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

   
                                   FORM 10-K/A
    

    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                                   ACT OF 1934
                   For the fiscal year ended December 31, 1996

                         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 1, 1997 was approximately $13,749,000 (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 1, 1997 was 36,726,539.


<PAGE>



                                     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 plans to implement crude oil refining and asphalt
terminalling and processing at its Lake Charles, Louisiana refinery in 1997 and
the production of asphalt, vacuum gas oil and other products in late 1997 or
1998. The Company is also in the process of negotiating participation rights in
oil and gas projects in South America and Kazakstan and is seeking other oil and
gas projects in the United States, Central and South America, Indonesia and in
Kazakstan.

     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 Lease" below. However, the Lease Agreement has
recently been terminated, and the Company is having discussions with various
companies to utilize the Company's personnel to operate the Crude Unit for
processing under similar or more attractive margins than those under the Lease
Agreement. See "Domestic Operations - Crude Unit" below. The term the "Company"
or "AIPC" includes AIPC and AIRI unless the context otherwise requires.

     On February 25, 1997, the Company sold all of the issued and outstanding
shares of common stock of its wholly-owned oil exploration and production
subsidiaries, American International Petroleum Corporation of Colombia and Pan
American International Petroleum Corporation, in an arms length transaction (the
"MIP Transaction") to Mercantile International Petroleum Inc. ("MIP"). See
"International Exploration and Production - Recent Developments - Sale of South
American Subsidiaries" below.

     Prior to the MIP Transaction, 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 Field, 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

     General

     In July 1988, AIRI acquired the Refinery 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 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.


                                        2

<PAGE>



     Total petroleum storage capacity is 645,000 barrels and is currently being
expanded to approximately 725,000 barrels. Storage tanks on the Refinery's land
include 220,000 barrels of crude storage, 345,000 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.

     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 has plans to
utilize the VDU beginning in 1997, primarily to process asphalt and vacuum gas
oil. See "Vacuum Distillation Unit Asphalt Project" below.

     Vacuum Distillation Unit Asphalt Project

     During 1996, the Company performed an analysis to determine the viability
of operating the VDU to produce asphalt and vacuum gas oil in addition to, but
separate from, any lease and/or other operation of the Crude Unit. Preliminary
studies utilizing actual pricing scenarios from 1994 and 1995 indicated that
such a project could provide the Company with significant amounts of revenues
and profits if appropriate feedstock and end-product contracts, and adequate
financing, could be secured.

     Because of delays incurred in securing timely financing, the Company
elected to divide the VDU asphalt project into two phases. Phase I provides the
minimum number of asphalt storage and shipping tanks, and the necessary
processing equipment for the Company to receive, modify and ship asphalt blend
stocks on behalf of its customers, on a terminal thru-put basis for a fee.

     Phase I construction of the asphalt terminal and polymer processing
facility was temporarily interrupted but has now resumed. All eight planned
asphalt storage tanks have been erected, and the Company is now in the process
of installing the interconnecting piping network. The hot oil heater and the
polymer processing mill have been delivered and are in place to be plumbed into
the system. The Company expects to test the completed system by June 1997.

     Phase II is intended to add some processing equipment modifications and
additional storage tanks to the VDU which will greatly increase the variety of
feedstocks the Company could process in the stand-alone mode of operation. In
addition, these modifications would also increase the overall throughput
capacity of the VDU system by more than 25%.

     Operating the VDU upon completion of Phase II will allow the Company to
provide asphalt, vacuum gas oil and other products. Phase II construction is
expected to take an additional six to eight months and cost approximately $2.0
million to complete.

     With the completion of Phases I and II, the Company will have a basic
foundation upon which to build its planned asphalt business. The Company intends
to continue to expand its asphalt manufacturing and marketing beyond the initial
program for local truck rack paving asphalt producers, into both conventional
and modified roofing asphalts and specialty industrial grade asphalt products. A
multitude of options exist for the Company to utilize combined or segregated
crude/vacuum unit operations to select crude oils and vacuum feedstock that can
maximize the market potential for particular asphalt products when demand
dictates.

     The Refinery's strategic location on the Intercoastal Waterway system
combined with the close proximity to rail and interstate highway transportation
provides access to markets throughout the central United States and Gulf Coast.
Future expansion and growth of the Refinery's business will be dependent on the
Company's ability to finance feedstock and the construction of additional
processing and manufacturing equipment. The Company plans to emphasize the
manufacture and sale of specialty polymermodified asphalt products to take
advantage of that niche market while aggressively developing a domestic
wholesale asphalt market for delivery by barge and railcar throughout the United
States.

     There can be no assurance that the VDU construction will be completed as
scheduled, that the Company will obtain sufficient financing or that the planned
operations will be profitable.

     Crude Unit

     The Company is currently evaluating several fee processing options for
operating the Crude Unit recently vacated by Gold Line. The Company intends to
staff and operate the Refinery with AIRI employees, and all operations are to be
under the direct control of AIRI management. In addition, the planned operation
of the VDU, while still fully capable of functioning on a stand-alone basis if
the Company so chooses, could be more effectively integrated with other refinery
utilities and support systems, thereby resulting in lower overall operating
costs.


                                        3

<PAGE>



     In the fee processing (tolling) configuration, the Company would process
various crude oils, condensate or reduced crudes into fungible products for
others for a predetermined fee. These fees would be based on the amount and
degree of services provided by the Company. Whenever possible, the processing
arrangement would be structured to maximize the capacity of the refinery
equipment.

     This format has a significant advantage over the Lease Agreement (See
"Refinery Lease" below) structure in that it would allow AIRI to retain control
over the Refinery and would provide financial security in the form of a letter
of credit or performance bond to guarantee payment when due. The Company intends
to charge minimum throughput fees whether the processing client provides
sufficient feedstock or not, as long as the refinery is mechanically capable of
processing that minimum quantity of feedstock. This requirement provides for a
certain amount of guaranteed compensation to the Company for granting access to
utilization of the refinery assets.

     There can be no assurance that a tolling contract will be consummated, that
the Company will obtain sufficient financing, and that the planned operations
will be profitable.

     Refinery Lease

     Beginning in 1990, Gold Line leased the Crude Unit from the Company and was
responsible for substantially all costs associated with operating the Crude
Unit.

     In 1994, the Lease Agreement expired. However, by mutual consent, Gold Line
continued to operate the Refinery on a holdover basis pursuant to the terms of
the Lease Agreement until March 22, 1995, when Gold Line obtained a line of
credit with NationsBank to finance its obligations at the Refinery, and the
Company entered into an amended Lease Agreement with Gold Line, extending the
lease term through March 31, 1998. The rental fees, payable monthly, were $.40
for each barrel of feedstock processed through the Refinery by Gold Line through
December 31, 1995, and increased to $.50 per barrel from January 1, 1996 through
the end of the lease. In addition, Gold Line had fallen far behind on the lease
obligations and, on March 22, 1995, the Company restructured all past due
amounts owed to AIRI by Gold Line and accepted a promissory note in the
principal amount of $1,801,464 (the "Note"), which is subject to a Subordination
and Standby Agreement between the Company, Gold Line and NationsBank (the
"Subordination Agreement"). Gold Line agreed to amortize the Note by making
quarterly payments to AIRI during the term of the Lease Agreement of
approximately $144,000, plus accrued interest at a rate of prime plus 1% and
certain additional payments. However, pursuant to the Subordination Agreement,
including certain profitability parameters, Gold Line was not permitted to make
any payments of principal and interest on the Note to AIRI, nor was AIRI
entitled to pursue payments thereof.

     During 1995, the NationsBank financing was not adequate to secure
sufficient levels of feedstock to keep the Refinery operating at full capacity.
As a result, the lease fees the Company received during 1995 of $1,185,000 were
substantially lower than expected. In addition, these problems put Gold Line in
a difficult position in obtaining new fuel supply contracts with the United
States Defense Fuel Supply Center ("DFSC"). With the objective of assisting Gold
Line in securing the necessary financing to ensure renewal of its supply
contracts, in February 1996, the Company agreed to reduce the amount of the Note
from $1,801,464 to $900,732. All other terms of the Note remained unchanged. In
March 1996, Gold Line was successful in obtaining the necessary financing to
secure a $45 million fuel supply contract with the DFSC.

     During the third and fourth quarters of 1996, Gold Line again began to fall
behind in its 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. In July and September 1996, and again 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 on the February 3, 1997 notice
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 to evict 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 addition, the Company
is suing Gold Line for recovery of unpaid amounts due and other damages. See
"Item 3 - Legal Proceedings".


                                        4

<PAGE>




     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. AIRI may not, during the term of the Loan Agreement, make
a dividend distribution to the Company or repay amounts advanced to it by the
Company, and AIRI is limited in the amount of additional indebtedness it can
incur.

     In the Loan Agreement, the Company granted MGTF warrants to purchase
516,667 shares (as adjusted) of the Company's 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 addition, MGTF's parent company, MG Corp., is entitled to one
seat on the Company's Board of Directors without the consent of the Company and
a second seat upon the consent of the Company's Board, which consent is not to
be unreasonably withheld. One of such Directors is also eligible to be appointed
to the Executive Committee, also upon consent of the Company's Board, which
consent is not to be unreasonably withheld. MGTF has not nominated any directors
to the Board.

     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. The expiration date of June 30, 1997 remained unchanged.

     In March 1995, the parties further amended the Loan Agreement whereby the
due date was extended to March 31, 1998, and MGTF agreed that only fifty percent
of the monthly lease fee proceeds from a lessee would be applied to amortize the
MGTF loan, where previously 100% of same were applied. To the extent that the
portion of such lease rental payments is not sufficient to meet accrued interest
due on the loan, the Company must advance funds to AIRI to satisfy such
obligation. The related interest rate was also reduced to the prime rate plus
1%.

     As part of certain negotiations related to the MIP Transaction, the Company
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 addition, the Company
pledged 1,000,000 shares of MIP common stock (partial consideration the Company
received in the MIP Transaction) as additional collateral for the Loan
Agreement. The Company expects to pay the balance due on the Loan Agreement on
or before the revised due date by margining or selling some of its MIP shares,
or with other conventional financing.

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

     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

                                        5

<PAGE>



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") with a
                  trading price of approximately $2.00 on the date the parties
                  agreed in principle to the sale.
          (d)     A two-year $3 million 5% exchangeable subordinated debenture
                  of AIPCC (the "Exchangable Debenture"), exchangable 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.

     As a result of the MIP Transaction, the Company now owns approximately
11.3% of MIP's outstanding share capital on a fully-diluted basis (47,720,867
shares). MIP is traded in U.S. dollars on the Toronto Stock Exchange ("TSE")
under the symbol MPT.U. As of April 1, 1997, the MIP Shares were trading on the
TSE at $1.70 per share.

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

     Kazakstan Agreement

     On January 27, 1997, the Company entered into an option agreement, which
was amended on March 7, 1997 (the "Option") with MED Shipping and Trading S.A.
("MED"), a Liberian corporation with offices in Frankfurt, Germany, whereby MED
granted the Company, until March 31, 1997, the right to obtain a 40% working
interest in a certain petroleum concession in the Ustert Basin of Kazakstan (the
"License"). The License is owned 90% by MED and 10% by another entity. As
consideration for the Option, the Company paid MED a $100,000 non-refundable
cash deposit and also issued to MED 300,000 shares of the Company's common
stock, pursuant to Regulation S. Although the term of the Option has expired,
the Company continues its due diligence and negotiations with MED regarding its
possible participation in the License.

          Political Risks. The Company's future foreign operations, if any,
could be adversely affected by the occurrence of political instability and civil
unrest. Political instability could also change the operating environment for
the Company in the countries in which the Company may be involved through the
imposition of restrictions on foreign ownership, repatriation of funds, adverse
environmental laws and regulations, adverse labor laws and the like.

   
     Currency and Exchange Risks in Kazakstan. The Company does not engage in
hedging transactions to reduce the risks of foreign currency exchange rate
fluctuations and has not experienced signfificant gains or losses related to
such events within Kazakstan, or elsewhere. The Company anticipates little, if
any, currency and exchange risk 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 Kazakstan. Subsequently, the Company will
be exposed to the currency and exchange risks which typically present themselves
in CIS countries.
    

     Colombia, South America

     In 1987, AIPCC acquired the rights to 45% of the Puli Association Contract
Area in the Middle Magdalena Region from the previous operator. In December
1991, AIPCC purchased an additional 35% interest, bringing its total working
interest to 80%. Petroleros Del Norte, a Colombian company, owns the remaining
20% of the working interest. AIPCC is the operator of its Puli Association
Contract, which is subject to a 20% royalty payable to the Colombian government
national oil company ("Ecopetrol") and to certain Colombian taxes.

     Under the terms of the Association Contract, twenty-one productive wells
had been drilled and completed as of December 31, 1996. These wells produced an
average of 884 gross barrels of oil per day during 1996. All of the producing
wells are located

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<PAGE>



in the Toqui-Toqui Field of the Puli Association Contract Area.

     In December 1991, AIPCC signed an Association Contract with Ecopetrol to
explore approximately 190,000 acres in the Lagunillas area of the Middle
Magdalena Valley. In October 1994, AIPCC farmed-out a 50% working interest in
Lagunillas to a non-affiliated company. In September 1995, AIPCC entered into a
farmout agreement with a separate non-affiliated oil and gas company (the
"Farmee"), whereby AIPCC will transfer all of its remaining interest and
obligations at Lagunillas when the Farmee places a performance guarantee and
Ecopetrol processes the transfer of interest in the contract.

       As discussed above, on February 25, 1997, the Company sold all of the
issued and outstanding shares of AIPCC's common stock and has no remaining
assets or obligations in Colombia.

     Peru, South America

     In October 1993, PAIPC entered into a joint venture agreement with Rio
Bravo S.A., a Peruvian corporation ("Rio Bravo"), to participate in the
exploration and development of a 27,000 acre block in the Talara Basin under
which PAIPC received a 65% interest in production from exploration and
development after recovery of 150% of all drilling costs invested by PAIPC on
behalf of Rio Bravo. The agreement also provides PAIPC with an option to
participate in the rehabilitation and further development of a producing oil
field on the block on a 50/50 basis.

   
     In late 1994 and early 1995, PAIPC drilled one exploratory well and two new
step-out development wells. However, full evaluation of the potential of those
oil reservoirs was delayed, primarily due to a dispute with Rio Bravo. In spite
of these problems, the minimum work program required under the license contract
in Peru was completed and certified as complete by the government. However, Rio
Bravo continuously refused to cooperate in the development program in the block
and to honor PAIPC's right to oil production from the Block. Consequently, PAIPC
has not received its share of revenues since Rio Bravo locked out PAIPC's
employees in October 1995. With the sale of its Peruvian properties to MIP, the
Company relinquished all its rights with respect to Peru (including its rights
to its share of revenues that it had not received from Rio Bravo) and therefore
has no remaining assets or obligations there.
    

Indonesia

     In December 1995, the Company entered into a Farmout Agreement with P.T.
Pelangi Niaga Mitra Internasional, an Indonesian company, whereby the Company
was to earn a 49% working interest in a Technical Assistance Contract ("TAC")
with Pertamina for the Pamanukan Selatan area of West Java Province, Indonesia
by providing 100% of the funding for the exploration, development and operation
of the TAC.

     During the period in which the Company was waiting for government approval
of this transaction, Pertamina, the Indonesian government oil company, changed
the regulations governing joint venture and farmout agreements in Indonesia. As
a result of these changes, in the second quarter of 1996, the Company elected
not to pursue this transaction and relinquished its rights thereto.

