<PAGE>

                                  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, 1998

                         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 March 29, 1999 was approximately $48,000,000 (assuming
solely for purposes of this calculation that all directors and officers of the
Registrant are "affiliates").

The number of shares of Common Stock of the Registrant outstanding as of March
29, 1999 was 66,216,889.



<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 implemented the productionof asphalt, vacuum gas oil
and other products at its subsidiary's Lake Charles, Louisiana refinery the
first quarter of 1998 utilizing low-cost, low-gravity, high-sulpher crudes from
Mexico and Venezuela and is engaged in oil and gas exploration and development
in western Kazkastan. The Company is also seeking other oil and gas projects in
the United States, Russia and Central Asia.

The Company's wholly-owned subsidiary, American International Refinery, Inc.
("AIRI") is the owner of a refinery in Lake Charles, Louisiana (the "Refinery").
A certain portion of the Refinery, a 30,000 barrel-per-day crude distillation
tower (the "Crude Unit") was leased by AIRI to Gold Line Refining Ltd. ("Gold
Line"), an independent refiner, from 1990 to March 20, 1997 under a lease
agreement (the "Lease Agreement") between AIRI and Gold Line. See "Domestic
Operations - Refinery" below. The Company is now producing asphalt and other
petroleum products. See "Domestic Operations - Refinery" below.

The Company's wholly-owned subsidiary, American International Petroleum
Kazakstan ("AIPK") is the owner of a 70% working interest in a 20,000 square
kilometer exploration block in western Kazakstan. See "International Exploration
and Development" below.

1229329 Ontario ("Ontario"), a wholly-owned subsidiary of the Company organized
under the laws of the Province of Ontario, Canada, was created specifically to
enable the Company to sell in Canada shares of common stock of Mercantile
International Petroleum Inc. ("MIP"), which the Company received as partial
proceeds from an asset sale, which occurred on February 25, 1997 when the
Company sold all of the issued and outstanding shares of common stock of its
wholly-owned oil and gas exploration and production subsidiaries, American
International Petroleum Corporation of Colombia ("AIPCC") and Pan American
International Petroleum Corporation ("PAIPC"), in an arms length transaction
(the "MIP Transaction"). See "International Exploration and Development - Sale
of South American Subsidiaries" below. Prior to the MIP Transaction and the
implementation of its Kazakstan operations, the Company's principal oil and gas
properties consisted of (i) between 40% and 80% of the working interest in all
oil and/or gas wells drilled on approximately 33,000 acres in the Puli Anticline
and the Toqui-Toqui fields, located in the Middle Magdalena Region of Colombia,
South America and (ii) 65% of the working interest in approximately 27,000 acres
of exploratory and development contract rights in the Talara Basin in Peru,
South America.

   
In February 1998, the Company organized another wholly-owned subsidiary,
American Eurasia Petroleum Corporation ("AEPC"), to conduct business in Russia
and in Central Asia. In July 1998, the Company organized American International
Marine, Inc. ("AIM") to conduct barging and transportation of its own and
others' refined products. In August 1998, it organized American International
Petroleum Corporation Holding Inc. ("AIPC Holding") to hold 25% of the
outstanding shares of Zao Nafta, a Russian closed-stock Company, which it soon
expects to receive as a default payment. See "International Exploration and
Development B Zao Nafta Acquisition" below. AIM and AIPC Holding are also
wholly-owned subsidiaries of the Company. In November 1998 the Company purchased
100% of a 20,000 barrel per day refinery located on 55 acres of land in St.
Marks, Florida, near Tallahassee ("St. Marks"). The term the "Company" includes
AIPC, AIRI, AIPCC, PAIPC, AIPK, Ontario, AEPC, AIM, AIPC Holding, and St. Marks
unless the context otherwise requires.
    

Some of the information in this document, and in those incorporated by reference
herein, may contain forward-looking statements. Such statements can be
identified by the use of forward-looking terminology such as "may", "will",
"expect", "believe", "intend", "anticipate", "estimate", "continue", or similar
words. These statements discuss future expectations, estimate the happening of
future events or the Company's financial condition or state other
"forward-looking" information. When considering such forward-looking statements,
one should keep in mind the risk factors and other cautionary statements in this
document and in those incorporated by reference herein, including the Company's
continued losses, occasional working capital deficits, the ability to enter into
various contracts to operate the Refinery and to sell products therefrom,
completion of any necessary financing requirements, the impact of competitive
pricing , and other risks detailed from time to time in the Company's SEC
reports. Such risk factors could cause the Company's actual results to differ
materially from those contained in any forward-looking statement.

                                                                               2


<PAGE>

Domestic Operations

     Refinery

In July 1988, AIRI acquired the Refinery, which is located on 30 acres of land
bordering the Calcasieu River near Lake Charles, Louisiana. The Company also
owns 25 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 naphtha and the following side cuts: heavy naphtha, kerosene (for jet
fuel), #2 diesel, atmospheric gas oil and reduced crude oil sold as special #5
fuel oil. The Crude Unit is also suitable for adaptation to process sour crude
oil.

In 1989, the Company purchased a 16,500 barrel per day vacuum distillation unit
(the "VDU") which was dismantled and moved to the Refinery. Construction of the
VDU on the Refinery site was completed in 1993 and partially utilized by Gold
Line, for various economic reasons, the VDU was idle until mid-1998 when the
Company completed the expansion of, and certain enhancements to, the Crude Unit,
VDU, and other components of the Refinery to enable the Company to produce
conventional and polymerized asphalt, vacuum gas oil ("VGO"), diesel, and other
products.

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

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

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

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

     St. Marks Refinery

On November 23, 1998, the Company purchased 100% of St. Marks Refinery Inc., a
20,000 barrels per day refinery and product storage terminal located on the St.
Marks River near Tallahassee, Florida for 1.5 million shares of the Company's
common stock. From April 1998 to the date of purchase, the Company leased St.
Marks, where it sold approximately 32% of its total conventional asphalt sales
during 1998.

This strategic acquisition fits perfectly with AIRI's manufacturing and
marketing plan which includes wholesale barge, rail car, retail truck, all types
of roofing asphalt, industrial grades and many other conventional and
polymerized asphalt products that are currently being developed by the Company's
technicians specifically gathered to develop premium-priced products.


                                                                               3

<PAGE>

     American International Marine, Inc.

Also, during 1998, the Company formed a new subsidiary, American International
Marine, Inc. ("AIM"), which acquired a 1,750 ton , 27,000 barrel capacity
asphalt barge (the "Barge") primarily to shuttle asphalt between the Refinery
and the asphalt terminal at St. Marks and to transport refined products for
third parties. The internal barging operation is vital to enhance the
profitability of St. Marks. The Company expects to expand AIM's activities as
demand grows.

     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. In October 1997, the Company paid the total
balance due on the Loan Agreement.

During 1998, the Company financed an aggregate of approximately $2.1 million
worth of crude oil feedstock and asphalt (most of which it purchased from
Mexico) which was secured by AIRI's inventory. The Company has also borrowed
approximately $600,000 to purchase and refurbish the Barge.

     Recent Developments

In January 1999, the Company borrowed $1.8 million for working capital,
utilizing the Refinery's machinery and equipment as collateral (the "January
Note").

