -------------

Total assets at
     December 31, 1995                                                                                         $  32,640,362
                                                                                                               =============


Depreciation, depletion
     and amortization rate
     per equivalent barrel
     of oil                        $          -     $       3.86        $      -          $         -          $        3.86
                                   ============     ============        ==========        ===========          =============


Capital Expenditures,
     net of cost recoveries        $    400,368     $  1,265,989        $1,528,095        $         -          $   3,194,452
                                   ============     ============        ==========        -----------          =============

</TABLE>






                                      F-26


<PAGE>

NOTE 14 - SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
-----------------------------------------------------------------------------
AND DISCLOSURES OF CASH FLOW INFORMATION:
-----------------------------------------

The Company has issued shares of common stock and common stock warrants in the
acquisitions and conversions of the following noncash transactions:
<TABLE>
<CAPTION>
                                                                    1997                1996              1995
                                                                    ----                ----              ----
<S>                                                              <C>                 <C>                 <C>                    
Conversion of debentures                                         $9,343,022          $2,000,000$            -
Stock issued in lieu of current liabilities                         233,559             168,902          489,250
Issuance of warrants related to convertible debentures            6,264,411                -                -
Issuance of stock - unearned compensation                              -                424,063           20,312
Issuance of stock - compensation                                     40,000                -                -
Issuance of stock - services                                        247,607                -                -
Issuance of stock and warrants - for oil and gas properties       9,254,688                -                -
</TABLE>

Cash paid for interest, net of amounts capitalized, was $765,312, $808,477, and
$964,609, during 1997, 1996, and 1995, respectively. Cash paid for corporate
franchise taxes was $70,003, $114,128, and $52,050, during 1997, 1996 and 1995,
respectively.


NOTE 15 - SUBSEQUENT EVENTS: 
---------------------------- 

Regulation S Offerings 
---------------------- 

In 1998, the Company received aggregate net proceeds of $794,000 from the
exercise of warrants to acquire shares of common stock (see Note 9). The
exercise price of these warrants ranged from $.40 to $2.00 per share.

Class A Warrants
----------------

At December 31, 1997 the Company had 5,957,207 Class A Warrants that had an
expiration date of March 1, 1998. On February 13, 1998 the Company extended the
expiration date of these Warrants until April 9, 1998. Although the Company has
preliminary indication that approximately 55,000 Warrants have been exercised
through this date, the Company has not received a final accounting from its
Depositary Agent of the total number of Warrants that may have been exercised as
of the expiration date.


                      SUPPLEMENTARY OIL AND GAS INFORMATION
              FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995

The accompanying unaudited oil and gas disclosures are presented as
supplementary information in accordance with Statement No. 69 of the Financial
Accounting Standards Board.




                                      F-27


<PAGE>




                AMERICAN INTERNATIONAL PETROLEUM AND SUBSIDIARIES
                      SUPPLEMENTARY OIL AND GAS INFORMATION
                                   (UNAUDITED)

Capitalized costs relating to oil and gas activities and costs incurred in oil
and gas property acquisition, exploration and development activities for each
year are shown below:

<TABLE>
<CAPTION>

CAPITALIZED COSTS
   
                                                Colombia                                    Peru                     
                                --------------------------------------    ---------------------------------------    
                                    1997        1996          1995           1997           1996         1995        
                                    ----        ----          ----           ----           ----         ----        
<S>                              <C>         <C>           <C>            <C>            <C>           <C>                        
Unevaluated property not
   subject to amortization       $     -     $1,101,277    $ 1,101,277    $        -     $4,457,964    $3,382,041    
Proved and unproved
   properties                          -     31,924,991     31,225,040             -        200,000             -    
Accumulated deprecia-
   tion, depletion and
   amortization                        -     19,870,122     19,364,606             -        200,000             -    
                                --------------------------------------    ---------------------------------------    
Net Capitalized costs           $      -    $13,156,146    $12,961,711    $        -     $4,457,964    $3,832,041    
                                ======================================    =======================================    

Costs incurred in oil and gas property acquisition, exploration and development activities

Property acquisition
   costs - proved and
   unproved properties          $      -    $         -    $         -    $        -     $        -    $        -    
Exploration Costs                      -              -        744,549             -              -             -    
Development costs                      -        719,954        527,595             -              -             -    