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 has been extended to March 1,
1998, but the exercise price remains at $4.00 per share.

     Although the Company's operating cash income improved significantly during
1996, its cash flows were insufficient to fund all of its operations, including
debt service. In addition, the Company was unsuccessful in obtaining
conventional or mezzanine financing to expand its refinery operations or develop
its oil discovery in Colombia, either one of which was expected by management to
improve the Company's cash flow. Consequently, during 1996 and through April 9,
1997, the Company issued an aggregate of approximately 8.6 million shares of its
common stock and various promissory notes and convertible debentures in exchange
for cash and services rendered to the Company valued at an aggregate of
approximately $6,723,000 through various private placements and agreements, most
of which were issued in reliance upon the safe harbor provided by Regulation S
as promulgated by the Securities and Exchange Commission (the "SEC"). The
Company utilized most of the cash proceeds from these private placements to
repay debt and to fund certain operations.

Competition


                                        7

<PAGE>



     The geographic location of the Refinery in Lake Charles, La. gives the
Company a distinct freight advantage over other asphalt suppliers. 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.

     Due to highly volatile crude oil prices and environmental regulation, many
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 refining business.

     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 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.

<TABLE>
<CAPTION>
Sales to unaffiliated customers:                          1996               1995                1994

<S>                                                   <C>                <C>                 <C>        
   United States                                      $2,596,917         $ 1,403,668         $ 2,094,235
   Colombia                                           $1,508,260           1,214,213           1,169,323
   Peru                                                    *                 166,069             122,068

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

Operating profit or (loss):
   United States                                         980,874           (518,462)             717,824
   Colombia                                               39,595           (299,188)         (8,309,950)
   Peru                                                (200,000)             100,928              81,044

Identifiable assets:
   United States                                      12,895,332          13,565,280          14,481,904
   Colombia                                           14,641,646          14,136,257          13,580,190
   Peru                                                4,860,559           4,247,975           2,717,167

Export sales:                                               -                  -                   -
</TABLE>


                                        8

<PAGE>



*Information not available due to dispute with partner. See Item 7.
"Management's Discussion and Analysis of Financial Condition and Results of
Operations".

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

     Refinery

     The Company's anticipated asphalt terminalling and marketing operations for
conventional and polymerized asphalt are currently applicable only to the local
truck rack paving market within an approximate 100 mile radius of the Refinery.
This market segment represents approximately 20% of the total capacity of the
VDU. All other asphalt manufacturing and marketing opportunities in wholesale
barge and rail car paving, or retail truck for roofing asphalts, industrial
grade asphalts and all conventional and polymerized asphalt products will be
developed by the Company for internal benefit and growth. Beginning in 1998, the
Company plans to expand its customer base by 15-20% per year until full
utilization of the asphalt facility is reached.

     Since the Company was unable to secure a sufficient amount of funding to
complete the timely construction of the asphalt terminal facilities within the
deadline dates specified in its agreements with Coastal Refining and Marketing
Inc. ("Coastal"), the agreements have lapsed. However, the Company continues to
have discussions with Coastal regarding the implementation of terminalling and
other operations at the Refinery, but no decision has been made to date. Coastal
has expressed an interest in reinstating the agreements upon the completion of
the Company's construction, expected in June 1997, however, there is no
assurance Coastal will proceed with these arrangements.

     Oil and Gas

     For the four months ended April 30, 1994, the Company sold all of its oil
production from its Colombian properties to Ecopetrol. 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, for 1996,
averaged a net price to the Company of approximately $8.40 per barrel of oil. 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
in 1996, provided a net price to the Company of approximately $10.75 per barrel
of oil.

     Sales of the Company's crude oil to Carbopetrol S.A. in Colombia accounted
for 24%, 39% and 18% of the Company's 1996, 1995 and 1994 revenues,
respectively. Sales to Ecopetrol accounted for approximately 9%, 10% and 47% of
the Company's 1996, 1995 and 1994 revenues, respectively. Lease fees from Gold
Line accounted for approximately 60%, 42% and 59% of the Company's 1996, 1995
and 1994 revenues, respectively. On March 20, 1997, the Company terminated the
Lease Agreement with Gold Line. However, the Company is currently having
discussions with other potential customers. The Company believes that it can
obtain another contract with better or substantially the same margins as the
Lease Agreement or operate the Refinery itself. See "Domestic Operations -
Refinery Lease" above.

     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.

                                        9

<PAGE>



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, 1997, the Company employed 57 persons on a full-time basis,
including 9 persons who are engaged in management, accounting and administrative
functions for AIPC and 48 who are employed by AIRI on a full-time basis,
including 7 persons who are engaged in management and administrative functions.
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. The lease expires in November 30, 1998 and provides for a monthly rental
of $3,607.

     The Company also owns 87 acres of land in Lake Charles, Louisiana where its
oil Refinery is located. In addition to the structure and equipment comprising
the Refinery facility (See "Item 1 - Business - Domestic Operations"), the
Refinery assets include an approximately 4,000 square foot office building and
three metal building structures serving as work shops, maintenance and storage
facilities with an aggregate square footage of approximately 3,800 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, 1996, 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, 1996.

<TABLE>
<CAPTION>
                      Gross               Gross              Net                Net
                  Developed         Undeveloped        Developed         Undeveloped
                    Acreage             Acreage          Acreage             Acreage

<S>                  <C>                 <C>               <C>                 <C>  
Colombia             19,379              13,474            6,201               4,312

Peru                      -              27,300                -               6,800
</TABLE>

     The table below indicates the Company's gross and net oil and gas wells as
of December 31, 1996. 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.

<TABLE>
<CAPTION>
                                                     Productive Wells

                      Total                      Oil                        Gas
                 Gross           Net        Gross          Net        Gross          Net

<S>                 <C>          <C>           <C>         <C>        <C>            <C>                  
Colombia            21           8.4           21          8.4            -            -

Peru                 4           2.6            4          2.6            -            -
</TABLE>


                                       10

<PAGE>




Oil and Gas Production

     The table below indicates the Company's net oil and gas production, by
country, for each of the five years in the period ended December 31, 1996, 1995,
1994, 1993 and 1992, along with the average sales prices for such production
during these periods.

<TABLE>
<CAPTION>
                                                        Production

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

<C>                                <C>                     <C>                <C>               <C>                       
1996-Colombia                      130,433                 $9.98                 -                  -
         -Peru                        *                      *                   -                  -

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

1994-Colombia                      121,643               $  8.91                  -                 -
         -Peru                      17,534                  6.94                  -                 -

1993-Colombia                      132,756                $14.12                  -                 -

1992-United States                   3,570                $20.17             225,247              $1.55
        -Colombia                   71,236                 14.91                  -                 -
</TABLE>

       Average foreign lifting costs in 1996, 1995, 1994, 1993 and 1992 were
approximately $4.69, $2.75, $4.64, $9.02 and $9.11 per equivalent barrel of oil,
respectively. The Company's average domestic lifting costs for 1992 was
approximately $10.26 per equivalent barrel of oil.

*Information not available due to dispute with partner. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations".

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.


<TABLE>
<CAPTION>
                                                    Colombian Reserves
                                                                                                     Future
                                                                                                    Revenues
                                        Net Oil                                  Future             Discounted
                                      (Barrels)          Net Gas (mmcf)         Revenues             at 10%

Proved Developed
<S>                                     <C>                <C>                <C>                  <C>        
       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
                                      =========           ========           ===========           ===========
</TABLE>
                                       11

<PAGE>



     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.

     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 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.

<TABLE>
<CAPTION>
                                                 1996                      1995                      1994
                                       Gross           Net          Gross        Net          Gross        Net
Exploratory Wells:
<S>                                     <C>           <C>          <C>          <C>            <C>        <C>
       South America
       Oil                              1.00          1.00         2.00         2.00           2.00       1.15
       Gas                                                            -            -              -          -
       Dry                                 -             -         1.00         1.00              -          -
                                        ----          ----         ----         ----           ----       ----
           TOTAL                        1.00          1.00         3.00         3.00           2.00       1.15

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

TOTAL                                   2.00          1.65         5.00         4.30           4.00       2.45
                                        ====          ====         ====         ====           ====       ====
</TABLE>

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
existing requirements and that 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 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

                                       12

<PAGE>



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, even in light of the findings of the TAM, the IRS
Appeals officer has indicated to AIRI that the IRS still wants to negotiate a
settlement. As a result, AIRI is having ongoing discussions with the IRS
regarding the situation. Depending upon the results of these discussions, the
Company will decide whether to litigate or settle this situation. Regardless of
whether the Company decides to litigate or settle, it believes it will incur
some form of liability, either in legal expenses or payments to the IRS, or some
combination of both. Consequently, it has provided an allowance of $1,100,000
for this potential incurrence of expenditures, although at this time, the
Company is unable to determine exactly what liability may arise from this
assessment.

   
     On January 25, 1994, a lawsuit captioned Paul R. Thibodeaux, et al. 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 (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.
Responsive pleadings have been filed by AIRI to this action and to the three
amendments which added plaintiffs, defendants and restructured the plaintiff's
claims (deleting some claims and adding new claims). The lawsuit alleges, 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 seek an unspecified amount of damages,
including special and exemplary damages. AIRI continues to vigorously defend
such action. In March 1996, the Company and AIRI filed an Exception of
Prescription (the "Exception") which is expected to eliminate most of the
plaintiffs claims. The Court ordered a ruling on the Exception referring the
Exception to the merits. In the fourth quarter of 1996, a new Judge was assigned
AIRI's case. AIRI expects a status conference will be held soon, wherein AIRI
will apprise the new Judge of the exception and request a rehearing on the
Exception before the new Judge. At this time, the Company is unable to determine
what, if any, liability may arise from this action.
    

     On February 26, 1997, AIRI filed suit against Gold Line for termination of
the Lease Agreement and damages including unpaid processing fees, real-estate
taxes, insurance premiums 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, the court granted the eviction.
A court date is scheduled for May 15, 1997 to present a trial on the merits with
respect to the original amount due to AIRI. AIRI seeks approximately $1.8
million, including damages as of the date Gold Line exited the lease premises,
for disposition of salt water left on the premises by Gold Line, and also
movable property which has been taken or damaged by Gold Line. Gold Line has
asserted general affirmative defenses. The Company intends to pursue
aggressively all of its legal remedies against Gold Line.

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

                  None



                                       13

<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 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.

<TABLE>
<CAPTION>
                                                Common Stock                         Class A Warrants
                                       High Bid          Low Bid                High Bid         Low Bid

<C>                                       <C>              <C>                     <C>             <C>  
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

1995   First Quarter                      $1.89            $0.84                   $0.34           $0.13
       Second Quarter                      1.00             0.63                    0.16            0.06
       Third Quarter                       1.28             0.56                    0.22            0.09
       Fourth Quarter                      1.22             0.53                    0.22            0.09
</TABLE>

     At April 1, 1997, the Company had approximately 1,632 shareholders of
record of its Common Stock. The Company estimates that an additional 10,000
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.

Recent Issuances not Previously Reported

     Between April 1, 1997 and April 9, 1997 the Company sold two-year 8%
Redeemable Convertible Debentures (the "8% Debentures") in an offering of up to
$1.5 million. The aggregate principal amount of the 8% Debentures was $750,000.
The placement agent for the 8% Debentures was Global Funding Group. The Company
received net proceeds of $690,000 from the sale of the 8% Debentures. The
offering was made pursuant to a safe harbor from registration under Regulation S
to Non-U.S. Persons only. The Company may redeem at any time all or a portion of
the principal amount of the 8% Debentures at 125% of their face value. The
holders of the 8% Debentures may convert some or all of the principal balance of
the 8% Debentures 45 days after closing of the offering at a conversion price of
75% of the average closing bid price of the Company's common stock as traded on
NASDAQ for the five trading days immediately preceding the conversion date. The
Company plans to utilize some of the proceeds from the MIP Transaction to redeem
all or a portion of the 8% Debentures.


                                       14

<PAGE>




Item 6.         SELECTED FINANCIAL INFORMATION

     The following selected financial data for each of the five years in the
period ended December 31, 1996 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,
                                             1996             1995              1994             1993                1992
Condensed consolidated statement of operations:
<S>                                  <C>              <C>              <C>              <C>                 <C>          
  Revenues                           $  4,110,514     $  2,811,308     $   3,508,514    $   3,990,156       $   3,381,453
  Net loss(1)                         (4,652,207)      (4,338,322)      (10,966,914)     (14,139,737)         (4,987,144)
  Net loss per share(2)                    (0.16)           (0.20)            (0.65)           (2.23)              (0.90)

                                                                     At December 31,
                                             1996             1995              1994             1993                1992
Condensed consolidated balance sheet:
  Working capital deficit           $ (9,823,229)    $ (3,402,543)    $     (28,462)   $  (7,507,056)      $  (6,476,996)
  Total assets                         34,492,431       32,640,362        32,229,713       34,996,925          45,391,666
  Total liabilities                    13,164,713       11,349,670        10,255,687       18,878,148          15,685,931
  Long-term debt                        6,766,592        7,302,671         7,770,171       12,034,691           8,218,122
  Stockholders' equity                 21,327,718       21,290,692        21,974,626       16,118,777          29,705,731
  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.

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

Liquidity and Capital Resources

     During the last three years, the Company has had difficulty generating
sufficient cash flow to fund its operations, capital expenditures and required
principal payments. As a result, the Company has from time to time operated with
limited liquidity or negative working capital. In order to continue operations
under such circumstances, the Company has historically relied on outside sources
of capital. However, as a result of the MIP Transaction, discussed below, the
Company's working capital position significantly improved, as exhibited by the
pro-forma balance sheet comparison presented herein.

     At December 31, 1996 the Company had an unrestricted cash balance of
$11,000 compared to $162,000 at December 31, 1995. During the year ended
December 31, 1996, approximately $551,000 was provided by operations. Net loss
for the period totalled $4,652,000 (including $4,815,000 in non-cash elements as
follows: provision for depreciation, depletion and amortization of $1,265,000,
bad debts of $790,000, a contingent excise tax liability (or for legal expenses
related thereto, or both) of $850,000 and inputed interest expenses of
$1,216,000 related to the discount of certain convertible debentures. See
"Results of Operations Interest Expense" below.) There was also a non-cash
charge in 1996 of $200,000 related to a write down of the carrying costs of oil
and gas properties in Peru. Approximately $1,115,000 was used during the period
to increase current assets other than cash, and approximately $2,352,000 was
provided by an increase in accounts payable and accrued liabilities. Cash for
operations during 1996 was provided, in part, by the issuance of Common Stock
and convertible debentures in an aggregate amount of approximately $3,810,000.