In February 1999, the Company sold $10 million worth of 5% Secured Convertible
Debentures due in February 2004 in a private placement to a single entity (the
"5% Debentures"). The Company utilized approximately one-half of the proceeds
therefrom (1) to repay the January Note in full, (2) repay the $1.3 million
balance of principal and interest due pursuant to AIRI's September 1998
settlement of an Excise Tax dispute with the Internal Revenue Service (See "Item
3. Legal Proceedings", below), and (3) for working capital. The remainder was
utilized to redeem $3.5 million of principal from the Company's 14% Convertible
Notes and for certain seismic expenditures in Kazakstan. The 5% Debentures are
secured by a Mortgage on the Refinery, which collateral will be released when
the principal balance of the 5% Debentures falls below $3 million.

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.

     Kazakstan Agreement

   
In May 1997, the Company, through its wholly-owned subsidiary, American
International Petroleum Kazakstan ("AIPK"), entered into an agreement (the
"Kazakstan Agreement") with MED Shipping and Trading S.A. ("MED"), a Liberian
corporation with offices in Frankfurt, Germany, to buy from MED 70% of the stock
of MED Shipping Usturt Petroleum Ltd. ("MSUP"), a Kazakstan corporation which
owns 100% of the working interest in a Kazakstan oil and gas concession (the
"Concession" or "License Area"). The Concession is located approximately 125
kilometers from Chevron's multi-billion-barrel Tengiz Oil field near the Caspian
Sea in the North Ustyurt Basin. Independent, preliminary, evaluation indicates
potential recoverable reserves from 12 structures of possible oil bearing
Jurassic Age sandstones and 8 structures of gas bearing Eocene Age sandstones.
The Company tested one of the gas bearing Eocene structures in December 1998 and
plans additional testing in 1999.

The definitive agreement under which MSUP is to explore and evaluate hydrocarbon
reserves in the License Area provides for the payment of a commercial bonus of
0.5% of reserve value, a subscription bonus of $975,000, and grants MSUP the
exclusive right to a production license upon commercial discovery. The term of
the license is five years and may be extended for an additional 4 years. The
five-year minimum work program required by the license calls for MSUP to acquire
and process 3,000 kilometers of new seismic data, reprocess 500 kilometers of
existing seismic data, and a minimum of 6,000 linear meters of exploratory
drilling. Initial production up to 650,000 barrels is exempt from royalty, which
otherwise ranges between 6% and 26%, to be negotiated in conjunction with a
production agreement with the government. Income tax has been set at 30% and
social programs payments at $200,000 annually during exploration. The social
program contribution required in the Kazakstan Agreement is not specific as to
any one program. The contributions may be made to any
    

                                                                               4

<PAGE>


   
governmental or social agency recognized by the regional state government. The
contributions can also be made directly to the government of the respective
regions as appropriate. Contributions are normally coordinated with the local
state governor's office prior to any payment. Seventy percent of the annual
contribution is allocated to the Mangistau State, and thirty percent to the
Aktabinsk State, in accordance with the the percent of land area of the License
Area in each state. This contribution concept is common to most contracts and
the amount is determined at the time of negotiating the respective contracts on
a case by case basis. The Company has completed acquisition of 902 kilometers of
new 2D seismic data and reprocessed about 1,200 kilometers of vintage 2D seismic
data over the License Area and has completed drilling one Eocene gas test well
in December 1998 and plans long-term testing in 1999.
    

     Recent Developments

     Shagyryl-Shomyshty Gas Field

In February 1999, the Company was officially notified by the Kazakstan
government's State Investment Committee that it has won the tender for the
Shagyryl-Shomyshty gas field, ("Shagyryl"), in western Kazakstan. Fifty-eight of
the sixty-nine gas wells drilled to delineate the 200,000 acre gas field were
tested to have commercial gas by the regional development authorities. The
Company expects to sign in 1999 a license agreement with the Kazakstan
government for 100% ownership of the Shagyryl. The Srednyaya Azia - Center
("SAC") pipeline system, located approximately 65 miles to the west of Shagyryl,
contains three gas pipelines with a combined capacity of approximately 6.5
billion cubic feet of gas per day. The Bukhare pipeline, approximately 130 miles
to the east of Shagyryl, has a capacity of approximately two billion cubic feet
of gas per day.

The Company's strategy in Kazakstan includes developing shallow gas reserves in
Shagyryl. Exploration to delineate the potential deep oil plays will continue
with more deep seismic acquisitions. The timing and amount of any future
expenditures at Shagyryl are not currently determinable, but will be dependent
upon various factors, including the timing of the government's licensing
process, negotiated Company obligations there, and the success of securing
supplier-backed project financing or a partner to build the required transfer
pipeline.

      Zao Nafta Acquisition

   
On March 18, 1998, the Company signed an agreement (the "Option") with Zao Nafta
("ZN") a Russian closed stock company in which the Company received a 90-day
option to acquire a 75% working interest in a joint venture for the development
of 17 oil and gas licenses (the "Licenses") in the Samara and Saratov regions of
European Russia, covering approximately 877,000 acres (a "closed stock company"
is a company which has its equity ownership measured in registered shares. The
shares are not publicly traded or readily available for sale to another party
without first offering other shareholders proportional participation in the
purchase of the shares to be sold). During its due diligence process, the
Company was unable to reach an agreement with the owner of ZN over who would
control and manage development of the acquired fields. As a result, the Company
informed the owner that it would not pursue the purchase and requested a refund
of $300,000 deposit called for in the Option. When the refund was not paid by
the owner, the Company exercised its right under the Option to demand 25% of the
outstanding shares of ZN (the "ZN Shares") from the owner. The ZN Shares may be
sold or traded in private commercial transactions, as they are not listed or
traded on any organized exchange. The shares are in the process of being
delivered to the Company's counsel in Russia and will be held by AIPC Holding
until a decision is made on how or if to proceed. The Company is considering
various alternatives including the sale or barter of the ZN Shares to acquire
petroleum interests in the Samara region of Russia.

Sale of South American Subsidiaries
    

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

The assets of AIPCC and PAIPC consisted of oil and gas properties and equipment
in South America with an aggregate net book value of approximately $17.9
million. The total aggregate purchase price payable by MIP for the Purchased
Shares was valued (giving account to the contingent portion thereof which,
pursuant to GAAP, was not recorded by the Company) at up to approximately $20.2
The Company utilized a substantial portion of the cash proceeds of the sale to
repay the outstanding balance to MGTF on its 12% Secured Debentures due December
31, 1997, to pay other debts, expand its refinery, and for general corporate
use.

                                                                               5



<PAGE>

Competition

   
As an increasing number of State Departments of Transportation convert to
Strategic Highway Research Program (ASHRP@) performance graded (APG@) asphalt
specifications, the number of asphalt competitors continues to decline. In the
past year, several major oil companies have announced mergers and formed joint
operation spin-off companies in a move to consolidate resources, reduce
redundant operations, and increase efficiency. This has resulted in a
supply/demand shift that is favorable to the Company's business plan. As a
consequence of these consolidations, the number of major oil company asphalt
refiner/suppliers has been reduced by almost 40%.

The geographic location of the Refinery in Lake Charles, Louisiana, gives the
Company a distinct freight advantage over other asphalt suppliers in the area.
Most of the Company's competition in its planned asphalt manufacturing business
will come from those refiners who do not have downstream processing options such
as residual coking capacity. 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
market than the Refinery. This distance equates to more than $1.30 per barrel
freight advantage to the Company into the same markets.
    