Results of operations for oil and gas producing activities

Oil and gas sales              $ 292,947    $ 1,364,581    $ 1,104,095    $        -     $        -    $  166,069    
                                --------------------------------------    ---------------------------------------    
Lease operating costs             98,766        611,857        363,680             -              -        65,141    
Depreciation, depletion
   and amortization               70,216        491,732        531,989             -              -             -    
Provision for reduction
   of oil and gas properties           -              -              -             -        200,000             -    
                                --------------------------------------    ---------------------------------------    
                                 168,982      1,103,589        895,669             -        200,000        65,141    
                                --------------------------------------    ---------------------------------------    
Income (loss) before
   tax provision                 123,965        260,992        208,426             -       (200,000)      100,928    
Provision (benefit) for
   income tax                          -              -              -             -              -             -    
                                --------------------------------------    ---------------------------------------    
Results of operations          $ 123,965    $   260,992    $   208,426    $        -     $  (200,00)   $  100,928    
                                ======================================    =======================================
    
</TABLE>

<PAGE>
                               [RESTUBBED TABLE]
CAPITALIZED COSTS
<TABLE>
<CAPTION>

   
                                                  Kazakstan/Other                                    Total   
                                       -------------------------------------      -------------------------------------------
                                         1997(1)     1996(2)       1995(2)           1997           1996             1995
                                         -------     -------       -------           -----          ----             ----
<S>                                    <C>           <C>          <C>             <C>            <C>             <C> 
Unevaluated property not
   subject to amortization             $11,724,477   $ 89,389     $   65,506      $11,724,477    $ 5,648,630     $  4,998,824
Proved and unproved
   properties                                    -    371,665        351,257                -     32,506,656       31,566,297
Accumulated deprecia-
   tion, depletion and
   amortization                                  -    371,655         65,506                -     17,713,499       16,849,258
                                       -------------------------------------      -------------------------------------------
Net Capitalized costs                  $11,724,477   $ 89,389     $   65,506      $11,724,477    $17,713,499     $ 16,849,258
                                       =====================================      ===========================================

Costs incurred in oil and gas property acquisition, exploration and development activities

Property acquisition
   costs - proved and
   unproved properties                 $11,724,477   $      -     $        -      $11,724,477    $         -     $          -
Exploration Costs                                -          -              -                -              -          744,549
Development costs                                -          -              -                -        719,954          527,595

Results of operations for oil and gas producing activities

Oil and gas sales                      $         -   $      -     $        -      $   292,947    $ 1,364,581     $  1,270,164
                                       -------------------------------------      -------------------------------------------
Lease operating costs                            -          -              -           98,766        611,857          428,741
Depreciation, depletion
   and amortization                              -          -        351,257           70,216        491,732          883,246
Provision for reduction
   of oil and gas properties                     -          -        351,257                -      1,303,589        1,311,987  
                                       -------------------------------------      -------------------------------------------
                                                 -          -        351,257          168,982      1,303,589        1,311,987
                                       -------------------------------------      -------------------------------------------
Income (loss) before
   tax provision                                 -          -       (351,257)         123,945         60,992          (41,823)
Provision (benefit) for
   income tax                                    -          -              -                -              -                -
                                       -------------------------------------      -------------------------------------------
Results of operations                  $         -   $      -     $ (351,257)     $   123,945    $    60,992     $    (41,823)
                                       =====================================      ===========================================
</TABLE>



(1) Unevaluated property not subject to amortization reflected in 1997 includes
Kazakstan properties only. (2) Unevaluated property not subject to amortization
and proved and unproved properties reflected in 1996 were non-Kazakstan oil and
gas projects, which have been fully amortized and retired as of December 31,
1997.
    

                                      F-28


<PAGE>


OIL AND GAS RESERVES: 
--------------------- 

Oil and gas proved reserves cannot be measured exactly. Reserve estimates are
based on many factors related to reservoir performance which require evaluation
by the engineers interpreting the available data, as well as price and other
economic factors. The reliability of these estimates at any point in time
depends on both the quality and quantity of the technical and economic data, the
production performance of the reservoirs as well as extensive engineering
judgment. Consequently, reserve estimates are subject to revision as additional
data become available during the producing life of a reservoir. When a
commercial reservoir is discovered, proved reserves are initially determined
based on limited data from the first well or wells. Subsequent data may better
define the extent of the reservoir and additional production performance, well
tests and engineering studies will likely improve the reliability of the reserve
estimate. The evolution of technology may also result in the application of
improved recovery techniques such as supplemental or enhanced recovery projects,
or both, which have the potential to increase reserves beyond those envisioned
during the early years of a reservoir's producing life.