     During the years ended December 31, 1995 and December 31, 1994, the Company
generated net losses of $4,338,000 and $10,967,000 respectively. There was a
non-cash charge in 1994 of $6,904,000 for a reduction in the carrying cost of
oil and gas properties due primarily to prior-period reductions in the estimated
volume of proven oil and gas reserves. Cash flow used in operations in 1995 and
1994 totalled $274,000 and $5,110,000 respectively. Cash flow from operations
was adjusted for depreciation, depletion and amortization of $1,396,000 and
$1,501,000 in 1995 and 1994, respectively, and non-cash provisions for bad debts
in 1995 and 1994 of $711,000 and $19,000 respectively. In addition, the net loss
for 1994 included a contingent excise tax liability (or legal expenses therefor)
of $250,000 and a non-cash charge of $56,000 related to employment signing
bonuses and forgiveness of accounts receivable from an employee stock purchase.
There was also a non-cash provision of

                                       15

<PAGE>



$211,000 in 1994 for an adjustment to the exercise price of certain outstanding
warrants. Additionally, $189,000 and $277,000 in 1995 and 1994, respectively,
were invested in current assets other than cash. Accounts payable increased by
$1,985,000 in 1995 and decreased by $3,234,000 in 1994. Additional uses of funds
during the periods included investments in oil and gas properties during 1995
and 1994 of $3,194,000 and $5,557,000, respectively, net of certain recoverable
costs. Total cash used in operations and investment activity during the years
ended December 31, 1995 and 1994 was $3,481,000 and $10,341,000, respectively.

     Cash was provided primarily from outside sources, including $3,112,000 and
$14,978,000 from the issuance of common stock during 1995 and 1994,
respectively, and $60,000 in proceeds from the issuance of long term debt in
1994.

     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 continent 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") with a
                trading price of approximately $2.00 on the date the parties
                agreed in principle to the sale.

           (d)  A two-year $3 million 5% exchangeable subordinated debenture of
                AIPCC, 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 available to AIPCC on future tax filings in Colombia.


                                       16

<PAGE>


     As a result of the MIP Transaction, the Company now owns approximately
11.3% of MIP's outstanding share capital on a fully-diluted basis (47,720,867
shares). MIP is traded in U.S. dollars on the Toronto Stock Exchange (the "TSE")
under the symbol MPT.U.

     Since the MIP Shares were restricted from sale by the Company for 40 days
from the date of closing of the MIP Transaction, they were not immediately
marginable. In addition, Gold Line did not make any lease payments to the
Company in 1997. Consequently, in order to redeem certain outstanding
convertible debentures prior to their conversion by the holders thereof into

                                       17

<PAGE>


the Company's common stock, and to continue the expansion of its refinery, in
April 1997, the Company sold $750,000 of 8%, two-year Redeemable Convertible
Debentures pursuant to Regulation S (the "8% Debentures") to provide the
required cash flows the Company needs until it is able to margin or sell the MIP
Shares. It is the Company's intent to margin or sell the MIP Shares as required
and to utilize the proceeds therefrom to redeem all or a portion of the 8%
Debentures, and certain other outstanding convertible debentures of the Company
as well, prior to their conversion into shares of the Company's common stock.
However, to the extent it can, the Company intends to retain the MIP Shares
until the Company's capital requirements dictate that they be sold.

     The Company believes that it has sufficient capital, or access thereto, to
complete the expansion of its refinery in Lake Charles, Louisiana (the
"Refinery") to enable the implementation of its asphalt operations and to make
any preliminary oil and gas related expenditures. The asphalt and tolling
operations are expected to provide the Company with the future capital necessary
to fund its oil and gas operations, or place the Company in a position where it
is able to access conventional financing for such projects. The Company expects
to receive proceeds upon the final adjudication of its claim against Gold Line
although the exact amount, if any, is indeterminable at this time.

     During the next twelve months, the Company plans to expend up to
approximately $3 million for the Refinery expansion, which it expects to be
funded in part by the 8% Debentures, internally-generated cash flow from
refinery operations, and/or by the margin or sale of the MIP Shares and interest
payments received from the Exchangeable Debenture. The Company is also having
discussions with other financing entities who have expressed interest in
financing further expansion of the Refinery and future operations thereto.

     The Company's 12% Secured Debentures (the "Debentures"), which had a
principal and interest balance at December 31, 1996 of an aggregate of
$3,720,000 were paid in full during the first quarter of 1997, mostly from
proceeds received from the MIP Transaction.

     As of March 22, 1995, the Company amended certain terms of its Loan
Agreement with MG Trade Finance Corp. ("MGTF"), extending the due date for the
unpaid balance from May 31, 1995 to March 31, 1998. In addition, payments on the
loan were reduced from 100% to 50% of the monthly lease fee proceeds the Company
received from leasing the Refinery. See "Refinery Operations" below. If lease
fees are not sufficient to satisfy all accrued interest and principal when due,
the Company is obligated to satisfy any shortfall. The Company may be required
to fund future working capital requirements that arise from Refinery operations.
The Loan Agreement contains certain restrictive covenants and requirements,
however, the Company and MGTF have from time to time amended the Loan Agreement
or waived certain events of technical default. As part of the MIP Transaction,
the Company agreed to change the maturity date for payment of the unpaid balance
(currently $2,108,000) to September 30, 1997 from March 31, 1998. In addition,
the Company pledged 1,000,000 shares of its MIP common stock to further secure
the Loan Agreement. The Company expects to pay the balance due on the Loan
Agreement by the revised due date by margining or selling some of its MIP
shares, or with other conventional financing.

     During 1995, Gold Line incurred various financial and purchasing problems
which resulted in diminished throughput volumes and lower lease fees to the
Company than in 1994 and also prevented Gold Line from making its note scheduled
payments to the Company of approximately $144,000 plus interest per quarter in
September and December 1995, and throughout 1996. These problems resulted in
lower cash flow to the Company requiring it to utilize other methods to acquire
funds necessary to satisfy its monetary and contractual obligations, including
the issuance of equity, as described above. Pursuant to the Subordination
Agreement, the Company has agreed to defer the receipt of certain amounts owing
to it from Gold Line as at March 22, 1995, together with interest accruing
thereon, until such time as Gold Line is in compliance with certain covenants
under its financing with NationsBank. It is impossible to predict when, if ever,
Gold Line will be in compliance with such covenants and when, if ever, the
Company will be able to collect such obligations. Nonpayment thereof would not
result in and additional charge against earnings.

     There is no assurance of success of any financing efforts the Company may
pursue or the timing or success of it refinery/VDU projects and/or its potential
projects. In the event the Company is not able to fund its projects on its own
in a timely manner, Management believes it will be able to obtain partners for
certain projects, however, such projects could be delayed or curtailed.

Impact of Changing Prices

     The Company's revenues, its ability to repay indebtedness and the carrying
value of its oil and gas properties owned from time to time are affected 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

                                       18

<PAGE>



   
write-downs of the carrying value of those assets. For example, this occurred in
1994, when, based on estimates of proven reserve quantities by the Company's
independent reservoir engineers, the Company reduced the carrying value of its
oil and gas assets by $6,904,000 during the fourth quarter of 1994, primarily
due to net downward revisions to crude oil reserves in Colombia (See
"Supplementary Oil and Gas Information for the Years ended December 31, 1996,
1995, 1994 - Oil and Gas Reserves").
    

Results of Operations

     The following table highlights the results of operations for the years
ended December 31, 1996, 1995 and 1994.

<TABLE>
<CAPTION>
                                                                   For the Years Ended December 31,
                                                          1996                  1995                      1994
Exploration and Production Activity:

<S>                                                     <C>                   <C>                       <C>   
Colombia Properties:
    Revenue - Oil Sales (000's)                         $1,365                $1,104                    $1,083
    Lease Operating Expenses (000's)                      $612                  $364                      $564
    Production Volume - Bbls                           130,433               137,821                   121,643
    Average Price per Bbl                               $10.46                 $8.01                     $8.91
    Production Cost per Bbl                              $4.69                 $2.65                     $4.64
    DD&A per Bbl (1)                                     $3.77                 $3.86                     $5.51
Peru Properties (2)(3):
    Revenue - Oil Sales (000's)                              -                  $166                      $122
    Lease Operating Expenses (000's)                         -                   $65                       $41
    Production Volume - Bbls                                 -                17,794                    17,534
    Average Price per Bbl                                    -                 $9.29                     $6.96
    Production Cost per Bbl                                  -                 $3.66                     $2.34
    DD&A per Bbl                                             -                     -                         -

Refinery Operations:
    Refinery Lease Fees (000's)                         $2,468                $1,185                    $2,065
    Average Daily Throughput (Bbls)                     13,138                 8,116                    14,518
    Average Throughput Fee                                $.50                 $0.40                     $0.39
----------------------------
</TABLE>
(1)    DD&A excludes provisions for reduction of oil and gas properties of
       $200,000 and $6,904,000 in 1996 and 1994, respectively.

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

(3)    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 1996, 1995 and 1994.

Refinery Operations

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

     The Company leased its refinery to Gold Line Refinery Ltd. from 1990 until
March 20, 1997. 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 $.40 per barrel of
throughput, which increased to $.50 per barrel on January 1, 1996.
This rate continued until the Lease was terminated on March 20, 1997.

     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. In March of
1996, Gold Line secured an additional one-year, $45 million fuel supply contract
with the DFSC which, when combined with its then current DFSC contract increased
processing requirements to between 15,000 and 16,000 barrels of feedstock per
day. However, because of 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. The Company plans to implement terminalling
operations whereby the Company will charge a processing fee for providing its
refinery facilities as a terminal to store and process its customer's asphalt
for distribution to local

                                       19

<PAGE>



markets. The Company is also currently evaluating several fee processing options
for operating the Crude Unit, which could provide the Company with similar or
better operating income than that formerly provided by the Lease Agreement.

For the Year Ended December 31, 1995 compared to the Year Ended December 31,
1994

     Refinery lease fees declined by approximately 43% in 1995 to $1,185,000 as
compared to 1994. The decline relates primarily to financing and purchasing
problems encountered by Gold Line during 1995, as discussed above. As a result,
Gold Line experienced a 44% decline in its annual throughput in 1995 compared to
1994.

Oil and Gas Production Activity

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.

For the Year ended December 31, 1995 compared to the Year ended December 31,
1994.

     Oil production in 1995 increased to 155,615 barrels, a 12% increase over
1994. Average oil prices declined however, by 6% or $.50 per barrel, to $8.16 in
1995 as compared to $8.66 in 1994. The net effect of these occurrences resulted
in a $65,000 (5%) increase in the Company's oil revenues in 1995 compared to
1994.

     Production cost declined by $184,000 (30%) in 1995 compared to 1994,
primarily due to transportation costs incurred during the first four months of
1994, which were not incurred after that time. Effective May 1, 1994 AIPCC sold
all of its crude oil directly to an end-user at the wellhead, eliminating
transportation costs.

Other Income

     Other income decreased by approximately $78,000 (22%) during 1996 to
$278,000 compared to $356,000 in 1995. This was due primarily to a decrease in
interest income of 44% to $127,000, compared to $228,000 in 1995, due to a
decrease in funds on deposit during 1996.

     Other income increased by $118,000 (50%) during 1995 to $356,000 as
compared to 1994. A 60% increase in interest income in 1995, related to the Gold
Line note, was partially offset by a 10% decrease in 1995 compared to 1994 of
foreign exchange gains, primarily due to fluctuations in the currency exchange
rates between the United State and Colombia.

General and Administrative

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
capitalized and reimbursed G&A expenses of $137,000. During the construction of
the Company's refinery project, which commenced during 1996, approximately
$275,000 of G&A expenses were capitalized to the project. Further declines in
G&A are expected after February 25, 1997, due to the elimination of expenses
related to the operation of AIPCC and PAIPC.

For the year ended December 31, 1995 compared to the year ended December 31,
1994

     Total G&A during 1995 decreased by $564,000, or 14%, compared to 1994.
Payroll expenses declined by $255,000 (6%)

                                       20

<PAGE>



during 1995 compared to 1994. Decreases also occurred in the following
categories during 1995 versus 1994: professional fees, $73,000; travel, $69,000;
office rents, $60,000; public relations, $60,000; insurance, $33,000; and office
operating expenses, $54,000.

Interest

     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, discussed below, and to $450,000 in interest expense
related to a pending Excise Tax dispute with the IRS.

     Interest expense in 1996 reflects $1,216,000 related to the
presumed incremental yield the investor may derive from the discounted
conversion rate of such instruments issued by the Company in 1996. 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 also capitalizes certain other costs associated with the
offering and sale of debentures. Such costs are amortized as interest expense
over the life of the related debt instrument. Debenture costs amortized in 1996
increased by $183,000 to $289,000 as compared to 1995. In 1997, interest expense
is expected to decrease due to the expected issuance of fewer discounted
convertible debt instruments, the pay down of debt in January and February 1997,
and anticipated reductions in same later in 1997.

     Interest expense decreased 20% by $262,000 during the year ended December
31, 1995 as compared to 1994. Excluding a decrease in non-cash amortized bond
costs of $95,000, which are included in the interest expense category, interest
expense decreased by $167,000 during 1995 versus 1994, primarily due to reduced
debt balances.

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

     On August 13, 1996, Price Waterhouse LLP resigned as the independent
accountants of the Company. In connection with its audits for the two most
recent fiscal years and through August 13, 1996, there were no disagreements
with Price Waterhouse LLP on any matter of accounting principles or practices,
financial statement disclosure or auditing scope or procedure.

     Information required under Item 304 of Regulation S-K was previously
disclosed on a Current Report on Form 8-K dated August 19, 1996 filed by the
Company with the SEC.


                                       21

<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.

Name                        Age       Position(s)

George N. Faris             56        Chairman of the
                                      Board of Directors and
                                      Chief Executive Officer

Denis J. Fitzpatrick        52        Vice President, Secretary and
                                      Chief Financial Officer

William L. Tracy            49        Treasurer and Controller

Daniel Y. Kim               72        Director

Donald G. Rynne             74        Director

William R. Smart            76        Director


     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 has received a number of patents. Dr. Faris received a Ph.D. in
Mechanical Engineering from Purdue University in 1968.

     Mr. Denis J. Fitzpatrick 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 received a B.S. degree in Accounting from the
University of Southern California in 1974 and has held various accounting and
financial management positions in the oil and gas industry since that date. In
the past he has 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 a member of the American Management Association.

     Mr. William L. Tracy has been employed by the Company since February 1992
and was named Treasurer and Controller of the Company in 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.

     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. 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 was elected to the Company's Board of Directors in
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 also
Chairman of the Board of Directors of Dynamax Maritime & Resources Ltd., a
company engaged in the trading and shipping business, and has served in such
capacity since August 1984, and Chairman of the Board of Directors of Centurion
Maritime Ltd., a company engaged in the shipping business, and has served in
such capacity since August 1984. Mr. Rynne is involved in international maritime
trading and consulting, dealing primarily

                                       22

<PAGE>



in the Middle East in hydrocarbon products and capital equipment. Mr. Rynne
received a B.A. degree from Columbia University in 1949.

     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 is currently a director of Executone Information Systems, Inc.,
an electronics manufacturer, and has served in such capacity since September
1992. Mr. Smart was Chairman of the Board of Directors of Electronic Associates,
Inc., a manufacturer of electronic equipment, from May 1984 until May 1992. Mr.
Smart is also 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.

     The Company's directors and executive officers are elected annually to
serve until their respective successors are duly elected and qualified.

     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, 1996 through December 31, 1996, all filing requirements applicable to
its officers, directors and greater than ten percent beneficial owners were
complied with, except that each of Messrs. Fitzpatrick, Rynne, Smart and Tracy,
and Drs. Kim and Faris filed one late report on Form 4, in each case relating to
two transactions.

Item 11.   EXECUTIVE COMPENSATION

     SUMMARY COMPENSATION TABLE

     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 1996, 1995 and 1994.