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

     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:                                              1998               1997                    1996
                                                                              ----               ----                    ----
<S>                                                                            <C>               <C>                     <C> 
     United States                                                      $11,394,009       $    23,298              $2,596,917
     Colombia                                                                  -              292,947               1,508,260
     Peru                                                                      -                 *                      *
     Kazakstan                                                                 -                 -                      -

Sales or transfers between geographic areas:

     United States                                                             -                 -                      -
     Colombia                                                                  -                 -                      -
     Peru                                                                      -                 -                      -
     Kazakstan                                                                 -                 -                      -

Operating profit or (loss):

     United States                                                      $(2,820,758)     $(1,165,890)               $ 980,874
     Colombia                                                                  -            (170,424)                  39,595
     Peru                                                                      -                 *                   (200,000)
     Kazakstan                                                                 -                 -                      -

Identifiable assets:

     United States                                                      $35,234,530      $21,159,627              $12,895,332
     Colombia                                                                  -                 -                 14,641,646
     Peru                                                                      -                 -                  4,860,559
     Kazakstan                                                           22,677,073       11,724,477                   -

Export sales:
</TABLE>
   
*Information was not available due to dispute with partner, which dispute was
 settled subsequent to the MIP Transaction.
    
                                                                               6
<PAGE>


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.

   
Extensive national and/or local environmental laws and regulations in both the
United States and Kazakstan affect nearly all of the operations of the Company.
These laws and regulations set various standards regulating certain aspects of
health and environmental quality, provide for penalties and other liabilities
for the violation of such standards and establish in certain circumstances
obligations to remediate current and former facilities and off-site locations.
There can be no assurance that the Company will not incur substantial financial
obligations in connection with environmental compliance.

The Company is occasionally subject to nonrecurring environmental costs. The
annual cost incurred in connection with these assessments varies from year to
year, depending upon the Company's activities in that year. The costs of such
environmental impact assessments were not material in 1998, and are not expected
to be material in future years, however, there can be no assurance these costs
will not be material. The Company is not aware of any other anticipated
nonrecurring environmental costs.

Kazakstan has comprehensive environmental laws and regulations and has adopted
the environmental standards set out by the World Bank organizations. Enforcement
is administered through the Kazakstan Ministry of Environment and related local
state agencies. The Company's operations require a comprehensive environmental
permit for all drilling and exploration activities.

The Company has no currently outstanding or anticipated reclamation issues in
the United State or abroad.
    


Marketing

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

In the Texas market, the Company continues to expand its truck rack retail
asphalt marketing efforts. A recent inspection by the Texas Department of
Transportation materials division resulted in an approval for the Company to bid
on state and federal highway projects throughout Texas.

The Company has been very successful with its marketing efforts in both
Louisiana and Texas and maintains a constant backlog of orders and sales
agreements in excess of several million dollars for its polymerized and
conventional asphalt products. In addition, the Company is investigating the
possibility of establishing more truck rack retail locations outside the
immediate area of its current facility.



                                                                               7


<PAGE>


The Company's recent acquisition of St. Marks Refinery, Inc., located south of
Tallahassee in St. Marks, Florida, provides the Company with an excellent
strategic location from which to market polymerized and conventional asphalt
products across the entire northern half of Florida. In addition, from this
facility, the Company can penetrate asphalt markets in the southwestern quarter
of Georgia as well as the southeastern quarter of Alabama. The Company has
already been approved as an asphalt supplier for the Florida DOT ("Department of
Transportation") and the Georgia DOT. Alabama DOT approval is in progress and
the Company expects that process will be completed in the second quarter of
1999.

   
These market opportunities have the potential to increase the Company's
expansion into new profitable retail sales outlets at greater net-back margins
than can be achieved in the wholesale barge markets. As of March 30, 1999, the
Company has been very successful at the 1999 state highway lettings and has
already accumulated a firm backlog of orders and sales agreements in excess of
$6.5 million for its polymerized and conventional asphalt products, compared to
approximately $2.2 million at the same date last year. The Company expects to be
able to fulfill all of its backlog obligations when required.
    

The Transportation and Equity Act for the 21st Century ("TEA-21") signed into
law in August 1998, authorizes $173 billion over six years (1998-2003) for
construction and maintenance of federal highways. The six-state Gulf Coast
market where the Company sells its conventional and polymerized asphalt products
is slated to receive more than $32 billion in federal funding under TEA-21, a
61% increase over the previous highway spending program. TEA-21 is expected to
provide a significant increase in the overall demand for asphalt in the
Company's markets. In addition, matching state DOT highway funds could increase
the total spending for highway construction by another 10% - 50%.

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

Refinery sales to Conoco accounted for 19% of the Company's sales during 1998.
No other company accounted for 10% or more of the Company's sales during the
year.

Lease fees from Gold Line accounted for approximately 0%, 0% and 60% of the
Company's 1998, 1997 and 1996 revenues, respectively. On March 20, 1997, the
Company terminated the Lease Agreement with Gold Line.





                                       8



<PAGE>
Oil and Gas

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

Sales of the Company's crude oil to Carbopetrol S.A. in Colombia accounted for
0%, 29%, and 24% of the Company's 1998, 1997, and 1996 revenues, respectively.
Sales to Ecopetrol accounted for approximately 0%, 11%, and 9% of the Company's
1998, 1997, and 1996 revenues, respectively. The Company sold its assets in
Colombia and Peru in February 1997.

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. AIRI requires sour asphaltic crudes
that are in abundant supply within the western hemisphere. Primary sources
include Mexico, Venezuela, Colombia, Ecuador and Canada for "road grade"
asphalt. "Roofer's flux" crudes can be sourced from Saudi Arabia, Oman, U.S.
Gulf off-short, Texas and Louisiana sweet lights. Many crudes can be blended
into the primary base crudes. AIRI personnel have the experience and ability to
source the necessary feedstocks.

Employees
   
As of March 31, 1999, the Company employed 76 persons on a full-time basis,
including 15 persons who are engaged in management, accounting and
administrative functions for AIPC and 54 who are employed by AIRI on a full-time
basis, including 15 persons who are engaged in management and administrative
functions, and two persons who are employed by AIPK in management and
administrative positions. Five persons are employed by St. Marks, two of which
are in management and administration. The Company frequently engages the
services of consultants who are experts in various phases of the oil and gas
industry, such as petroleum engineers, refinery engineers, geologists and
geophysicists. The Company has no collective bargaining agreements and believes
that relations with its employees are satisfactory.
    

Item 2.  PROPERTIES

Office Facilities

The Company leases approximately 4,800 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 for a period of seven years at
a monthly rental rate of $19,600 and expires on December 31, 2006. In addition,
the Company leases approximately 10,500 square feet of office space in Houston,
Texas at a monthly rental of $17,929 This lease expires on December 12, 2003.

The Company also owns 90 acres of vacant land in Lake Charles, Louisiana where
the Refinery is located. In addition to the structures and equipment comprising
the Refinery facility (See "Item 1 - Business - Domestic Operations -
Refinery"), the Refinery assets include an approximately a 4,400 square foot
office building, a new 2,200 square foot asphalt plant office, and a
state-of-the-art laboratory, and two metal building structures serving as work
shops, maintenance and storage facilities with an aggregate square footage of
approximately 4,300 square feet. The Company also owns approximately 68 acres of
vacant land adjacent to the St. Marks Refinery in Florida.