The following table represents the Company's net interest in estimated
quantities of proved developed and undeveloped reserves of crude oil,
condensate, natural gas liquids and natural gas and changes in such quantities
at December 31, 1997, 1996 and 1997. Net proved reserves are the estimated
quantities of crude oil and natural gas which geological and engineering data
demonstrate with reasonable certainty to be recoverable in future years from
known reservoirs under existing economic and operating conditions. Proved
developed reserves are proved reserve volumes that can be expected to be
recovered through existing wells with existing equipment and operating methods.
Proved undeveloped reserves are proved reserve volumes that are expected to be
recovered from new wells on undrilled acreage or from existing wells where a
significant expenditure is required for recompletion.
<TABLE>
<CAPTION>

                                      United States             Colombia                        Total  
                                     --------------     ------------------------      -----------------------          
                                       Oil     Gas          Oil           Gas            Oil            Gas
                                      BBLS     MCF         BBLS           MCF            BBLS           MCF
                                      ----     ---         ----           ---            ----           ---
<S>                                  <C>      <C>       <C>           <C>            <C>            <C>             
January 1, 1995 estimates              --      --       1,166,258           --        1,166,258           --
       Extensions, discoveries
       and other additions             --      --         302,836      3,061,200        302,836      3,061,200
       Production                      --      --        (137,821)          --         (137,821)          --   
                                                       ----------     ----------     ----------     ----------
December 31, 1995                      --      --       4,106,480     11,381,400      4,106,480     11,381,400
       Revisions of
       previous estimates              --      --          34,372      3,298,000         34,372      3,298,000
       Extensions, discoveries
       and other additions             --      --            --             --             --             --
       Production                      --      --        (130,433)          --         (130,433)          --   
                                                       ----------     ----------     ----------     ----------
December 31, 1996                      --      --       4,010,419     14,679,400      4,010,419     14,679,400
       Revisions of
       previous estimates              --      --            --             --             --             --
       Extensions, discoveries
       and other additions             --      --            --             --             --             --
       Sales of reserves               --      --      (3,892,146)   (14,679,400)    (3,892,146)   (14,679,400)
       Production                      --      --        (118,273)          --         (118,273)          --
                                     ------- ------    ----------     ----------     ----------     ----------
December 31, 1997                      --      --            --             --             --             --   
                                     ======= ======    ----------     ----------     ----------     ----------

                                      United States             Colombia                        Total  
                                     --------------     ------------------------      -----------------------          
                                       Oil     Gas          Oil           Gas            Oil            Gas
                                      BBLS     MCF         BBLS           MCF            BBLS           MCF
                                      ----     ---         ----           ---            ----           ---
Net proved developed reserves
January 1, 1995                        --      --         899,971      4,160,200        899,971      4,160,200
December 31, 1995                      --      --       1,012,896      5,100,000      1,012,896      5,100,000
December 31, 1996                      --      --         948,721      6,321,100        948,721      6,321,000
December 31, 1997                      --      --            --             --             --             --
</TABLE>

Changes to reserves in 1997 reflect the sale of the Colombia subsidiary as of
February 25, 1997.

Revisions to reserves in 1996 reflect an increase in gas reserves due to the
Company's gas field development program and anticipated recompletion of Puli No.
3.

Revisions to crude oil reserves in 1995 reflect the increased working interest
participation of the Company in the proved undeveloped reserves due to
nonparticipation of the other joint venture partners.

                                      F-29
<PAGE>

STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOW:

The standardized measure of discounted future net cash flows relating to the
Company's proved oil and gas reserves is calculated and presented in accordance
with Statement of Financial Accounting Standards No. 69. Accordingly, future
cash inflows were determined by applying year-end oil and gas prices to the
Company's estimated share of the future production from proved oil and gas
reserves. Future production and development costs were computed by applying
year-end costs to future years. Future income taxes were derived by applying
year-end statutory tax rates to the estimated net future cash flows. A
prescribed 10% discount factor was applied to the future net cash flows.