<TABLE>
<CAPTION>
                                                                             Long Term Compensation
                              Annual Compensation                   ----------------------------------
Name and Principal ---------------------------------------------                          Other Annual      All Other
    Position        Year                    Salary       Bonus       Compensation           Options(#)     Compensation
------------------- ----                  --------     ---------    -------------         ------------     ------------
<S>                 <C>   <C>             <C>          <C>           <C>                  <C>               <C>        
George N. Faris     1996                  $292,000     $15,000       $ 9,600(1)           1,000,000         $422,000(2)
 Chairman of the    1995  $240,000            -        $45,000(1)    202,500(3)                -
 Board and Chief    1994                  $248,000       -           $16,250(4)                -               -
 Executive Officer

Denis J. Fitzpatrick               1996   $105,000     $ 5,000       $15,000(5)             100,000            -
 Secretary, Vice                   1995   $105,000        -          $18,494(5)(6)           20,000(3)         -
 President and Chief               1994   $ 38,000(7)     -          $  6,250(5)             20,000(8)         -
 Financial Officer

Kenneth N. Durham                  1996       -           -             -                      -               -
 President and Chief               1995   $145,000(9)     -             -                      -               -
 Operating Officer                 1994   $169,000        -             -                      -               -
</TABLE>

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

(1)  $35,503 of the amount in 1995 constituted forgiveness of interest on a note
     owed to the Company, the principle of which was repaid to the Company, and
     $9,600 was paid as a vehicle allowance for Dr. Faris pursuant to his
     contract in each of 1996 and 1995.

(2)  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.

(3)  Options issued in substitution for outstanding options. The exercise price
     was reduced to $.50 per share.


                                       23

<PAGE>



(4)  Includes split dollar life insurance premiums of $16,250 paid by the
     Company on behalf of Dr. Faris in 1994.

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

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

(7)  Mr. Fitzpatrick joined the Company on August 15, 1994 at an annual salary
     level of $105,000.

(8)  Options awarded upon hiring. These were later repriced. See footnote 3
     above.

(9)  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 "Plan"). The Plan
was approved by the Board of Directors on November 8, 1995 and by the Company's
shareholders on July 11, 1996. The Plan is administered by the Board of
Directors of the Company or a Committee designated by them. Under the Plan
employees, including officers and managerial or supervising personnel, are
eligible to receive Incentive Stock Options ("ISOs") or ISOs in tandem with
stock appreciation rights ("SARs"), and employees, directors, contractors and
consultants are eligible to receive non-qualified stock options ("NQSOs") or
NQSO's in tandem with SARs. Option may be granted under the Plan to purchase an
aggregate of 3,500,000 shares of Common Stock. If an option granted under the
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 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 Plan after November 7, 2005. The
exercise price of the options granted under the Plan cannot be less than the
fair market value of the shares of Common Stock on the date the option is
granted. ISOs granted to Shareholders owning 10% or more of the outstanding
voting power of the Company must be exercised at a price equal to 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 ISOs 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 NQSOs. The total number of options granted under
the Plan, as of April 10, 1997 was 1,902,500, 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, 1996, 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     Exercise      Expiration     for Option Term
Name                           Granted)       in Fiscal Year  Price($/sh)       Date      5%($)      10%($)
----                           ----------    ---------------  -----------   -----------  ------     -------
<S>                            <C>              <C>           <C>            <C>          <C>       <C>    
George N. Faris                1,000,000          76.9%          $.50         10/21/99    $  -      $20,000

Denis J. Fitzpatrick             100,000           7.7%          $.50         10/21/99    $  -      $ 2,000
</TABLE>



                                       24

<PAGE>




    AGGREGATE OPTION EXERCISES IN 1996 AND OPTION VALUES AT DECEMBER 31, 1996

     The table below includes the number of shares covered by both exercisable
and unvested stock options owned by certain executive officers as of December
31, 1996. Also reported are the values for "in-the-money" options which
represent the positive spread between exercise price of any such stock options
and the year-end price.

<TABLE>
<CAPTION>                                                                                Value of Unexercised
                               Shares                       Number of Unexercised     In-the-money
                             Acquired on         Value      Options at Year End        Options(1)
Name                          Exercise         Realized   Exercisable  Unexercisable   Exercisable  Unexercisable

<S>                          <C>               <C>           <C>         <C>           <C>          <C>
George N. Faris                    -              -          452,000     750,000           -              -

Denis J. Fitzpatrick               -              -           45,000      75,000           -              -
</TABLE>


(1)  The closing price of the Common Stock on the last day of the year ended
     December 31, 1996 was $.39. Therefore, all options listed were
     "Out-of-the-Money" as of that date.

     EMPLOYMENT CONTRACT

     Effective May 1, 1989, the Company entered into a 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 effective
February 1, 1996.

     Pursuant to the employment agreement, in the event of a change in control
of the Company which Dr. Faris and a majority of the Company's Board of
Directors approve, Dr. Faris was entitled, upon such change of control, to
terminate his employment and receive 2.9 times his fixed compensation as defined
in the employment agreement. However, if Dr. Faris opposed a change in control,
but the majority of the Board of Directors voted in favor of such change, then
Dr. Faris could have terminated his employment and received 2.5 times his fixed
compensation. In the event that Dr. Faris' employment was terminated prior to
the expiration of his contract for reasons other than cause or death, or if such
employment agreement was not renewed at termination, the Company was to pay
severance to Dr. Faris in an amount equal to the product of his number of years
of service, beginning with the calendar year 1981, multiplied by $50,000 in
annual installments of $250,000.

     On September 7, 1995, the Board of Directors approved an amendment to Dr.
Faris' employment agreement, which was signed by Dr. Faris and the Company on
October 13, 1995, and subsequently ratified by the Company's shareholders.
Pursuant to the Amendment, the rights of Dr. Faris described in the previous
paragraph terminated, and Dr. Faris received, in exchange, 900,000 shares of
restricted stock of the Company.

     SALARY REINSTATEMENTS

     In April 1994, officers of the Company voluntarily reduced their salaries
(the Chief Executive Officer by 20% and other officers by 15%) until, in
February 1996, the Compensation Committee recommended, and the Board of
Directors approved, a reinstatement of these officers' salaries to their
previous levels, effective February 1, 1996. The reinstatement was made to
provide the necessary incentives to management to continue their efforts under
very difficult circumstances and to ensure that the Company maintains a
competititive position in the industry regarding the contuity of the employment
of its officers. During the past three fiscal years, Management has
significantly reduced general and administrative and operating costs. See "Item
7 Management's Discussion and Analysis of Financial Condition and Results of
Operations - Results of Operations".

     COMPENSATION OF DIRECTORS

     During 1996, the Company reimbursed directors for their actual
Company-related expenses, including the costs of attending directors' meetings.
The Company accrued, for each outside director, $500 per month for serving in
such capacity; $500 per each Committee meeting attended in person if such
director served on a Standing Committee of the Board of Directors; and $500 for
each Board meeting attended in person.



                                       25

<PAGE>



     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, any of whose officers served either
on the Board of Directors of the Company or on the Compensation Committee of the
Company.

Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The following table sets forth certain information, as of April 1, 1997,
regarding (i) each person known by the Company to be the owner of more than 5%
of the outstanding Common Stock, (ii) each director, (iii) each executive
officer named in the Summary Compensation Table above, and (iv) all directors
and executive officers as a group.

<TABLE>
<CAPTION>
Name and Address                      Amount and Nature of                  Percent
of Beneficial Holder(1)               Beneficial Ownership                  of Class
-----------------------               --------------------                 ---------
<S>                                   <C>                                  <C> 
George N. Faris                          2,595,176(2)                         6.7%

Daniel Y. Kim                               88,500(3)                          *

Donald G. Rynne                            382,780(4)                         1.0%

William R. Smart                           192,944(5)                          *

Denis J. Fitzpatrick                       100,000(6)                          *

Kenneth N. Durham                            5,000                             *

All officers and directors
as a group (consisting of
6 persons)                               3,397,900(7)                        8.7%
</TABLE>

* Less than 1%

(1)  All Officers and Directors have an address care of the Company, 444 Madison
     Avenue, Suite 3203, New York, NY 0022.

(2)  Excludes 37,400 shares of Common Stock beneficially owned by Mrs. Claudette
     Faris, Dr. Faris' wife, as to which shares Dr. Faris disclaims beneficial
     ownership, and 250,000 unexercisable options. Includes 1,238,169 shares of
     Common Stock issuable upon exercise of stock options and warrants held by
     Dr. Faris.

(3)  Includes 80,500 shares of Common Stock issuable upon exercise of a like
     number of options owned by Dr. Kim. Excludes 25,000 unexercisable options.

(4)  Includes 174,260 shares of Common Stock issuable upon exercise of a like
     number of options and warrants owned by Mr. Rynne. Excludes 25,000
     unexercisable options.

(5)  Includes 136,986 shares of Common Stock issuable upon exercise of a like
     number of options and warrants owned by Mr. Smart. Excludes 25,000
     unexercisable options.

(6)  Includes 95,000 shares of Common Stock issuable upon exercise of options
     owned by Mr. Fitzpatrick. Excludes 25,000 unexercisable options.

(7)  Includes all of the shares of Common Stock issuable upon exercise of
     options and warrants described in Notes (2) through (6) above, plus 38,500
     shares of Common Stock issuable upon exercise of options owned by another
     officer of the Company. Excludes 12,500 unexercisable options owned by such
     officer.


                                       26

<PAGE>



Item 13.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

          See "Item 11 - Executive Compensation - Employment Contract".

                                     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, 1996 and 1995                              F-5
     Consolidated Statement of Operations
       Years Ended December 31, 1996, 1995 and 1994            F-6
     Consolidated Statement of Cash Flows
        Years Ended December 31, 1996, 1995 and 1994           F-7
      Consolidated Statement of Changes in
       Stockholders' Equity - Years Ended
       December 31, 1996, 1995 and 1994                        F-8
     Notes to Consolidated Financial Statements                F-11
       Supplementary Oil and Gas Information                   F-33

(2)  Financial Statement Schedules.

     None.

(3) Exhibits.

*2.1     Share Purchase Agreement dated February 25, 1997, among the Registrant,
         AIPCC, PAIPC and MIP.(12)

*3.1     Restated Articles of Incorporation of the Registrant. (8)

*3.2     By-Laws of the Registrant, as amended.

*4.1     Form of Class A Warrant. (4)

*4.2     1995 Stock Option Plan and Form of Option Agreements of the
         Registrant.(7)

*4.3     Form of 12.5% Series X Senior Convetible Subordinated Redeemable
         Debenture due January 2, 1998.(10)

*4.4     Form of Subscription Agreement used in connection with the offering of
         the Series X Debentures, referred to herein as Exhibit 4.3.(10)

*4.5     Form of Regulation S Subscription Agreement for Common Stock used in an
         offering of 1,000,000 shares dated May 28, 1997.(11)

*4.6     Form of 7% Convertible Debenture due February 1, 1999.(11)

*4.7     Form of Subscription Agreement used in connection with the offering of
         the 7% Debentures, referred to herein as Exhibit 4.6.(11)

*4.8     Form of 8% Redeemable Convertible Debenture due April 1999 and Form of
         Subscription Agreement relating thereto.

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

                                       27

<PAGE>




*10.2    Loan and Security Agreement ("Loan Agreement") dated December 4, 1990
         by and between MG Trade Finance Corp. ("MGTF") and AIRI. (2)

*10.3    Corporate Continuing Guarantee of the Registrant to MGTF, dated
         December 4, 1990. (2)

*10.4    Pledge Agreement, dated as of the 4th day of December 1990, by and
         among the Registrant, AIRI and MGTF.(2)

*10.5    Shareholder Distribution Agreement dated as of the 4th day of December
         1990, by and among the Registrant, AIRI and MGTF. (2)

*10.6    Form of Sale of Indebtedness and Assignment of Collateral Mortgage
         Notes and Security Documents. (2)

*10.7    Form of Collateral Mortgage Note drawn by AIRI. (2)

*10.8    Form of Amended and Restated Collateral Pledge Agreement drawn by AIRI
         (Inventory). (2)

*10.9    Form of Amended and Restated Collateral Pledge Agreement drawn by AIRI
         (Fixed Assets). (2)

*10.10   Environment Indemnity Agreement dated December 4, 1990 by and between
         AIRI, the Registrant and MG. (2)

*10.11   Amendment to Loan and Security Agreement, dated as of September 26,
         1991. (3)

*10.12   Promissory Note, dated March 15, 1995 from Gold Line Refining, Ltd. to
         American International Petroleum Corporation.(5)

*10.13   Amended and Restated Lease Agreement between Gold Line and AIRI dated
         March 22, 1995.(5)

*10.14   Letter Agreement dated March 22, 1995 amending Loan and Security
         Agreement(5)

*10.15   Subordination and Standby Agreement dated March 22, 1995 between
         NationsBank, Gold Line Refining, Ltd., Citizens Bank and AIRI.(7)

*10.16   Intercreditor Letter Agreements dated March 22, 1995 between MGTF,
         Citizens Bank and AIRI.(7)

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

*10.18   Letter dated February 9, 1996 amending Promissory Note between AIRI and
         Gold Line Refining Ltd.(7)

*10.19   Registration Rights Agreement dated July 11, 1996 between Dr. George N.
         Faris and the Registrant.(8)

*10.20   $3 million 5% exchangeable debenture, granted by AIPCC to the
         Registrant, due February 25, 1999.(12)

*10.21   Pledge Agreement dated February 25, 1997 among the Registrant, MIP and
         MGTF.(12)

*16.1    Letter dated August 19, 1996 regarding a change in certifying
         accountant.(9)

*21.1    Subsidiaries of the Registrant.

 23.1    Consent of Huddleston & Co., Inc., Petroleum and Geological Engineers

*27.1    Financial Data Schedule.
   
 99.1    Letter dated November 20, 1997 from Bernardo Villegas Perez
    
* Exhibits that were previously filed with Form 10K in April 1997.
-------------------------

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


                                       28

<PAGE>



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

(3)      Incorporated herein by reference to the Registration Statement on ForM
         S-1, declared effective November 9, 1992.

(4)      Incorporated herein by reference to the Registration Statement on Form
         S-2, declared effective January 13, 1994.

(5)      Incorporated herein by reference to the Registrant's Annual Report on
         Form 10-K for the fiscal year ended December 31, 1994.

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

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

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

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

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

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

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

(b)      Reports on Form 8-K

         A Current Report on Form 8-K, dated December 24, 1996, was filed by the
Company with respect to the sale of convertible debentures pursuant to
Regulation S.


                                       29



                          INDEPENDENT AUDITOR'S REPORT


To the Board of Directors and Stockholders
American International Petroleum Corporation

We have audited the accompanying consolidated balance sheet of American
International Petroleum Corporation and Subsidiaries as of December 31, 1996,
and the related consolidated statements of operations, stockholders' equity and
cash flows for the year 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 audit.

We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides 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, 1996,
and the results of their operations and their cash flows for the year then
ended, in conformity with generally accepted accounting principles.

HEIN + ASSOCIATES LLP
Certified Public Accountants
Houston, Texas
April 9, 1997

                                      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 audits and the report of other auditors, the
accompanying consolidated balance sheet and the related consolidated statements
of operations, of cash flows and of changes in stockholders' equity present
fairly, in all material respects, the financial position of American
International Petroleum Corporation and its subsidiaries at December 31, 1995,
and the results of their operations and their cash flows for each of the two
years in the period 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 audits. 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 assets of
$14,136,257 at December 31, 1995 and 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 audits 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 10 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>



                         TRANSLATION OF AUDITOR'S REPORT


Bogota, March 11, 1997

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

I have audited the general balance sheets of the Colombian Branch of American
International Petroleum Corporation of Colombia through December 31, 1995, as
well as the corresponding financial results, changes in the net worth of the
Branch, changes in the financial status and cash flow for the years ended on
said dates. The presentation of those financial statements and their
corresponding notes are the responsibility of the Branch's administration and
they reflect its operation. My functions include their audit and rendering an
opinion about them.