                                                                               9
<PAGE>
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, 1998, 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, 1998.
<TABLE>
<CAPTION>
                              Gross                     Gross                       Net                 Net
                            Developed                Undeveloped                 Developed          Undeveloped
                             Acreage                   Acreage                    Acreage             Acreage
                             -------                   -------                    -------             -------   
<S>                          <C>                       <C>                        <C>               <C>
Kazakstan                       -                      4,734,097                     -               3,313,868
</TABLE>

The table below indicates the Company's gross and net oil and gas wells as of
December 31, 1998. 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>
Kazakstan                 -                     -               -                   -               -              -
</TABLE>

Oil and Gas Production

The table below indicates the Company's net oil and gas production, by country,
for each of the three years in the periods ended December 31, 1998, 1997, 1996,
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)
                             -------                    ------------------       -------           --------       
<S>                          <C>                        <C>                      <C>              <C>  
1998 -Kazakstan                 -                          $    -                   -              $   -
     -Colombia                  -                               -                   -                  -
     -Peru                      -                               -                   -                  -
                                                                                       
1997 -Kazakstan                 -                          $    -                   -              $   -
     -Colombia                18,625                          11.81                 -                  -
     -Peru                      *                               *                   *                  *
                                                                                       
1996-Colombia                130,433                        $ 10.46                 -              $   -
     -Peru                      *                               *                   -                  -
</TABLE>                                                      

Average foreign lifting costs in 1997 and 1996 were approximately $5.31 and
$4.69 per equivalent barrel of oil, respectively. The Company incurred no
lifting costs in 1998.

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

                                                                              10
<PAGE>
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%
                                      ---------         --------------            --------             ------
<S>                                 <C>                <C>                     <C>                  <C>    
Proved Developed
     Producing                         917,522             1,121.1              $ 9,379,548          $ 5,899,502
                                                       
Proved Developed                                       
     Non-Producing                      31,199             5,200.0                4,070,584            2,274,369
                                                       
Proved Undeveloped                   3,061,698             8,358.3               28,474,585           14,183,770
                                     ---------             -------               ----------           ----------
                                                       
          TOTAL                      4,010,419            14,679.4              $41,924,717          $22,357,641
                                     =========            ========              ===========          ===========
</TABLE>
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 Company sold all of it's oil and gas producing properties in February 1997,
as previously discussed, and has not yet implemented production operations in
Kazakstan, therefore it had no exploration or development wells during the
current year. The following table sets forth the gross and net exploratory and
development wells which were completed, capped or abandoned in which the Company
participated during the years indicated.

                                                                              11
<PAGE>

<TABLE>
<CAPTION>
                                               1998                            1997                        1996      
                                               ----                            ----                        ----
                                      Gross              Net             Gross          Net            Gross              Net
                                      -----              ---             -----          ---            -----              ---
<S>                                  <C>              <C>               <C>            <C>           <C>                <C>
Exploratory Wells:
    Kazakstan                           -                 -                -             -                -                   -
    South America:
     Oil                                -                 -                -             -              1.00               1.00
     Gas                                -                 -                -             -                 -                  -
     Dry                                -                 -                -             -                 -                  -
                                       ---              ---               ---           ---             ----               ----
     TOTAL                              -                 -                -             -              1.00               1.00
                                        -                 -                -             -              ----               ----

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

TOTAL                                   -                 -                -             -              2.00                1.6
                                       ===              ===               ===           ===             ====               ====

</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 claimed that AIRI failed to comply with an administrative procedure that
required sellers and buyers in tax-free transactions to obtain certification
from the IRS. The Company believes that AIRI complied with the substance of the
then existing requirements and that such sales were either tax-free or such
excise taxes were paid by the end-users of such products. AIRI offered to
negotiate a settlement of this matter with IRS Appeals since early 1993. Such
negotiations included face-to-face meetings, numerous phone calls and written
transmittals and several offers of settlement by both the Company and the IRS.
During these negotiations, the IRS Appeals officers offered to waive all of the
penalties and 75% of the amount of the proposed tax liability. However, AIRI
rejected this offer and requested the IRS' National Office to provide technical
advice to its Appeals officers. After numerous conferences and discussions with
the National Office in 1995, the National Office issued an adverse Technical
Advice Memorandum ("TAM") to its Appeals Office in Dallas, Texas, to the effect
that AIRI should be liable for the tax on the sale of diesel fuel for the first
three quarters of 1989. However, subsequent to the issuance of the TAM, the IRS
Appeals officer indicated to AIRI that the IRS still wanted to negotiate a
settlement. In 1998, the Company reached a final agreement (the "IRS Agreement")
with the IRS to settle this matter by agreeing to pay an aggregate of $646,633
in tax, plus interest accrued for the applicable periods involved. In the IRS
Agreement, the IRS waived all penalties and 75% of the amount of the originally
proposed tax liability. The Company continues to maintain that it is not liable
for the excise taxes at issue, but agreed to settle the dispute at a
significantly lowe amount of liability in order to bring this long-running issue
to conclusion. In February 1999, the Company paid all amounts due to the IRS on
this matter, which totaled approximately $1.3 million.

In January 1994, a lawsuit captioned Paul R. Thibodeaux, et al. (the
"Plaintiffs") v. Gold Line Refinery Ltd. (a limited partnership), Earl Thomas,
individually and d/b/a Gold Line Refinery Ltd., American International Refinery,
Inc., Joseph Chamberlain individually (collectively, the "Defendants") (Docket
No. 94-396), was filed in the 14th Judicial District Court for the Parish of
Calcasieu, State of Louisiana. Subsequently, several parties were joined as
plaintiffs or defendants in the lawsuit. The lawsuit alleged, among other
things, that the defendants, including AIRI, caused or permitted the discharge
of hazardous and toxic substances from the Lake Charles Refinery into the
Calcasieu River. The plaintiffs sought an unspecified amount of damages,
including special and exemplary damages. In October 1997, the Plaintiffs and
Defendants agreed upon a cash settlement, of which the Company's share of
$45,000 was placed into escrow in October 1997 and paid in 1998. This matter has
been fully and finally settled and all claims have been dismissed with prejudice
as to all defendants, which includes the Company and AIRI.

                                                                              12
<PAGE>

In 1998, Neste Trifinery ("Neste"), filed suit in a Harris County District Court
against the Company and its wholly-owned subsidiary, American International
Refinery, Inc. ("AIRI") (Neste Trifinery V. American International Refinery,
Inc. Etc. Case No. 98-11453; in the 269th Judicial District; in and For Harris
County, Texas). Neste has asserted claims for recovery of compensatory and
punitive damages based on the following theories of recovery; (1) breach of
contract, (2) disclosure of confidential information; and (3) tortious
interference with existing contractual relations. Generally, Neste has alleged
that in connection with the due diligence conducted by the Company and AIRI of
the business of Neste, the Company and AIRI had access to confidential or trade
secret information and that the Company and AIRI have exploited that
information, in breach of an executed Confidentiality Agreement, to the
detriment of Neste. Neste seeks the recovery of $20,000,000 in compensatory
damages and an undisclosed sum in connection with its claim for the recovery of
punitive damages.