In the Company's opinion, this standardized measure is not a representative
measure of fair market value, and the standardized measure presented for the
Company's proved oil and gas reserves is not representative of the reserve
value. The standardized measure is intended only to assist financial statement
users in making comparisons between companies.
<TABLE>
<CAPTION>
                                                                  Colombia                     
                                                 1997               1996            1995
                                                 ----               ----            ----
<S>                                          <C>               <C>              <C>        
Future cash inflows                          $      -          $ 61,173,696      $46,433,879
Future development costs                            -           (12,170,000)     (10,780,000)
Future production costs                             -            (8,012,891)      (9,409,442)
Future income tax expenses                          -                     -                -
                                              ----------       ------------     ------------
Future net cash flows                               -            40,990,805       26,244,437
Annual discount 10% rate                            -           (19,088,789)     (13,885,290)
                                              ----------       ------------     ------------
Standardized measure discounted future
     net cash flows                          $      -          $ 21,902,016     $ 12,359,147
                                              ==========       ============     ============
</TABLE>

As previously discussed, the Colombia subsidiary was sold on February 25, 1997.

Future cash flows in 1996 increased as a result of the increased selling price
of oil in the world market in 1996 and also as a result of the upward revision
in estimated future recoverable equivalent barrels of oil by approximately
585,000 BOE.

Estimated future income taxes were eliminated in 1995 and 1996 because estimated
future tax deductions related to oil and gas properties exceeded estimated
future net revenues based on oil and gas prices and related costs at December
31, 1995 and 1996.

CHANGES IN STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS: 

The aggregate change in the standardized measure of discounted future net cash
flows was a decrease of $21,902,016 in 1997 and an increase of $9,542,869 and
$2,288,243 in 1996 and 1995, respectively. The principal sources of change were
as follows:
<TABLE>
<CAPTION>
                                                                           For the years ended December 31,         
                                                               -----------------------------------------------------
                                                                    1997                  1996                 1995
                                                                    ----                  ----                 ----

<S>                                                         <C>                     <C>                    <C>        
Beginning of year                                           $ 21,902,016            $12,359,147            $10,070,904
Sales and transfer of oil and gas produced,
     net of production costs                                    (161,813)              (752,724)              (740,495)
Net changes in prices and production costs                        -                   6,764,808                135,987
Extensions, discoveries, additions and
     improved recovery, less related costs                        -                      -                     660,594
Net change due to sales of minerals in place                 (21,740,203)                -                        -
Previously estimated development costs
     incurred during the year                                     -                     719,954                527,595
Changes in estimated future
     development costs                                            -                    (973,650)            (2,032,144)
Revisions of previous reserve
   
     quantity estimates                                           -                   1,460,849              3,783,148
Changes in timing and other                                       -                   1,087,717             (1,053,532)
Accretion of discount                                             -                   1,235,915               1007,090
                                                            ------------            -----------            -----------
End of year                                                 $     -                 $21,902,016            $12,359,147
                                                            ============            ===========            ===========
    

</TABLE>

                                      F-30


<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 amendment to the report to be
signed on its behalf by the undersigned, thereunto duly authorized.

                                    American International Petroleum Corporation

Dated:  February 9, 1999
                                    By:   /s/ Denis J. Fitzpatrick
                                         ---------------------------------------
                                              Denis J. Fitzpatrick
                                              Chief Financial Officer

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


By:          /s/ George N. Faris                  Date:      February 9, 1999
             --------------------------
             George N. Faris, Chairman
             of the Board of Directors
             and Chief Executive Officer

By:          /s/ Denis J. Fitzpatrick             Date:      February 9, 1999
             --------------------------
             Denis J. Fitzpatrick
             Vice President, Secretary,
             Principal Financial and
             Accounting Officer

By:          /s/ Donald G. Rynne                  Date:      February 9, 1999
             --------------------------
             Donald G. Rynne, Director

By:          /s/ Daniel Y. Kim                    Date:      February 9, 1999
             --------------------------
             Daniel Y. Kim, Director

By:          /s/ William R. Smart                 Date:      February 9, 1999
             --------------------------
             William R. Smart, Director

By:          /s/ Richard W. Murphy                Date:      February 9, 1999
             --------------------------
             Richard W. Murphy, Director



<PAGE>


                           Exhibit Index

Exhibit
Number              Description
------              -----------

4.14                1998 Stock Option Plan of the Registrant*

4.15                1998 Stock Award Plan of the Registrant*

21.1                Subsidiaries of the Registrant*

27.1                Financial Data Schedule*

* Previously filed.