I obtained the necessary information to comply with my functions as Auditor and
conducted my work in accordance with generally accepted auditing rules in
Colombia, which require that the auditing 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, the conduct of an examination based on selective
samples 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 management and the presentation of the financial
reports as a whole. I consider that my audit provides a reasonable basis for the
opinion I express below regarding the financial reports.

The Branch follows accounting procedures generally accepted for oil companies,
established by the Superintendency of Companies and Colombian law, in its
accounting and in the presentation of the financial statements. In my opinion,
the financial statements previously mentioned, which were faithfully taken from
the books, reasonably reflect the financial condition of American International
Petroleum Corporation of Colombia through December 31, 1995, the results of its
operations, changes in its financial condition, changes in its net worth and its
cash flows for the year ended on those dates, all 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 Main Office; the correspondence and vouchers of the
accounts were duly carried out and kept, and adequate measures of internal
control and maintenance and guard of the Branch's and third parties' goods in
its possession were observed.

BERNARDO VILLEGAS PEREZ
AUDITOR
Professional Card No. 4962-A


                                       F-3


<PAGE>



BERNARDO VILLEGAS PEREZ
Contador Publico

Santafe de Bogota, D.C. Marzo 11 de 1997


A los senores Miembros de la Junta Directiva de AMERICAN INTERNATIONAL PETROLEUM
CORPORATION COLOMBIA

He auditado los balances generales de la Sucursal en Colombia de American
International Petroleum Corporation of Colombia al 31 de Diciembre de 1995 y los
correspondientes Estados de Resultados, de cambios en el patrimonio, de cambios
en la situacion financiera y de flujo de efectivo de los anos terminados en
dichas fechas. La presentacion de dichos estados financieros y sus
correspondientes notas son responsabilidad de la administracion y estos reflejan
su gestion. Entre mis funciones se encuentra la de auditarlos y expresar una
opinion sobre ellos.

Obtuve la informacion necesaria para cumplir mi funcion de Revisor Fiscal y
lleve a cabo mi trabajo de acuerdo con normas de auditoria generalmente
aceptadas en Colombia, las cuales requieren que la auditoria sea planeada y
efectuada para cerciorarse de que los estados financieros reflejan razonblemente
la situacion financiera y las operaciones del ejercicio. Una auditoria de
estados financieros implica, entre otras cosas, hacer un examen con base en
pruebas selectivas de la evidencia que respaldan las cifras y las revelaciones
en los estados financieros; ademas evaluar los principios de contabilidad
utilizados, las estimaciones contables hechas por la administracion y las
presentacion de los estados financieros en conjunto. Considero que mi auditoria
provee una base rezonable para la opinion que sobre los estados financieros
expreso mas adelante.

En su contabilidad y en la presentacion de los estados financieros la sucursal
observa normas contables de general aceptacion para Companias Petroleras
establecidas por las Superintendencia de Sociedades y las leyes Colombianas. En
mi opinion los estados financieros antes mencionados, que fueron tomados
fielmente de los libros, presentan razonblemente las situacion financiera de
American International Petroleum Corporation of Colombia al 31 de Diciembre de
1995, los resultados de sus operaciones, los cambios en el patrimonio, en su
situacion financiera y en los flujos efectivos del ano terminados en esa fecha,
de conformidad y con base en los principios de contabilidad generalmente
aceptados en Colombia.

Ademas, conceptuo que durante el ano terminado en 31 de Diciembre de 1995, la
contabilidad de American International Petroleum Corporation of Colombia se
llevo de conformidad con las normas legales y la tecnica contable; las
operaciones en los libros y los actos de los administradores se ajustaron a los
estatutos y a las decisiones de la Junta Directiva de su Casa Matriz; la
correspondencia, los comprobantes de las cuentas se llevaron y se conservan
debidamente, se observaron medidas adecuadas de control interno y conservacion y
custodia de los bienes de American International Petroleum Corporation of
Colombia y de terceros, en su poder.

BERNARDO VILLEGAS PEREZ
Revisor Fiscal
Tarjeta Profesional 4962-A

                                       F-4


<PAGE>


<TABLE>
<CAPTION>


                                       AMERICAN INTERNATIONAL PETROLEUM CORPORATION AND SUBSIDIARIES
                                                        CONSOLIDATED BALANCE SHEETS

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

                                                                                  1996                    1995

                                  Assets
Current assets:
<S>                                                                                  <C>                       <C>      
  Cash and cash equivalents                                                          $ 11,058                  $ 162,218
  Cash - restricted                                                                   161,022                    226,223
  Marketable Securities                                                                     -                          -
  Accounts receivable, net                                                          1,073,140                  1,073,553
  Inventory                                                                           459,961                    504,953
  Prepaid expenses                                                                    838,104                    547,509
                                                                           -------------------   ------------------------
       Total current assets                                                         2,543,285                  2,514,456
                                                                           -------------------   ------------------------
Property, plant and equipment:                                                                    
  Unevaluated property                                                              5,648,630                  4,998,824
  Oil and gas properties                                                           32,506,656                 31,566,297
  Refinery property and equipment                                                  17,235,183                 15,521,995
  Other                                                                               499,971                    506,445
                                                                           -------------------   ------------------------
                                                                                   55,890,440                 52,593,561
Less - accumulated depreciation, depletion                                                        
 and amortization and impairments                                                 (23,959,191)               (22,502,472)
                                                                           -------------------   ------------------------
       Total property, plant and equipment                                         31,931,249                 30,091,089
                                                                           -------------------   ------------------------
Other long-term assets, net                                                            17,897                     34,817
                                                                           -------------------   ------------------------

       Total assets                                                              $ 34,492,431               $ 32,640,362
                                                                           ===================   ========================
                                                                                                  
                   Liabilities and Stockholders' Equity                                           
Current liabilities:                                                                              
  Notes payable                                                                     $ 237,162                   $ 66,759
  Current portion of long-term debt                                                 5,968,393                  1,870,000
  Accounts payable                                                                  3,636,765                  2,363,562
  Accrued liabilities                                                               2,524,194                  1,616,678
                                                                           -------------------   ------------------------
       Total current liabilities                                                   12,366,514                  5,916,999
Long-term debt                                                                        798,199                  5,432,671
                                                                           -------------------   ------------------------
       Total liabilities                                                           13,164,713                 11,349,670
                                                                           -------------------   ------------------------
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, 34,458,921 shares issued and outstanding                                          
    at December 31, 1996 and 24,705,926 shares at                                                 
    December 31, 1995                                                               2,756,714                  1,976,474
  Additional paid-in capital                                                       78,677,265                 74,768,272
  Stock purchase warrants                                                           1,297,754                  1,297,754
  Accumulated deficit                                                             (61,404,015)               (56,751,808)
                                                                           -------------------   ------------------------
       Total stockholders' equity                                                  21,327,718                 21,290,692
                                                                           -------------------   ------------------------
Commitments and contingent liabilities (Note 10)                                            -                          -
                                                                           -------------------   ------------------------

Total liabilities and stockholders' equity                                       $ 34,492,431               $ 32,640,362
                                                                           ===================   ========================
</TABLE>


        The accompanying notes are an integral part of these statements.

                                      F-5

<PAGE>

<TABLE>
<CAPTION>

                           AMERICAN INTERNATIONAL PETROLEUM CORPORATION AND SUBSIDIARIES

                                       CONSOLIDATED STATEMENTS OF OPERATIONS



                                                                       For the years ended December 31,
                                                           ----------------------------------------------------------
                                                                 1996              1995                   1994

Revenues:
  Oil and gas production and
<S>                                                             <C>               <C>                    <C>        
   pipeline fees                                                $ 1,364,581       $ 1,270,164            $ 1,205,424
  Refinery lease fees                                             2,467,606         1,184,864              2,065,437
  Other                                                             278,327           356,280                237,653
                                                           -----------------  ----------------      -----------------
       Total revenues                                             4,110,514         2,811,308              3,508,514
                                                           -----------------  ----------------      -----------------
Expenses:                                                                                            
  Operating                                                         613,336           432,440                615,934
  General and administrative                                      3,076,357         3,572,337              4,136,276
  Depreciation, depletion and                                                                        
   amortization                                                   1,265,230         1,396,423              1,500,558
  Interest                                                        2,818,218         1,037,308              1,299,778
  Write-down of oil and gas properties                              200,000                 -              6,904,016
  Provision for bad debts                                           789,580           711,122                 18,866
                                                           -----------------  ----------------      -----------------
       Total expenses                                             8,762,721         7,149,630             14,475,428
                                                           -----------------  ----------------      -----------------

Net loss                                                       $ (4,652,207)     $ (4,338,322)         $ (10,966,914)
                                                           =================  ================      =================

Net loss per share of common stock                                  $ (0.16)          $ (0.20)               $ (0.65)
                                                           =================  ================      =================

Weighted-average number of shares
 of common stock outstanding                                     29,598,832        21,746,719             16,780,865
                                                           =================  ================      =================



</TABLE>



The accompanying notes are an integral part of these statements.

                                      F-6
<PAGE>

<TABLE>
<CAPTION>
                           AMERICAN INTERNATIONAL PETROLEUM CORPORATION AND SUBSIDIARIES

                                       CONSOLIDATED STATEMENTS OF CASH FLOWS

                                                                        For the years ended December 31,
                                                             --------------------------------------------------------
                                                                  1996                1995               1994
Cash flows from operating activities:
<S>                                                          <C>                 <C>                <C>
  Net loss                                                   $ (4,652,207)       $ (4,338,322)      $ (10,966,914)
  Adjustments to reconcile net loss to net
   cash provided (used) by operating activities:                                                    
     Depreciation, depletion and amortization                   2,551,504           1,502,435           1,698,532
     Write-down of oil and gas properties                         200,000               -               6,904,016
     Provision for bad debts                                      789,580            711,122               18,866
     Warrant price adjustment                                       -                   -                 210,588
     Compensation expense                                         424,063             55,814                  -
     Changes in assets and liabilities:                                           
        Accounts and notes receivable                            (789,167)           (537,569)            286,491
        Inventory                                                  44,992             446,519             (55,864)
        Prepaid and other                                        (370,274)            (98,359)             27,586
        Accounts payable and accrued liabilities                2,352,361           1,984,574          (3,233,610)
                                                             ----------------    ----------------  ------------------
      Net cash provided by (used in) operating activities         550,852            (273,786)         (5,110,309)
                                                             ----------------    ----------------  ------------------
Cash flows from investing activities:
  Additions to oil and gas properties                          (1,590,165)         (3,194,454)         (5,556,593)
  Additions to refinery property and equipment                 (1,713,188)             14,284               -
  Proceeds from sales of marketable securities                     -                     -                301,201
  Other                                                           (10,176)            (26,753)             25,037
                                                             ----------------    ----------------  ------------------
             Net cash used in investing activities             (3,313,529)         (3,206,923)         (5,230,355)
                                                             ----------------    ----------------  ------------------
Cash flows from financing activities:
  Cash - restricted, loan collateral                               65,201             (11,593)           (214,630)
  Net increase (decrease) in notes payable                        170,403              66,759            (535,078)
  Increase (decrease) in notes payable
    officers and directors                                          -                    -                (50,000)
  Proceeds from long-term debt                                      -                    -                 60,000
  Repayments of long-term debt                                 (1,434,278)           (467,500)         (3,374,520)
  Proceeds from issuance of common stock and
    warrants, net                                                 745,302           3,111,858          14,977,922
  Proceeds from exercise of stock warrants                                                          
    and options                                                      -                     32                 140
  Proceeds from notes receivable for issuance                                                       
    of common stock                                                  -                   -                367,064
  Proceeds from issuance of debentures, net                     3,064,889                -                   -
                                                             ----------------    ------------  ------------------
             Net cash provided by financing activities             2,611,517           2,699,556          11,230,898
                                                             ----------------    ----------------  ------------------
Net increase (decrease) in cash and                                                                 
  cash equivalents                                                  (151,160)           (781,153)            890,234
Cash and cash equivalents at beginning of year                       162,218             943,371              53,137
                                                             ----------------    ----------------  ------------------

Cash and cash equivalents at end of year                           $ 11,058           $ 162,218           $ 943,371
                                                             ================    ================  ==================
</TABLE>


        The accompanying notes are an integral part of these statements.

                                      F-7
<PAGE>
<TABLE>
<CAPTION>

                                                   AMERICAN INTERNATIONAL PETROLEUM CORPORATION AND SUBSIDIARIES

                                                     CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY


                                                                                             Additional           Stock
                                                                   Common stock                paid-in           purchase
                                                              Shares          Amount           capital           warrants
                                                           -------------   -------------    --------------    ---------------


<S>              <C>                                         <C>            <C>              <C>                 <C>
Balance, January 1, 1996                                     24,705,926     $ 1,976,474      $ 74,768,272        $ 1,297,754

Conversions of Debentures                                     6,535,122         522,810         1,477,190             -
Issuance of stock in lieu of current
    liabilities                                                 479,540          38,363           130,539             -
Issuance of stock for compensation                              905,000          72,400           351,663             -
Issuance of common stock                                      1,833,333         146,667           598,635             -
Imputed interest on debentures
    convertible at a discount to market                           -               -             1,350,966             -
Net loss for the year                                             -               -                -                  -
                                                           -------------   -------------    --------------    ---------------

Balance, December 31, 1996                                   34,458,921     $ 2,756,714      $ 78,677,265        $ 1,297,754


<CAPTION>



                                                   Accumulated
                                                     deficit             Total       
                                                  ----------------   --------------- 

                                                                                     
<S>              <C>                               <C>                <C>           
Balance, January 1, 1996                           $ (56,751,808)     $ 21,290,692  
                                                                                     
Conversions of Debentures                                 -              2,000,000            
Issuance of stock in lieu of current
    liabilities                                           -                168,902       
Issuance of stock for compensation                        -                424,063       
Issuance of common stock                                  -                745,302       
Imputed interest on debentures                                                       
    convertible at a discount to market                   -              1,350,966       
Net loss for the year                               (4,652,207)         (4,652,207)      
                                                  ----------------   ---------------

Balance, December 31, 1996                        $ (61,404,015)     $ 21,327,718


</TABLE>



         The accompanying notes are an integral part of this statement.