In addition to seeking the recovery of compensatory and punitive damages, Neste
sought injunctive relief. Specifically, Neste sought to enjoin the Company and
AIRI from: (1) offering employment positions to the key employees of Neste; (2)
contacting the suppliers, joint venture partners and customers of Neste in the
pursuit of business opportunities; (3) interfering with the contractual
relationship existing between Neste and St. Marks Refinery, Inc.; and (4)
disclosing or using any confidential information obtained during the due
diligence process to the detriment of Neste. The Company and AIRI have asserted
to a general denial to the allegations asserted by Neste. The Company and AIRI
also moved the district court to refer the matter to arbitration, as provided
for in the Confidentiality Agreement, and to stay the pending litigation. On
March 27, 1998, the district court referred the matter to arbitration, as
requested by the Company and AIRI, and stayed litigation. At present, the
dispute existing between the Company, AIRI and Neste in Texas will be decided by
a panel of three arbitration judges under the American Arbitration Association
rules for commercial disputes. The Company and AIRI are vigorously defending
this matter, and the Company's counsel does not anticipate an unfavorable
outcome, although a definitive outcome is not yet determinable.
   
On February 26, 1998, the Company entered into a Letter Agreement with DSE,
Inc., the parent corporation of St. Marks Refinery, Inc., whereby the Company
agreed to purchase or lease the refinery and terminals facility located at St.
Marks, Florida. Thereafter, St. Marks Refinery, Inc. elected to terminate its
storage agreement with Neste Trifinery. On March 10, 1998, Neste sued St. Marks
Refinery, Inc. in the United states District Court for the Northern District of
Florida, Case No. 4:98cv86-WS, and sought an injunction to prevent immediate
termination of its storage agreement. Following an evidentiary hearing, the
District Judge denied Neste's application for injunctive relief and adopted the
recommendations of the Magistrate, who found in part that Neste had failed to
prove a substantial likelihood of success on the merits. The District Court's
order was appealed by Neste to the United States Court of Appeals for the
Eleventh Circuit, but the Appellate Court denied Neste's motion for injunction
pending appeal. On appeal, the federal court found in favor of Neste and issued
a judgement related thereto for $175,000, which was paid by the Company on
behalf of St. Marks in March 1999. However, DSE, Inc. has agreed to reimburse
the Company $75,000 of the $175,000, pursuant to DSE, Inc.'s indemnification of
the Company included in the Stock Purchase Agreement under which the Company
purchased St. Marks.
    
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 Class A Warrants expired
on April 9, 1998). The following table sets forth, for the periods indicated,
the range of closing high and low bid prices of the Common Stock and the Class A
Warrants as reported by NASDAQ. These quotations represent prices between
dealers, do not include retail markups, markdowns or commissions and do not
necessarily represent actual transactions.
<TABLE>
<CAPTION>
                                                      Common Stock                                   Class A Warrants
                                                      ------------                                   ---------------- 
                                               High Bid             Low Bid                    High Bid            Low Bid
                                               --------             -------                    --------            -------
<S>                                              <C>                  <C>                         <C>                <C>  
1998     First Quarter                           $4.91                $3.19                       $2.19              $0.75
         Second Quarter                           4.34                 1.53                        1.12               0.01
         Third Quarter                            1.94                 0.94                        *                    *
         Fourth Quarter                           2.50                 0.69                        *                    *

1997     First Quarter                           $0.73                $0.31                       $0.22              $0.06
         Second Quarter                           0.69                 0.41                        0.66               0.06
         Third Quarter                            7.13                 0.44                        4.00               0.13
         Fourth Quarter                           6.50                 3.19                        3.75               1.31
</TABLE>
*The Class A Warrants expired on April 9, 1998.

At March 31, 1999, the Company had approximately 1,681 shareholders of record of
its Common Stock. The Company estimates that an additional 12,000 shareholders
hold Common Stock in street name.

During the fiscal quarter ended December 31, 1998, the Company issued an
aggregate of 7,323,169 shares of Common Stock upon conversion of, and in payment
of accrued interest, on its 14% Convertible Notes. The issuance of those shares
were exempt from the Registration requirements of the Securities Act under
Sections 3(a)(9) and 4(2), respectively of the Securities Act.

Dividend Policy

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

Item 6.  SELECTED FINANCIAL INFORMATION

The following selected financial data for each of the five years in the period
ended December 31, 1998 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,
                                                              --------------------------------
                                           1998                1997             1996             1995           1994
                                           ----                ----             ----             ----           ----
<S>                                  <C>              <C>                <C>               <C>              <C>    
Condensed consolidated statement 
  of operations:
     Revenues                         $11,854,290     $    827,964       $  4,003,006      $  2,811,308     $    3,508,514
     Net loss(1)                       (9,103,113)     (17,953,621)        (4,652,207)       (4,338,322)       (10,966,914)
     Net loss per share - basic and  
       diluted                              (0.17)           (0.43)             (0.16)            (0.20)             (0.65)

                                                                           At December 31,
                                           1998                1997             1996             1995           1994
                                           ----                ----             ----             ----           ----

Condensed consolidated balance sheet:
     Working capital (deficit)        $(4,902,108)   $    (693,676)      $ (9,823,229)    $  (3,402,543)          $(28,462)
     Total assets                      60,861,334       41,839,860         34,492,431        32,640,362         32,229,713
     Total current liabilities          8,220,206        9,335,479         13,164,713        11,349,670         10,255,687
     Long-term debt                     6,110,961              -0-          6,766,592         7,302,671          7,770,171
     Stockholders' equity              46,530,167       32,504,381         21,327,718        21,290,692         21,974,626
     Cash Dividends declared                  -0-              -0-                -0-               -0-                -0-
</TABLE>
1)  Net loss in 1996 and 1994 included a provision for the write down of the
    carrying costs of oil and gas properties of $200,000 and $6,904,000,
    respectively.

                                                                              14
<PAGE>
Item 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
         CONDITION AND RESULTS OF OPERATIONS

Results of Operations

The following table highlights the results of operations for the years ended
December 31, 1998, 1997 and 1996.
<TABLE>
<CAPTION>
                                                                            For the Years Ended December 31,
                                                                            --------------------------------
                                                                            1998           1997           1996
                                                                            ----           ----           ----
<S>                                                                        <C>           <C>          <C>    
Refinery Processing Operations:
    Refinery product revenues (000's)                                      $11,394              -            -
    Product Costs (000's)                                                   $8,194              -            -
    Operating Costs (000's)                                                 $3,087

Exploration and Production Activity:
Colombia Properties(1):
    Revenue - Oil Sales (000's)                                                  -           $261       $1,365
    Lease Operating Expenses (000's)                                             -            $99         $612
    Production Volume - Barrels                                                  -        318,625      130,433
    Average Price per Bbl                                                        -         $14.01       $10.46
    Production Cost per Bbl                                                      -          $5.31        $4.69
    DD&A per Bbl (2)                                                             -          $3.77        $3.77


Peru Properties (3)(4):
    Revenue - Oil Sales (000's)                                                  -              -            -
    Lease Operating Expenses (000's)                                             -              -            -
    Production Volume - Bbls                                                     -              -            -
    Average Price per Bbl                                                        -              -            -
    Production Cost per Bbl                                                      -              -            -
    DD&A per Bbl                                                                 -              -            -

Refinery Operations(5):
    Refinery Lease Fees (000's)                                                  -              -       $2,468
    Average Daily Throughput (Bbls)                                              -              -       13,138
    Average Throughput Fee                                                       -              -        $0.50
</TABLE>
--------------------
(1) Reflects activity through the closing of the MIP Transaction on February 25,
    1997.

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

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

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

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

                                                                              15
<PAGE>
Refinery Operations

For the Year Ended December 31, 1998 compared to the Year Ended December 31,
1997

During 1997, the Company commenced expansion of the Refinery and conversion of
the crude unit to a heavy crude processing unit to enable the manufacture of
asphalt and other products. During 1998 the Company undertook extensive testing
of its refinery equipment and processing capabilities. The Refinery did
extensive process sampling with various types of crude oils in an effort to
determine the most economical and technically acceptable crude feedstock to
develop and produce the basic asphalt material to be used in developing the
specialty asphalts the asphalt road construction industry will require, and in
some areas is currently requiring, to be used. As a result of the refinery's
testing activity this year, the refinery manufactured products which generated
revenues of approximately $6 million dollars from asphalt products and
approximately $3.4 million dollars from certain light-end and other products.
The Company's sales prices on its retail asphalt ranged from $75 to $187 a ton.
The Company incurred approximately $6.8 million in product costs related to
those revenues and approximately $2.7 in operating costs during this extensive
testing period throughout 1998. Because of very low operating levels during most
of 1998 and redundant processing and blending of feedstock and asphalt during
the testing process, the Company's margins were severely distorted and should
not be considered indicative of margins expected during normal operating
conditions expected during the 1999 season. Costs, and likewise, revenues and
margins, will vary depending upon a number of factors, including but not limited
to feedstock prices, and from the Company's product mix, which will be
determined over time as the Company's markets are further developed.

The Refinery's terminal operations in St. Marks, Florida, which commenced in
June 1998, had revenues of approximately $2 million dollars from sales of
asphalt and costs of sales of approximately $1.8 million related to those sales
during 1998.

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

The Company, which had previously leased it's refining facility to Gold Line
Refining on a processing fee basis, evicted Gold Line in March 1997 for defaults
under several clauses of its lease agreement, the most prevalent being
non-payment of lease fees. Due to Gold Line's subsequent filing of bankruptcy in
1997, the Company did not recognize any of the $443,000 in lease fees earned
during the first quarter of 1997.

The Company had no refinery processing activity in 1997.

Oil and Gas Production Activity

For the Year ended December 31, 1998 compared to the Year Ended December 31,
1997

The Company had no oil and gas production activity during the year ended
December 31, 1998.

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

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

Other Income

For the Year ended December 31, 1998 compared to the Year Ended December 31,
1997.

Other income decreased during 1998 by approximately $107,000 to $461,000
compared to 1997, primarily from a $63,000 decrease in interest income due to
reduced funds on deposit in 1998 compared to those on deposit in 1997. An
additional decrease of approximately $50,000 in 1998 compared to 1997 was
attributable to a one-time $50,000 non-cash reduction of an accounts payable
item recorded as income in 1997.

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

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

                                                                              16
<PAGE>

General and Administrative

For the Year ended December 31, 1998 compared to the Year ended December 31,
1997

Total General and Administrative expenses ("G&A") increased by approximately
$469,870, or 10%, in 1998 compared to 1997. The Company incurred approximately
$1.4 million in additional G&A during 1998, principally due to increased
activity at the Refinery, which were offset by an aggregate of approximately
$1.0 million in reduced G&A resulting from a reduction of $279,000 related to
the sale of its Colombia and Peru oil and gas operations in 1997 and a non-cash
charge of $745,000 in 1997 in connection with the issuance of stock options. In
addition, legal expenses decreased by approximately $90,000 due primarily to the
settlement of the IRS Excise tax case and an environmental lawsuit. See "Item 3.
Legal Proceedings" above. Due to the increased activity at the refinery, payroll
and related employee expenses increased by approximately $434,000 and general
insurance costs increased by approximately $86,000 due to increased coverages of
the Refinery equipment and liability. General office administrative expenses
increased by $80,000 due to the increased sales and operations at the refinery.
Additional costs of approximately $70,000 were incurred in upgrading computers
systems due in part to Year 2000 compliance considerations. Investor relations
increased in 1998 by approximately $111,000 compared to 1997 and professional
consulting fees increased by approximately $500,000. The Company capitalized
approximately $578,000 of G&A in 1998 compared to approximately $622,000 in 1997
in connection with the Refinery expansion.

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

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

Depreciation, Depletion and Amortization

For the Year ended December 31, 1998 compared to the Year ended December 31,
1997

Depreciation, Depletion and Amortization ("DDA") increased approximately $39,000
in 1998 compared to the same period in 1997. The increase in 1998 of $124,000,
due to an increase in refinery depreciable assets during 1998, was offset by a
decrease in 1998 of depreciation and depletion attributable to the Colombia and
Peru operations that were sold in 1997. See "Item 1. Business. International
Exploration and Production" above.

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

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

Interest

Interest expense of $6,042,000 and $1,899,000 in 1998 and 1997, respectively,
was related to the presumed incremental yield the investor may derive from the
discounted conversion rate of such instruments issued by the Company during
these years. Management believes that the related amount of interest recorded by
the Company is not necessarily the true cost to the Company of the instruments
it issued and that it may be reasonable to conclude that the fair value of the
Common Stock into which these securities may be converted was less than such
stock's quoted market price at the date the convertible securities were issued
(considering factors such as the period for which sale of the stock is
restricted, which in certain cases was as long as six months, large block
factors, lack of a sufficiently-active market into which the stock can be
quickly sold, time value, etc.). However, generally accepted accounting
principles requires that an "intrinsic value" of the conversion feature at the
date of issuance should be accounted for and that such incremental yield should
be measured based on the stock's quoted market price at the date of issuance,
regardless if such yield is assured.

                                                                              17
<PAGE>
The Company expenses and also capitalizes certain other costs associated with
the offering and sale of debentures. Capitalized costs are amortized as interest
expense over the life of the related debt instrument. These costs include the
accounting for Common Stock warrants issued with and related to certain
convertible debentures, commissions paid, and certain legal expenses. Sales of
debentures and notes in 1997 were $20,537,000 compared to $3,065,000 in 1996. As
a result, debenture costs incurred and amortized in 1997 increased by $2,964,282
to $3,253,035, compared to a total of $289,000 in 1996.

For the Year ended December 31, 1998 compared to the Year ended December 31,
1997

Interest expense for 1998 was $1,912,949, net of capitalized interest of
$7,055,340, compared to an interest expense of $6,663,992, net of capitalized
interest of $340,988 in 1997. The Company incurred approximately $1,670,000 of
interest on debentures utstanding during the year. The Company also incurred
approximately $2,118,000 of imputed interest costs on the sale of its $12
million debentures in April 1998 and amortized an additional $3,924,000 related
to the conversion of debentures held at December 31, 1997. The Company
capitalized interest expense of $7,055,000 incurred in connection with its oil
and gas and refinery projects during 1998.