                                      F-8

<PAGE>
<TABLE>
<CAPTION>

                                                 AMERICAN INTERNATIONAL PETROLEUM CORPORATION AND SUBSIDIARIES

                                                   CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY

                                                                                                                 Notes
                                                                              Additional         Stock        receivable
                                                     Common stock               paid-in         purchase     for issuance
                                                Shares           Amount         capital         warrants       of stock
                                            ---------------   -------------  --------------   -------------  --------------


<S>              <C>                            <C>            <C>            <C>              <C>               <C>
Balance, January 1, 1995                        19,099,048     $ 1,527,924    $ 71,595,370     $ 1,297,754       $ (32,936)

Warrants exercised                                       8               1              31          -                -
Issuance of stock in lieu of current                                                                -
  liabilities                                      728,205          58,256         430,994          -                -
Issuance of stock for compensation                  10,000             800          19,512          -             32,936
Issuance of common stock                         4,868,665         389,493       2,722,365          -                -
Net loss for the year                               -                -                -             -                -
                                            ---------------   -------------  --------------   -----------  --------------

Balance, December 31, 1995                      24,705,926     $ 1,976,474    $ 74,768,272     $ 1,297,754     $     -
                                            ===============   =============  ==============   =============  ==============



<CAPTION>


                                                      Accumulated
                                                        deficit            Total
                                                    -----------------  ---------------


<S>              <C>                                 <C>               <C>
Balance, January 1, 1995                             $ (52,413,486)    $ 21,974,626

Warrants exercised                                          -                    32
Issuance of stock in lieu of current
  liabilities                                               -               489,250
Issuance of stock for compensation                          -                53,248
Issuance of common stock                                    -             3,111,858
Net loss for the year                                  (4,338,322)       (4,338,322)
                                                  -----------------  ---------------

Balance, December 31, 1995                          $ (56,751,808)     $ 21,290,692
                                                   =================  ===============

</TABLE>




         The accompanying notes are an integral part of this statement.


                                      F-9

<PAGE>

<TABLE>
<CAPTION>

                               AMERICAN  INTERNATIONAL  PETROLEUM  CORPORATION  AND  SUBSIDIARIES

                                      CONSOLIDATED  STATEMENT  OF  CHANGES  IN  STOCKHOLDERS'  EQUITY


                                                                                                               Notes
                                                                      Additional          Stock               receivable
                                             Common stock               paid-in          purchase            for issuance
                                         Shares          Amount         capital          warrants              of stock
                                        --------         -------       ---------        ----------           -------------


<S>               <C>                    <C>             <C>        <C>                 <C>                  <C>
 Balance, January 1, 1994                7,064,233        565,139    $  57,000,210       $    -               $     -

 Issuance of stock and warrants         11,382,548        910,603       13,169,565      1,297,754                  -
 Conversion of debentures                  633,334         50,667          899,333           -                     -
 Issuance of stock for payment of
   notes payable                             8,525            682           12,105           -                     -
 Issuance of stock in lieu of current
   liabilities                              10,373            830           14,729            -                     -
 Issuance of stock for note receivable        -              -               -               -                  (400,000)
 Payment received on note receivable          -              -               -               -                   367,064
 Exercise of warrants                          35              3              137            -                     -
 Adjustment to exercise price of warrants     -              -            210,588            -                     -
 Expired stock dividends - Aztec              -              -            288,703            -                     -
 Net loss for the year                        -              -               -               -                     -
                                       ----------    ------------  --------------     ------------
 Balance, December 31, 1994            19,099,048    $  1,527,924  $   71,595,370     $  1,297,754       $    (32,936)
                                       ==========    ============  ==============     ============



<CAPTION>





                                                              Accumulated
                                                               deficit                 Total
                                                           --------------            ---------


<S>               <C>                                     <C>                     <C>
 Balance, January 1, 1994                                 $  (41,446,572)         $ 16,118,777

 Issuance of stock and warrants                                   -                 15,377,922
 Conversion of debentures                                         -                    950,000
 Issuance of stock for payment of
   notes payable                                                  -                     12,787
 Issuance of stock in lieu of current
   liabilities                                                    -                    15,559
 Issuance of stock for note receivable                            -                  (400,000)
 Payment received on note receivable                              -                   367,064
 Exercise of warrants                                             -                       140
 Adjustment to exercise price of warrant                          -                   210,588
 Expired stock dividends - Aztec                                  -                   288,703
 Net loss for the year                                      (10,966,914)          (10,966,914)
                                                        ------------------      --------------

 Balance, December 31, 1994                                 (52,413,486)         $ 21,974,626
                                                          ===============        =============






</TABLE>



         The accompanying notes are an integral part of this statement.

                                     F-10

<PAGE>



                 AMERICAN INTERNATIONAL PETROLEUM CORPORATION AND              
                                   SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES:

American International Petroleum Corporation (the "Company") was incorporated
in the State of Nevada and, through its wholly-owned subsidiary, is the owner
of a refinery in Lake Charles, Louisiana. The Company is also seeking domestic
and international oil and gas properties.

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"). Consequently, all references to these subsidiaries herein are
presented in the past tense.

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"), 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. In the first quarter of 1996,
the Company fulfilled its drilling requirements in Peru and the cash
collateral was released.

Inventory

Inventory consists of oil and gas equipment and 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

                                     F-11


<PAGE>

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.

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
$331,355, $472,606, and $383,004 for the years ended December 31, 1996, 1995
and 1994, respectively.

   
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. As a result of applying this
policy, the Company charged $6,904,016 to expense in 1994 for the reduction of
carrying costs of oil and gas assets, due primarily to net downward revisions
to crude oil reserves in Colombia (See "Supplementary Oil and Gas Information
for the Years Ended December 31, 1996, 1995, 1994 - Oil and Gas Reserves.
    

The Company's oil and gas properties, substantially all of which were held in
AIPCC and PAIPC, were reduced 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.

On March 31, 1995, the Financial Accounting Standards Board 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 required that
the carrying amount of impaired assets to 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, 1996 and 1995.

Property and equipment - other than oil and gas properties

Property and equipment are carried at cost. 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.

Earnings per share

Earnings per share of common stock are based on the weighted-average number of
shares outstanding. Fully diluted earnings per share amounts are not presented
because they are anti-dilutive.

                                     F-12


<PAGE>

Foreign currency

   
Although the functional currency of the Company's South American subsidiaries
is the local currency, because the economies in Colombia and Peru are highly
inflational, under SFAS 52, the U.S. dollar is utilized as the functional
currency of these subsidiaries. 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 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
gains were $63,763, $12,544, and $34,300 in 1996, 1995, and 1994, 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.
    

Stock-based compensation

   
Statement on 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.
AIPC 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.

Reclassifications

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

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

                                     F-13


<PAGE>

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 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.

As a result of the MIP transaction, the Company now owns approximately 11.3%
of MIP's outstanding share capital on a fully-diluted basis (47,720,867
shares). MIP is traded in U.S. dollars on the Toronto Stock Exchange under the
symbol MPT.U.

The Company utilized some of the proceeds of the sale to repay the outstanding
balance on its 12% Secured Debentures, due December 31, 1997, and intends to
utilize the remaining proceeds to pay other debts, expand its refinery and for
general corporate use.

The unaudited Pro forma Balance Sheet presented herein reflects the historical
accounts of the Company giving effect to the MIP transactions as if it had it
occurred at December 31, 1996.

New Accounting Standard

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 Company does not believe the new statement will
have a material impact upon previously presented earnings per share
information.

NOTE 2 - MANAGEMENT'S PLANS:

The Company has incurred losses of $4,652,207, $4,338,322, and $10,966,914
for the years ended December 31, 1996, 1995 and 1994, respectively. The
Company also had negative working capital of $9,823,229 at December 31,
1996, which included approximately $3,720,000

                                     F-14


<PAGE>

of principal and interest due on its 12% Secured Debentures. During the
third and fourth quarters of 1996, the lessee of the Company's refinery,
Gold Line Refining Inc. ("Gold Line") began withholding payment of its
lease fees and other amounts due to the Company under its lease. In addition,
Gold Line did not make its scheduled note payments to the Company. This
situation, coupled with the Company's negative working capital, required the
Company to find other sources with which to fund its operations and meet its
financial obligations. As a result, the Company issued certain convertible
debentures, bonds and shares of its common stock for cash and services rendered
to the Company of approximately $3.8 million during 1996.

During the first quarter of 1997, the Company received cash and settled certain
liabilities totaling approximately $2.2 million from the sales and issuance
of its common stock and convertible debentures. Funds from these transactions
enabled the Company to make payments of principal and interest on its 12%
Secured Debentures totaling approximately $1,379,125, to settle certain
other obligations outstanding at December 31, 1996 and to make certain capital
improvements to its Refinery.

On February 25, 1997, the Company sold all of the issued and outstanding shares
of common stock of its wholly-owned subsidiaries (Notes 1 and 15). The Company
plans to utilize some of the proceeds received from this transaction to repay
its outstanding debts and fund its operations until cash flows from its
refinery operation are sufficient in nature to support the Company's operating
capital requirements. Certain of the proceeds mentioned above are in the form
of shares of common stock (the "MIP Shares") of the purchaser Mercantile
International Petroleum, Inc. ("MIP"). The Company, initially, plans to margin
the MIP shares as required in order to fund its operations. At some future
date, it is likely the Company will sell a substantial portion of the MIP
shares as its capital requirements dictate. However, the Company prefers to
hold the MIP shares rather than sell them at this time, with the intention of
selling them at a higher price than their current market value.

As a result of a Company-filed action citing non-payment of lease fees and
other amounts due to the Company, on March 20, 1997, Gold Line received
a court order terminating its lease with the Company and was evicted from the
refinery premises (Note 8). The Company is currently evaluating several
options whereby AIRI would operate the crude processing unit ("CPU"),
previously leased to Gold Line, and process feedstocks and produce products
for other companies for a fee. It is expected that such an arrangement would
provide operating income which would be similar to or greater than that
derived from the Gold Line lease. In addition, the new terms would include both
the implementation of a minimum throughput fee and a performance bond from
these entities to ensure timely payment of fees. The Company hopes to
implement this operation sometime during the second quarter of 1997. Upon
completion of the necessary construction and expansion of the Company's
vacuum distillation unit ("VDU"), in 1997 or early in 1998, the Company plans
to implement the manufacturing of its own asphalt.

Management believes the proceeds generated from equity financing and the
margin and/or sale of the MIP shares, should provide the Company with the
funds necessary to meet its working capital obligations and operating
commitments during the ensuing fiscal year or until the refinery operations
are sufficient in nature to provide same.

                                     F-15


<PAGE>

The Company is also currently having discussions with various banking
institutions in the United States and abroad regarding financing for the
contemplated refinery operations. In addition, the Company has alternative
methods of obtaining funds, including private or public equity and
debenture or mezzanine financing, some of which it has utilized successfully
in the past.

In the event the Company is unable to raise sufficient proceeds from the margin
or sale of the MIP shares, or from debt financing, the exercise of outstanding
options and warrants or from the consummation of additional equity financing,
of which there is no assurance, the Company may be required to postpone and/or
curtail its planned development activities at the refinery, or any anticipated
oil or gas projects it may be considering.

NOTE 3 - ACCOUNTS AND SHORT-TERM NOTES RECEIVABLE:

Accounts and notes receivable are shown below:

                                                         December 31,
                                                  ----------------------------
                                                      1996            1995

Accounts receivable - trade                       $ 1,942,946     $ 939,958.00 
Note receivable - Gold Line                           900,732        1,058,971
Other                                                 150,980          139,082
                                                  -----------     ------------
                                                    2,994,658        2,138,011
Less - allowance for doubtful accounts             (1,921,518)      (1,064,458)
                                                  -----------     ------------
                                                  $ 1,073,140     $  1,073,553 
                                                  ===========     ============

NOTE 4 - OTHER LONG-TERM ASSETS:

Other long-term assets consist of the following:

                                                           December 31,
                                                  ---------------------------- 
                                                       1996            1995

Note receivable - Gold Line                       $       -        $   974,583 
Unamortized bond issue cost                           17,897            34,817 
                                                  ----------       -----------
                                                      17,897         1,009,400
Less - allowance for doubtful accounts                    -           (974,583)
                                                  ----------       -----------
                                                  $   17,897       $    34,817 
                                                  ==========       =========== 

NOTE 5 - ACCOUNTS PAYABLE:

Accounts payable at December 31, 1995 included $500,000 payable to an
individual subcontractor for oil and gas operational services which was paid
subsequent to December 31, 1995.

                                     F-16



<PAGE>

NOTE 6 - ACCRUED LIABILITIES:

Accrued liabilities consist of the following:

                                                          December 31,
                                                  ----------------------------
                                                      1996            1995

Accrued payroll                                   $   266,429     $    366,499
Accrued interest                                      282,076          347,247
Corporate taxes                                       330,024          275,206
Excise taxes                                        1,100,000          250,000
Property taxes                                        219,345          228,756
Other                                                 326,320          148,970
                                                  -----------     ------------
                                                  $ 2,524,194     $  1,616,678
                                                  ===========     ============
NOTE 7 - LONG-TERM DEBT:

                                                           December 31,
                                                  ----------------------------
   
Note payable to MG Trade
   Finance Corporation                            $ 2,108,393     $  2,845,171
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        4,207,500
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          250,000
                                                  -----------      -----------
                                                    6,766,592        7,302,671

Less - Current portion                              5,968,393        1,870,000
                                                  -----------      -----------
                                                  $   798,199      $ 5,432,671
                                                  ============     ===========
    

                                     F-17



<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 issued by the Company 
in 1996. During 1996, the Company sold convertible debentures totaling
$2,965,000 of which $2,000,000 were converted into the Company's common stock 
at discounts to market ranging from 25% to 35%. The remaining convertible 
debentures sold during 1996, are convertible into the Company's common stock 
at discounts to market ranging from 25% to 35%. The following are the Company's
unaudited quarterly results of operations for the year ended December 31, 1996,
as restated to reflect accounting for various convertible debentures issued 
during 1996, which are convertible at a discount to market, in the manner
prescribed by generally accepted accounting principles.


                       First          Second         Third         Fourth
                      Quarter         Quarter       Quarter        Quarter

Net (loss), as
 previously 
 reported            $(312,177)     $(470,210)     $(742,780)     $(1,911,190)
Loss per share,
 as previously
 reported               $(0.01)        $(0.02)        $(0.02)          $(0.06)
Additional 
 financing cost        221,296        753,062         80,407          161,085
Loss per share,
 on additional cost     $(0.01)        $(0.03)           $--              $--
                    -----------     ----------     ----------     ------------
Net (loss), 
 as restated          $(533,473)   $(1,223,272)    $(823,187)      $(2,072,275)
Loss per share, 
 as restated             $(0.02)        $(0.05)       $(0.03)           $(0.06)


Long-term debt of $5,968,393, $673,754 and $124,445 matures during 1997, 1998 
and 2000, respectively.

Note payable to MG Trade Finance Corporation

On December 4, 1990, AIRI entered into a loan and security agreement (the 
"Loan Agreement") with 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 the event of a default,
whereby AIRI common stock may be sold, MGTF will retain, after satisfying all
indebtedness due MGTF, an amount equal to 50% of the amount due MGTF on the the
date of the default.

                                 F-18


<PAGE>
   
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 addition, MGTF's parent company, MG Corp., is entitled to
one seat on the Company's Board of Directors without the consent of the
Company and a second seat upon the consent of the Company's Board, which
consent is not to be unreasonably withheld. One of these seats would then
be eligible to be appointed to the Executive Committee, also upon consent of
the Company's Board. which consent is not to be unreasonably withheld. MGTF
has not made such a request. As long as the Company has any obligations to
MGTF, the Company has agreed not to undertake any financial commitments, or
acquire or dispose of assets in excess of $250,000 without the unanimous
consent of the Executive Committee. MGTF has not nominated any persons to be
on the Board.

In November 1992, MGTF agreed to modify the Loan Agreement and extend the
maturity of a portion of the principal due on May 31, 1993. Under the
modified agreement, principal payments of $3,374,520 were made during 1994
and the remaining principal of $2,845,171 was due May 31, 1995. In
consideration for the extension, the Company agreed to extend the expiration
date of all warrants held by MGTF and its affiliate, Metallegesllschaft,
that remain outstanding on December 31, 1993 or June 30, 1994 to June 30, 1997.
The exercise price of any warrants subject to the extension was increased to
$15.63 per share of common stock. On July 25, 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.
    