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

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

Realized and Unrealized Loss on Marketable Securities

As partial proceeds from the MIP Transaction, the Company received approximately
$4.4 million shares of MIP common stock valued at $2.00 per share. However,
during 1997 and 1998, the market value of MIP's shares continued to decline
significantly. During 1997, the Company sold and disposed of approximately
1,441,000 shares of the MIP shares for proceeds of approximately $1,979,000 and
recorded an aggregate net realized and unrealized loss of $6,053,000 for the
year ended December 31, 1997. During 1998 the Company sold all of its remaining
MIP shares for proceeds of approximately $377,000 and recorded an aggregate net
realized loss of approximately $369,000.

Loss on Sale of Assets

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

Liquidity and Capital Resources

During the year ended December 31, 1998, the Company used a net amount of
approximately $2,000,000 for operations, which reflects approximately $4,570,000
in non-cash provisions, including depreciation, depletion and amortization of
$2,473,000 and $1,494,000 in provision for bad debts. Approximately $799,000 was
used during the period to increase product and feedstock inventory and
$3,346,000 was provided by an increase in accounts payable and accrued
liabilities and in current assets other than cash. Additional uses of funds
during 1998 included additions to oil and gas properties and Refinery property
and equipment of $8,512,000 and $8,578,000, respectively. Cash for operations
was provided, in part, by proceeds from the exercise of certain warrants and
options and the sale of marketable securities of $738,000 and $377,000,
respectively, and from proceeds from long and short-term debt of approximately
$13,847,000. The Company was recently notified that MIP has defaulted on its
senior notes to its lenders and its common stock has been delisted from the
Toronto Stock Exchange. In addition, its recent payment due to the Company in
February 1999 of $1.5 million, plus accrued interest for the fourth quarter of
1998, was not made as scheduled. Therefore, the Company has provided an
allowance for these amounts as of December 31, 1998. The Company intends to
continue to pursue payment from MIP for all amounts due.

At December 31, 1998, the Company had negative working capital of approximately
$4.9 million dollars. However, in January and February 1999, the Company
borrowed an aggregate of $11.8 million, $10 million of which is outstanding
convertible debt due and payable in February 2004. The proceeds were used to
reduce a significant amount of current liabilities, including $1.3 million in
excise tax and related interest due to the IRS and an aggregate of approximately
$3 million in accounts payable at the Refinery and in Kazakstan.

In addition, the Company has also arranged for an aggregate of approximately
$2.1 million in financing, secured by its accounts receivable, inventory, and
its asphalt barge, $1.5 million of which it is utilizing to purchase crude oil
feedstock and asphalt. The remaining $600,000 was utilized to purchase and
refurbish a 1,750 ton barge (the "Barge"), which it intends to use to transport
asphalt, primarily to its St. Marks distribution facility in Florida.

                                                                              18
<PAGE>
   
In April 1998, the Company reached an agreement with certain institutional
investors (the "Investors") which provided it with up to $52 million in private
debt and equity financing (the "Facility") to be used by the Company on an as
needed basis over a two year period. Initial funding of $5 million and $7
million took place in April and May 1998, respectively, in the form of two-year
convertible notes (the "April 1998 Notes"). The proceeds from these fundings
were used for capital expansion, crude oil feedstock purchases, and for certain
operating expenditures at the Refinery and St. Marks, and to fund seismic
acquisition and processing, drilling expenditures, and certain operating
expenditures in Kazakstan. As of March 31, 1999, approximately $3 million in
principal remains from the original $12 million balance; $3.5 million was
redeemed by the Company and approximately $5.5 million was converted into
approximately 6.6 million shares of the Company's common stock.

The remaining portion of the Facility consisted of a $40 million Equity Line of
Credit (the "Equity Line") from which the Company could, under certain
conditions, draw funds in exchange for shares of the Company's Common Stock at
an approximate 15% discount from the market price of same on the date of the
draw down. However, the Company has obtained alternative financing (as discussed
above and in Item 1. "Business - Recent Developments") and mutually agreed with
the Investors to terminate the Equity Line.
    
In general, since the implementation of testing operations at the Refinery in
the last week of the first quarter of 1998, the Refinery has been running at
less than 10% capacity. In July 1998, when capacity reached approximately 12%,
the refinery averaged positive cash flows of approximately $130,000, even though
testing was still in progress.

The Company recently retained a major investment banking firm to assist it in
locating a joint venture partner and financing for its Kazakstan concessions.
Depending on the timing and success of this process, the Company intends to be
very conservative with its expenditures overseas during 1999. As of March 1999,
the Company's existing working capital was insufficient to provide it with all
of the capital it may require to complete its minimum work program for 1999.
However, the Company believes it can obtain a deferral of these minimum
requirements. If it is unable to obtain the necessary financing to meet these
requirements or if it is unable to obtain a deferral thereof, certain projects,
expansions and other activities in Kazakstan could be delayed or cancelled.

In March 1998, the Company signed an agreement for the Exploration of the
Mamourinskoye and Saratovskoye oil fields, with Zao Nafta ("ZN") a Russian
closed stock company. This agreement gave the Company 90 days in which to
perform technical and legal due diligence evaluations of the ZN properties.
These oil fields are included in 17 oil and gas licenses (the "Licenses") held
by ZN, covering about 877,000 acres in the Samara and Saratov regions of
Southwestern Russia, approximately 600 to 800 kilometers north of the Caspian
Sea and southeast of Moscow. Upon favorable completion of the due diligence
evaluation, a joint venture was to be formed to operate these 17 Licenses with
the Company, as Operator, holding a 75% working interest.

The Company agreed to pay $11 million for the 75% working interest in the joint
venture, $4.7 million in cash and $6.0 million in crude oil from 25% of the
Company's future net production. The Company made a refundable advance (the
"Advance") on the purchase price of $300,000 to ZN for their use in assisting
the Company in completing all legal and contractual conditions required by the
Company. In June 1998, the Company withdrew from negotiations after it could not
reach agreement on operational control of the proposed joint venture. ZN
breached its obligation to return the Advance to the Company and consequently,
was required to deliver 25% of its issued and outstanding shares to the Company.
The Company's legal counsel in Moscow has effected the legal transfer of these
shares to the Company. The Company now expects to meet with the other owners of
ZN and determine how to proceed with the proposed joint venture.

Also in March 1998, the Company signed an agreement (the "Agreement") to lease
or, subject to certain conditions, to purchase the 55 acre, 20,000 barrels per
day St. Marks Refinery and product storage terminal, located on the St. Marks
River near Tallahassee, Florida ("St. Marks"). Under the Agreement, the Company
agreed to lease St. Marks on an annual renewable basis, beginning April 1, 1998,
and to perform a due diligence process to determine if it would purchase St.
Marks for up to $4.5 million in cash and/or shares of the Company's Common
Stock. During its due diligence process, the Company identified certain factors
which significantly reduced the purchase price the Company was willing to pay to
1.5 million shares of AIPC common stock and the assumption of $50,000 of St.
Marks' liabilities. The seller agreed to accept the lower purchase price and the
parties closed the transaction in November 1998.
<PAGE>

During 1998, the Company reached an agreement to settle an ongoing dispute with
the IRS, which called for the Company to pay $646,633 in excise taxes, plus
interest incurred for the applicable periods dating back to 1989. In February
1999, the Company paid all remaining tax and interest due under the settlement
of approximately $1.3 million.
   