In March 1995, MGTF agreed to further modify the Loan Agreement and extend
the maturity of the $2,845,171 principal originally due from the Company
on May 31, 1995. Under the modified agreement, the maturity was changed to
March 31, 1998. Previously, all monthly lease fees received pursuant to
the terms of any lease of the refinery were required to be remitted to MGTF
in repayment of the loan principal and interest. Under the modified Loan
Agreement, one-half of the monthly lease fees are required to be remitted
to MGTF and the related interest rate was reduced from prime plus 2.0% to
prime plus 1.0%. Pursuant to the Loan Agreement, AIRI granted MGTF an 
option to lease the refinery for a period of 13 months commencing after the
expiration of the current lease (Note 8). Any such lease will call for a 
rental, net of all operating expenses, of $.45 per barrel for a minimum
throughput of 18,000 bbls per day, and $.48 per barrel for any amounts in
excess of 18,000 bbls per day.

The Loan Agreement with MGTF contains various events of default including, 
but not limited to, failure to make principal or interest payments in a timely
manner, transfers of funds by dividend or other means from AIRI to the Company,
age of accounts payable amounts and refurbishment and maintaining adequate 
insurance coverage. An event of default, if declared and not cured within the
allowed time, would permit MGTF to accelerate the loan and demand immediate 
payment. At various times during 1996, 1995, 1994, the Company has been in
technical default with respect to certain monetary covenants. The Company
believes it will continue to be successful in negotiating the resolution of
such compliance issues with MGTF.

As part of certain negotiations related to the MIP Transaction, the Company
agreed to change the due date of the unpaid balance of the Loan Agreement of
$2,108,000 to September 30, 1997

                                     F-19


<PAGE>

from March 31, 1998. In addition, 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.

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 have been 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. The
carrying value of the Company's refinery property and equipment amounted to
$12,425,476 (cost - $15,561,286; accumulated depreciation - $3,125,810) at
December 31, 1996.

   
The Company recognizes its lease fees as earned as barrels are processed through
its refinery. On several occasions in the past, although Gold Line had been
delinquent with its payments, they repeatedly made the payments or made
arrangements to make the payments. Consequently, the Company recorded lease fees
as earned. 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.
    

                                     F-20

<PAGE>


NOTE 9 - STOCK OPTIONS AND WARRANTS:

Outstanding warrants and options

At December 31, 1996, 1995 and 1994, 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.

<TABLE>
<CAPTION>

  Number of Shares Underlying
      Options and Warrants
         at December 31,              Exercise      Expiration
-------------------------------       --------      ----------
   1996       1995       1994          Price           Date
   ----       ----       ----          -----           ----
<C>       <C>        <C>              <C>           <C>
        -      1,500      1,500       $ 36.250      April 1, 1996 (2)
        -     66,715     66,715       $ 32.500      February 26, 1996 (2)
        -      7,988      7,988       $ 15.000      March 10, 1996 (2)
        -      3,000      3,000       $ 30.000      August 28, 1996 (2)
5,957,347  5,957,347  5,957,355       $  4.000      March 1, 1997 (3)
   20,000     20,000     20,000       $ 30.625      July 14, 1997
        -    282,500          -       $  1.000      December 31, 1997 (1) (2)
  150,000    150,000          -       $  2.000      March 31, 1998
        -     20,000          -       $  1.000      August 3, 1998 (1) (2)
        -          -     56,250       $ 20.000      December 31, 1995 (2)
        -          -    296,667       $ 15.630      June 30, 1997 (2)
        -          -    100,000       $ 16.880      June 30, 1997 (2)
        -          -    337,500       $  4.000      December 31, 1997 (1) (2)
  282,500          -          -       $  0.500      December 31, 1997 (1)
   20,000          -          -       $  0.500      August 3, 1998 (1)
        -          -     20,000       $  1.500      August 3, 1998 (2)
1,550,000          -          -       $  0.500      October 21, 1999
   50,000          -          -       $  0.500      November 1, 2000
   10,500          -          -       $  0.475      July 16, 2001
    8,333          -          -       $  0.416      August 19, 2001
   16,667          -          -       $  0.413      August 20, 2001
   18,519          -          -       $  0.406      October 31, 2001
---------  ---------  ---------
8,083,866  6,509,050  6,866,975
=========  =========  =========
</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 1995 
    or 1996 as indicated in the table.
   
(3)  Class A Warrants.
    

                                  F-21

<PAGE>

Options and warrants to purchase 8 and 35 shares were exercised in 1995 and 
1994, respectively, at prices of $4.00. No options or warrants to purchase 
were exercised during 1996.

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, 1995 
and 1996 was as follows:

<TABLE>
<CAPTION>
                                              Weighted Average
                                 Number of     Exercise Price
                                  Shares         Per Share
                                 ---------    ----------------
<S>                              <C>              <C>
Outstanding, December 31, 1994     360,500        $  4.08
Canceled                          (302,500)       $  3.83
Granted                            302,500        $  1.00
Expired                            (55,000)       $  4.00

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
</TABLE>

As of December 31, 1996, options to acquire $1,465,000 shares of the Company's 
common stock were fully vested and exercisable at a weighted average exercise 
price of $0.50 per share. The remaining options, which also have a weighted 
average exercise price of $0.50 per share, will vest in 1997.

If not previously exercised, options outstanding at December 31, 1996, will
expire as follows: 282,500 options expire on December 31, 1997; 20,000 options 
expire on August, 1998; 

                                       F-22

<PAGE>
1,550,000 options expire on October 22, 1999; and 50,000 options expire on 
November 1, 2000. The weighted average grant date fair value of the options 
issued during 1996 and the weighted average exercise price of those options 
amounted to $.034 and $0.50, respectively.

The fair value of each option grant was estimated on the date of grant using 
the Black-Scholes option pricing model with the following assumptions: risk-
free rates of 5.5% to 6.3%; volatility of 176%, no assumed dividend yield; and 
expected lives of one to four years.

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

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:

<TABLE>
<CAPTION>
                                              1995            1996
                                              ----            ----
<S>                                       <C>             <C>
Net loss                    As reported   $ (4,338,322)   $ (4,652,207)
                            Pro forma       (4,631,608)     (4,851,124)

Net loss per common share   As reported          (0.20)          (0.16)
                            Pro forma            (0.21)          (0.16)
</TABLE>

Options which were issued 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. In
accordance with SFAS 123 the revaluation of the shares constitutes a new 
issuance of options. 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 options had 
declined.

NOTE 10 - COMMITMENTS AND CONTINGENT LIABILITIES:

Drilling commitments

As of December 31, 1996, the Company had completed all its contractual work 
commitments in Colombia and Peru. As a result of the sale of its wholly-owned 
Colombia and Peru subsidiaries, the Company has no further obligations in 
either country.

                                       F-23

<PAGE>
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 wants 
to negotiate a settlement. AIRI continues to meet with the IRS to resolve 
this situation. A settlement is expected in the second quarter of 1997, 
although the exact nature of such a settlement cannot be predicted at this
time.

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. In this instance, the Company has provided an aggregate 
allowance during 1996 and 1995 of $850,000 and $250,000, respectively, for 
estimated costs, either in the form of legal expenses or payments to the IRS, 
or some combination of both.

Environmental lawsuit

   
On January 25, 1994, a lawsuit captioned Paul R. Thibodeaux, et al v. Gold 
Line Refinery Ltd. (a limited partnership), Earl Thomas, individually and 
d/b/a/ Gold Line Refinery Ltd., American International Petroleum Corporation,
American International Refinery, Inc., and Joseph Chamberlain individually 
(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. Responsive pleadings have 
been filed by AIRI to this action and to the three amendments which added 
plaintiffs defendants and restructured the plaintiff's claims (deleting some
claims and adding new claims). The lawsuit alleges, among other things, that 
the defendants, including the Company's wholly-owned subsidiary, AIRI, caused 
or permitted the discharge of hazardous and toxic substances from the Lake 
Charles refinery into the Calcasieu River. The plaintiffs seek an unspecified 
amount of damages, including special and exemplary damages. AIRI continues to
vigorously defend such action. In March 1996, the Company and AIRI filed an 
Exception of Prescription (the "Exception") which is expected to eliminate 
most of the plaintiff's claims. The Court ordered a ruling on the 

                                       F-24
</PAGE>

<PAGE>
Exception, referring the Exception to the merits. In the fourth quarter of 
1996, a new Judge was assigned AIRI's case. AIRI expects a status conference 
will be held soon, wherein AIRI will apprise the new Judge of the Exception
and request a rehearing on the Exception before the new Judge. At this time, 
the Company is unable to determine what, if any, liability may arise from this 
action.

Contract claims

In October 1995, Rio Bravo S.A., the operator of the Company's Lot IV Block in 
Peru, locked out PAIPC personnel from access thereto and filed a legal action 
in Peru against PAIPC claiming damages of $11,695,000 and alleging that PAIPC's
License Contract with the government to explore Block IV (the "License 
Contract") was canceled by the government due to the fact that PAIPC did not
complete the minimum work program required under the License contract. 
However, because the minimum work program was completed and was certified as 
complete by the government (the performance bond placed by PAIPC to assure 
its compliance with the minimum work program has, in fact, been released by 
the government) and, since the License Contract with the government is still 
in effect and has not been canceled, the Company expects the legal action 
by Rio Bravo will be decided in PAIPC's favor. PAIPC has also filed counter-
claims and is in the process of filing liens against Rio Bravo to defend 
its interests in the Block and License contract and continues to participate 
in meetings with the government related to the activities in the Block and 
in all matters of administration and execution of the obligations in the
License Contract. As of February 25, 1997 the Company sold all its rights 
with respect to Peru and therefore has no remaining assets or obligations 
there.

Employment agreements

The Company has entered into an employment agreement with its chief executive 
officer. Total salaries payable under this contract for 1997 are $300,000. 

In September 1995, the Company's Board of Directors authorized the issuance, 
subject to shareholder approval, of 900,000 restricted shares (the "Shares")
of the Company's common stock to its Chairman and Chief Executive Officer, 
Dr. George Faris. The Shares were granted to Dr. Faris in consideration for 
Dr. Faris waiving certain rights under his employment contract, thereby 
relieving the Company of its obligation to make cash payments to Dr. Faris 
upon a change of control or involuntary termination. Shareholder approval was 
obtained in July 1996 and the Company recorded the issuance of the shares and 
the related expense at that time.

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

                                       F-25

<PAGE>
March 20, 1997, the court granted the eviction. A future court date is 
scheduled for May 15, 1997 to present a trial on the merits with respect 
to the original amount due to AIRI. AIRI seeks approximately $1.8 million, 
including damages as of the date Gold Line exited the lease premises, for 
disposition of salt water left on the premises by Gold Line, and also movable 
property which has been taken or damaged by Gold Line. Gold Line has asserted 
general affirmative defenses. The Company intends to pursue aggressively all 
of its legal remedies against Gold Line. The likelihood of AIRI collecting
these delinquent amounts is unknown at this time. However, the Company has 
provided an allowance during 1996 of $681,000 which fully reserves all amounts 
due AIRI as of December 31, 1996.

Lease commitments

The Company leases office space under various operating leases expiring in 
1997 and 1998. Additional office space is rented on a month-to-month basis. 
Future minimum payments under operating leases with remaining terms of one 
year or more consisted of the following at December 31, 1996:

<TABLE>
<S>                            <C>
           1997                $ 131,190
           1998                  112,932
                               ---------
Total Minimum lease payments   $ 244,122
                               =========
</TABLE>

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:

<TABLE>
<CAPTION>
                             1996         1995        1994
                             ----         ----        ----
<S>                        <C>          <C>         <C>
Minimum rentals            $ 307,912    $ 297,502   $ 243,324
Less - sublease rentals      130,437      114,213           -
                           ---------    ---------   ---------
Total                      $ 177,475    $ 183,289   $ 243,324
                           =========    =========   =========
</TABLE>

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-26



<PAGE>


NOTE 11 - INCOME TAXES:

Income taxes

The Company uses the asset and liability approach for financial accounting
and report 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 1994, 1995 and 1996 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 $54,000,000 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 1996 is approximately $18,500,000.

The components of deferred tax assets and liabilities are as follows:

<TABLE>
<CAPTION>
                                                                       December 31,
                                                                       ------------
                                                                  1996               1995
                                                                  ----               -----
<S>                                                            <C>              <C>
Deferred tax assets:
    Net operating loss carryforwards                           $ 6,942,000      $  9,674,000
    Allowance for doubtful accounts                                721,000           877,000
    Accrued liabilities                                                  -            88,000
    Depreciation, depletion, amortization and impairment          (984,000)         (461,000)
                                                               -----------      ------------
Net deferred tax asset                                           6,679,000        10,178,000
                                                               -----------      ------------
Valuation allowance                                             (6,679,000)      (10,178,000)
                                                               ===========      ============

</TABLE>

The valuation allowance relates to the uncertainty as to the future
utilization of net operating loss carryforwards.

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. Accounts
receivable were $1,073,140 at December 31, 1996. Refinery processing fees were
earned through lease of the Company's

                                      F-27

<PAGE>

refinery to Gold Line. Trade accounts receivable and notes receivable from
Gold Line aggregated $2,126,418 at December 31, 1996, net of reserves for
uncollectible amounts of $1,921,518. 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, 7 and 8). The Company has filed suit as discussed
previously in Note 10 to collect certain reserved amounts from Goldline.

The estimated fair value of the Company's financial instruments is as
follows:

<TABLE>
<CAPTION>

                                    1996                             1995
                         -----------------------------   ---------------------------
                           Carrying         Carrying        Carrying        Carrying
                             value            value           value           value
                             ------           ------          ------          ------
<S>                      <C>              <C>             <C>             <C>
Long-term debt           $ 6,766,592      $ 6,766,592     $ 7,302,671     $ 7,352,671
</TABLE>

For investments, fair value equals quoted market price. Fair value of fixed-
rate long-term debt is determined by reference to rates currently available
for debt with similar terms and remaining maturities. As of December 31,
1996, 88% of the Company's long-term debt matures during 1997. 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.

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.


    
   
Note that Costs and Operating Expenses in Columbia in 1994 of $9,479,273
includes a $6,904,016 charge to expense for the reduction of the carrying
costs of oil and gas assets. In addition, operating costs were higher in
1994 compared to 1995 and 1996, primarily due to the incurrence of
approximately $182,000 in transportation costs during 1994, where no
transportation costs were incurred in 1995 and 1996. Also, the labor and
professional staffs were downsized subsequent to 1994, resulting in
significant reductions in payroll and technical services costs in 1995 and
1996.
    

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.

                                      F-28

<PAGE>

      Financial information, summarized by geographic area, is as follows:


<TABLE>
<CAPTION>

                                                  Geographic Segment
                                ----------------------------------------------------        Consolidated
1996                            United States          Columbia             Peru               total
----                            -------------        ------------        -----------        ------------
<S>                             <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-29


<PAGE>



<TABLE>
<CAPTION>

                                                  Geographic Segment
                                ----------------------------------------------------        Consolidated
1995                            United States          Columbia             Peru               total
----                            -------------        ------------        -----------        ------------
<S>                             <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       $    40,368         $ 1,265,989         $ 1,528,095         $ 3,194,452
                                =============        ============        ===========         ===========
</TABLE>

                                      F-30

<PAGE>

<TABLE>
<CAPTION>

                                                  Geographic Segment
                                ----------------------------------------------------        Consolidated
1994                            United States          Columbia             Peru               total
----                            -------------        ------------        -----------        ------------
<S>                             <C>                  <C>                 <C>                <C>
Sales and other
    operating revenue            $ 2,094,235         $ 1,169,323         $   122,068        $  3,385,626
Interest income and other
    corporate revenues                                                                           122,888
                                                                                            ------------
Total revenue                                                                               $  3,508,514
Costs and operating
    expense                        1,376,411           9,479,273              41,024          10,896,708
                                -------------        ------------        -----------        ------------
Operating profit (loss)          $   717,824         $(8,309,950)        $    81,044        $( 7,388,194)
                                =============        ============        ===========        ============

General corporate expense                                                                      2,278,942
Interest expense                                                                               1,299,778
                                                                                             -----------
Net loss                                                                                     (10,966,914)
                                                                                             ===========

Identifiable assets
    at December 31, 1994         $14,481,904         $13,580,190         $ 2,717,167         $30,779,261
                                 ===========         ===========         ===========
Corporate assets                                                                               1,450,452
                                                                                             -----------

Total assets at
    December 31, 1994                                                                        $32,229,713
                                                                                             ===========

Depreciation, depletion
    and amortization rate
    per equivalent barrel
    of oil                       $         -         $      5.51         $         -         $      5.51
                                =============        ============        ===========         ===========

Capital Expenditures,
    net of cost recoveries       $         -         $ 3,200,281         $ 2,307,855         $ 5,508,136
                                =============        ============        ===========         ===========
</TABLE>

                                      F-31


<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 in the acquisitions and
conversions of the following noncash transactions:

<TABLE>
<CAPTION>
                                                   1996              1995            1994
                                                   ----              ----            ----
<S>                                             <C>                <C>             <C>
Conversion of debentures                        $ 2,000,000        $       -       $ 950,000
Conversion of notes payable                               -                -          12,787
Stock issued in lieu of current liabilities         168,902          489,250          15,559
Issuance of stock for notes receivable,
    net of amounts collected                              -                -          32,936
Issuance of stock - unearned compensation           424,063           20,312               -
</TABLE>

Cash paid for interest, net of amounts capitalized, was $808,477, $964,609,
and $647,439 during 1996, 1995, and 1994, respectively. Cash paid for
corporate franchise taxes was $114,128, $52,050, and $36,001 during 1996,
1995 and 1995, respectively.

NOTE 15 - SUBSEQUENT EVENTS:

Regulation S Offerings
   
In 1997, the Company received aggregate net proceeds of $2,742,000 from the
sales and issuance of shares of its common stock and from the sales of
redeemable convertible subordinated debentures, issued in accordance with
Regulation S. The proceeds were utilized for the payment of certain debts
(including an aggregate of approximately $1,380,000 in principal and interest
on the Company's 12% secured debentures which was due on December 31, 1996),
the expansion of its Refinery, and for working capital purposes.
    
Sale of Subsidiaries

On February 25, 1997, the Company sold all of the issued and outstanding common
stock of its wholly-owned subsidiaries in Columbia and Peru for cash, stock
and the assumption of certain Company debt, including payment of the
remaining principal and interest due on its 12% Secured Debentures of an
aggregate of approximately $2,362,000.

Note Payable
   
As part of its February 25, 1997 agreement to sell its subsidiaries in
Columbia and Peru, the Company agreed to move up the due date of its
$2,108,000 note payable to MG Trade Finance Corp. from March 31, 1998 to
September 30, 1997.
    
                                      F-32


<PAGE>

Gold Line Lease

On March 20, 1997, the Company terminated its lease and evicted the lessee Gold
Line Refining Ltd. (Note 10).

Kazakstan Option

On January 27, 1997, the Company entered into an option agreement, which was
amended on March 7, 1997 (the "Option") for the right to obtain a 40% working
interest in a certain petroleum concession in Kazakstan. In consideration for
the Option, the Company paid $100,000 in cash and issued 300,000 shares of
its common stock.

                     SUPPLEMENTARY OIL AND GAS INFORMATION
               FOR THE YEARS ENDED DECEMBER 31, 1996, 1995, 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-33





<PAGE>

<TABLE>
<CAPTION>
                                                       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:

CAPITALIZED COSTS
                                         Colombia                                         Peru                       
                          ---------------------------------------------  ----------------------------------------  
                               1996           1995           1994            1996          1995         1994         
Unevaluated property not
<S>                          <C>            <C>            <C>             <C>          <C>          <C>             
 subject to amortization     $ 1,101,277    $ 1,101,277    $ 2,163,201     $ 4,457,964  $ 3,832,041  $ 2,303,946     
Proved and unproved
 properties                   31,934,991     31,215,040     28,903,520         200,000            -            -     
Accumulated deprecia-
 tion, depletion and
 amortization                 19,870,122     19,364,606     18,832,617         200,000            -            -     
                          ---------------------------------------------  ----------------------------------------   

Net Capitalized costs       $ 13,166,146   $ 12,951,711   $ 12,234,104     $ 4,457,964  $ 3,832,041  $ 2,303,946     
                          =============================================  ========================================  


<CAPTION>



   

CAPITALIZED COSTS

                                                     Other                                    Total
                                        ---------------------------------   -------------------------------------------
Unevaluated property not                  1996        1995       1994           1996           1995          1994
 subject to amortization
<S>                                      <C>          <C>                     <C>            <C>           <C>
Proved and unproved                      $ 89,389     $ 65,506         -      $ 5,648,630    $ 4,998,824   $ 4,467,147
 properties
Accumulated deprecia-                     371,665      351,257         -       32,506,656     31,566,297    28,903,520
 tion, depletion and
 amortization
                                          371,665      351,257         -       20,441,787     19,715,863    18,832,617
                                        ---------------------------------   -------------------------------------------
Net Capitalized costs
                                         $ 89,389     $ 65,506       $ -     $ 17,713,499   $ 16,849,258  $ 14,538,050
                                        =================================   ===========================================

    




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



   

Property acquisition
 costs - proved and
<S>                            <C>          <C>          <C>              <C>           <C>            <C>          <C>
 unproved properties           $      -     $        -     $        -      $--           $   -          $   -         $ -
Exploration Costs                     -         744,549     3,016,741        -               -              -           -
Development costs                719,954        527,595       683,532        -               -              -           -

Results of operations for oil
and gas producing activities

Oil and gas sales            $ 1,364,581    $ 1,104,095    $ 1,083,406      $ -       $ 166,069       $ 122,018          -
                          ---------------------------------------------  ----------------------------------------   ---------
Lease operating costs            611,857        363,600        564,061        -          65,141         41,022           -
Depreciation, depletion
 and amortization                491,732        531,989      6,904,016        -              -             -             -
Provision for reduction
 of oil and gas properties             -              -        670,857        200,000        -             -             -
                          ---------------------------------------------  ----------------------------------------   ---------
                               1,103,589        895,589      8,138,934        200,000       65,141       41,022          -
                          ---------------------------------------------  ----------------------------------------   ---------
Income (loss) before
 tax provision                   260,992        208,506     (7,055,528)             -      100,928       80,996          -
Provision (benefit) for
 income tax                            -              -              -              -            -            -          -
                          ---------------------------------------------  ----------------------------------------   ---------

Results of operations          $ 260,992      $ 208,506   $ (7,055,528)    $ (200,000)   $ 100,928     $ 80,996         $ -
                          =============================================  ========================================   =========
    

<CAPTION>


   
Property acquisition
 costs - proved and
<S>                              <C>       <C>              <C>            <C>           <C>
 unproved properties             $ -       $ -              $ -            $ -           $ -
Exploration Costs                  -        - -            744,549   3,016,741
Development costs                  -

Results of operations
for oil and gas                                         719,954        527,595       683,532
producing activities
                                 $ -       $ -      $ 1,364,581    $ 1,270,164   $ 1,205,424
Oil and gas sales         -------------------------   -------------------------------------------
                                   -         -          611,857        428,741       605,083
Lease operating costs
Depreciation, depletion      351,257         -          491,732        883,246       670,857
 and amortization
Provision for reduction            -         -          200,000              -     6,904,016
 of oil and gas properties-------------------------   -------------------------------------------
                             351,257         -        1,303,589      1,311,987     8,179,956
                          -------------------------   -------------------------------------------

Income (loss) before        (351,257)        -           60,992        (41,823)   (6,974,532)
 tax provision
Provision (benefit) for            -         -                -              -             -
 income tax               -------------------------   -------------------------------------------

                           $ (351,257)      $ -         $ 60,992      $ (41,823) $ (6,974,532)
Results of operations     =========================   ===========================================
    

</TABLE>

                                      F-34
<PAGE>

<TABLE>
<CAPTION>

COSTS NOT SUBJECT TO AMORTIZATION:

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


                                                         December 31,
                                  ------------------------------------------------------------
                                        1996                 1995                 1994
                                        ----                 ----                 ----
Colombia:
<S>                                <C>                  <C>                   <C>        
  Acquisition costs                $ 1,101,277          $ 1,101,277           $ 1,101,277
  Exploration costs                         -                    -              1,061,924
                                  -----------------    -----------------    ------------------
                                     1,101,277            1,101,277             2,163,201
Peru:
  Exploration costs                  4,457,964            3,832,041             2,303,946
                                  -----------------    -----------------    ------------------
Other
  Acquisition costs                     89,389               65,506                     -
                                  -----------------    -----------------    ------------------

                                    $ 5,648,630          $ 4,998,824           $ 4,467,147
                                  =================    =================    ==================



</TABLE>




                                     
Acquisition costs of unproved properties not subject to amortization at December
31, 1996, 1995 and 1994, respectively, consists mainly of lease acquisition
costs related to unproved areas. As of February 25, 1997 the Company has sold
all of its wholly owned subsidiaries operating in Columbia and Peru.

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.


                                      F-35

<PAGE>

<TABLE>
<CAPTION>

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, 1996, 1995 and 1994. 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.




                                  United States                  Colombia                        Total
                             -------------------------   --------------------------    --------------------------
                                 Oil          Gas            Oil          Gas              Oil          Gas
                                BBLS         MCF            BBLS         MCF              BBLS         MCF

<S>     <C>                                            <C>        <C>               <C>         <C>       
January 1, 1994                   -           -        4,089,275  11,564,300        4,089,275   11,564,300

  Revisions of
    previous estimates            -           -      (1,192,425)  (3,244,100)      (1,192,425)  (3,244,100)
  Extensions, discoveries
     and other additions          -           -               -            -                -            -
  Production                      -           -        (121,643)           -         (121,643)           -
                       -------------------------   --------------------------    --------------------------
December 31, 1994                 -           -       2,775,207    8,320,200        2,775,207    8,320,200

    Revisions of
      previous 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
                       =========================   ==========================    ==========================

</TABLE>

                                      F-36
<PAGE>

<TABLE>
<CAPTION>
                                   United States            Columbia                Total
                                   --------------       ------------------     --------------------
                                   Oil        Gas        Oil        Gas        Oil          Gas
                                   BBLS       MCF        BBLS       MCF        BBLS         MCF

<S>                               <C>        <C>       <C>        <C>          <C>        <C>
Net proved developed reserves

January 1, 1994                     -          -        992,166   5,155,900    992,166    5,155,900
December 31, 1994                   -          -        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

</TABLE>


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.

Revisions to crude oil reserves in 1994 reflect the elimination of the Puli
No. 3 K4 formation reserves, which were found to be incapable of production
due to formation damage. These revisions were partially offset by an increase
in the Toqui reserves due to the lower decline rate demonstration during
1994.


                                      F-37

<PAGE>

<TABLE>
<CAPTION>

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.

                                                                       Colombia
                                           -----------------------------------------------------------------
                                                  1996                    1995                  1994
                                                  ----                    ----                  ----

<S>                                            <C>                     <C>                   <C>         
Future cash inflows                            $ 61,173,696            $ 46,433,879          $ 33,896,403

Future development costs                        (12,170,000)            (10,780,000)           (5,977,600)

Future production costs                          (8,012,891)             (9,409,442)           (7,154,014)

Future income tax expenses                                -                       -                     -
                                           -------------------     -------------------   -------------------

Future net cash flows                            40,990,805              26,244,437            20,764,789

Annual discount 10% rate                        (19,088,789)            (13,885,290)          (10,693,885)
                                           -------------------     -------------------   -------------------

Standardized measure discounted future
 net cash flows                                $ 21,902,016            $ 12,359,147          $ 10,070,904
                                           ===================     ===================   ===================

</TABLE>


                                    
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 1994, 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, 1994, 1995 and 1996.

                                      F-38
<PAGE>


CHANGES IN STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS:


The aggregate change in the standardized measure of discounted future net cash
flows was an increase of $9,542,869 and of $2,288,243 in 1996 and 1995
respectively and a decrease of $3,532,119 in 1994. The principal sources of
change were as follows:

<TABLE>
<CAPTION>





                                                       For the years ended December 31,
                                         ---------------------------------------------------------------------------------
                                                  1996            1995            1994
                                                  ----             ----            ----

<S>                                           <C>             <C>             <C>
Beginning of year                             $ 12,359,147    $ 10,070,904    $ 13,603,023
Sales and transfer of oil and gas produced,
   net of production costs                        (752,724)       (740,495)       (519,345)
Net changes in prices and production costs       6,764,808         135,987       1,660,800
Extensions, discoveries, additions and
   improved recovery, less related costs              --           660,594            --
Previously estimated development costs
   incurred during the year                        719,954         527,595         683,532
Changes in estimated future
   development costs                              (973,650)     (2,032,144)      1,302,552
Revisions of previous reserve
   quantity estimates                            1,460,849       3,783,148      (5,751,795)
Changes in timing and other                      1,087,717      (1,053,532)     (2,268,165)
Accretion of discount                            1,235,915       1,007,090       1,360,302
                                              ------------    ------------    ------------

                                              ============    ============    ============
End of year                                   $ 21,902,016    $ 12,359,147    $ 10,070,904
                                              ============    ============    ============




</TABLE>

                                      F-39
<PAGE>







                                   SIGNATURES


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

                                            AMERICAN INTERNATIONAL
                                            PETROLEUM CORPORATION


Dated:  November 19, 1997
                                          By:  /s/ Denis J. Fitzpatrick
                                               Denis J. Fitzpatrick
                                               Chief Financial Officer

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



By:        /s/ George N. Faris            Date:  November 19, 1997
           George N. Faris, Chairman
           of the Board of Directors
           and Chief Executive Officer


By:        /s/ Denis J. Fitzpatrick       Date:  November 19, 1997
           Denis J. Fitzpatrick
           Vice President, Secretary,
           Principal Financial and
           Accounting Officer


By:        /s/ Donald G. Rynne            Date:  November 19, 1997
           Donald G. Rynne, Director


By:        /s/ Daniel Y. Kim              Date:  November 19, 1997
           Daniel Y. Kim, Director


By:        /s/ William R. Smart           Date:  November 19, 1997
           William R. Smart, Director



<PAGE>


                                  Exhibit Index

Exhibit
Number             Description

3.2                Bylaws of the Registrant, as amended

4.8                Form of 8% Redeemable Convertible Debenture due April 1999
                   and Form of Subscription Agreement relating thereto.

   
23.1               Consent of Huddleston & Co., Inc., Petroleum and Geological
                   Engineers.
    

21.1               Subsidiaries of the Registrant

27.1               Financial Data Schedule