The Refinery, as mentioned above, was operated on a limited basis (less than 10%
capacity) during 1998 while extensive testing of equipment, various types of
crude oil feedstocks, and asphaltic blends took place. These processes severely
limited the Company's operating margins during the 1998 asphalt season. The
Company was, nevertheless, able to obtain an aggregate of approximately $4
million in conventional, non-equity financing, including the $2.1 million
mentioned above. Because of the resultant limited amount of cash flow available
during 1998 to support such debt, the Company utilized care not to overextend
its ability to repay same on a timely basis.
    
                                                                              19
<PAGE>
   
As of March 1, 1999, the Company had a backlog of asphalt sales of approximately
$6.5 million. The Company expects to operate the Refinery at a minimum of 20%
capacity during 1999. Coupled with currently-available sources of non-equity
financing, at these levels of capacity and with existing levels of feedstock and
other costs in place, the Company would expect sufficient positive operating
margins to support all Refinery and corporate overhead in 1999. As operations at
the Refinery expand during 1999, the Company plans, to the extent possible, to
prudently obtain bank or other conventional, non-equity financing to replace its
existing convertible debt and provide the supplemental funds necessary to
support its operations and minimal work program in Kazakstan. The Company is
currently having discussions with a major investment banking firm, which has
expressed interest in providing approximately $40 million in high yield debt,
and with various smaller firms for lesser amounts of debt to supplement the
Company's cash flow from operations during 1999. If the Company is unable to
derive the necessary working capital from the Refinery, St. Marks and AIM, or
from a joint venture partner in Kazakstan, to support its operations during
1999, or obtain the necessary financing to adequately supplement or provide all
of its funding needs, its ability to continue operations could be materially and
adversely effected.
    
Y2K Issues
   
The Company has been addressing the potential impact of the nearly universal
practice in the computer industry of using two digits rather than four to
designate the calendar year relating to the year 2000, ("Y2K"). The Company has
engaged outside computer consultants to assist it with its evaluation. The
Company is not aware of any circumstances in which the failure of a supplier or
customer to deal successfully with the issue would have a material impact on the
Company's ability to continue to operate on an uninterrupted basis. The Company
has assessed its internal programs and hardware and concluded that all of its
systems are, or will be, in compliance prior to year-end. Should the Company
experience any such problems with regards to its internal systems, it has
estimated that, in a worst-case scenario, the aggregate cost to mitigate any
related problemswould not exceed $75,000.
    
Market Risk

The Company is exposed to various types of market risk in the normal course of
business, including the impact of interest rate changes and foreign currency
exchange rate fluctuations. The Company does not employ risk management
strategies, such as derivatives or various interest rate and currency swaps, to
mitigate these risks.

     Foreign Exchange Risk

The Company is subject to risk from changes in foreign exchange rates for its
international operations which uses a foreign currency as their functional
currency and are translated to U.S. dollars. The Company has not experienced any
significant gains or losses to such events.

     Interest Rate Risk

The Company is exposed to interest rate risk from its various financing
activities. The following table provides information, by maturity date, about
the company's interest rate sensitive financial instruments, which are fixed
rate debt obligations. The fair value of financial instruments closely
approximates the carrying values of the instruments due to the short-term or
recent issuance of such instruments.

                                                  Total
                                                  Recorded         Fair
             1999               2000              Amount           Value
             ----               ----              ------           -----

Debt:     $1,820,896         $6,110,961          $7,931,857      $7,931,857
               9.57%                40%

A 10% increase in interest rates would decrease the Company's cash flow by
approximately $800,000 and would decrease the fair value of the Company's debt
instruments.

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

             None.
    
                                                                              20
<PAGE>


                                    PART III.

Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

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

<TABLE>
<CAPTION>
                                                                                         Year First
    Name                    Age        Position(s)                             Became a Director or Officer        
    ----                    ---        -----------                             ---------------------------- 
<S>                         <C>        <C>                                     <C> 
George N. Faris             58         Chairman of the Board and                           1981
                                       Chief Executive Officer

William R. Smart            78         Director                                            1987

Daniel Y. Kim               74         Director                                            1987

Donald G. Rynne             76         Director                                            1992

Richard W. Murphy           69         Director                                            1998

Denis J. Fitzpatrick        54         Vice President, Secretary and                       1994
                                       Chief Financial Officer

Gustave E. Chew             60         President - American International
                                       Refinery, Inc.                                      1997

William L. Tracy            51         Treasurer and Controller                            1992
</TABLE>
-------------------------------------

Biographical Information

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

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

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

                                                                              21
<PAGE>
Mr. Donald G. Rynne has served as a member of the Company's Board of Directors
since September 1992. Mr. Rynne has been Chairman of the Board of Directors of
Donald G. Rynne & Co., Inc., a privately owned company engaged in international
consulting and trading, since founding that company in 1956. Mr. Rynne is
involved in international maritime trading and consulting, dealing primarily in
the Middle East in hydrocarbon products and capital equipment. Mr. Rynne
received a B.A. degree from Columbia University in 1949.

Ambassador Richard W. Murphy was educated at Harvard College (B.A. 1951) and at
Emmanuel College, Cambridge (A.B. 1953). After service in the U.S. Army, he was
appointed to the Foreign Service of the Department of State. From 1971 to 1983
he held successive appointments as Ambassador to Mauritania, Syria, the
Philippines and Saudi Arabia. He was Assistant Secretary of State for Near
Eastern and South Asian Affairs from 1983-89 when he retired. President Reagan
nominated him to the rank of Career Ambassador in 1996, a rank restricted at any
given time to five career diplomats. Since 1989 Mr. Murphy has been Senior
Fellow for the Middle East at the council on Foreign Relations in New York City
and a private consultant. He is a frequent commentator on Middle Eastern issues
for National Public Radio, CNN, and BBC and has written for the New York Times,
The Washington Post, The International Herald Tribune and the Christian Science
Monitor. He was also a Director of Maxxus Energy.

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

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 has held various accounting and financial management positions
during his 24 years in the oil and gas industry. He has also served as a
Director or Officer of the Council of Petroleum Accountants Society; served on
the Tax Committee of the American Petroleum Institute and as a member of the
American Management Association. Mr. Fitzpatrick received a B.S. degree in
Accounting from the University of Southern California in 1974.

Mr. Gustave E. Chew joined the Company in December 1997 as President of AIRI. He
received Bachelor of Science degrees in Chemical Engineering and Accounting in
1959 from Lehigh University. Mr. Chew was most recently Managing Director of
Neste Trifinery Petroleum Services in Corpus Christi, Texas. He has 38 years of
experience in the refining industry, including 28 years with British Petroleum
North America. Mr. Chew is Chairman of the Asphalt Institute and for nine years
has served as a Director of the National Petroleum Refiners Association.

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

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

Item 11.      EXECUTIVE COMPENSATION

The following table discloses compensation for services rendered by the
Company's Chief Executive Officer and all other executive officers of the
Company whose compensation exceeded $100,000 in 1998, 1997 and 1996.
<TABLE>
<CAPTION>
                             Annual Compensation                               Long Term Compensation 
                             -------------------                               ----------------------
Name and Principal                                               Other Annual                          All Other
Position                 Year         Salary     Bonus          Compensation       0ptions(#)          Compensation
-----------              ----         ------     -----          ------------       ----------          ------------
<S>                      <C>        <C>           <C>                              <C>          <C>                
George N. Faris          1998       $330,000      $120,000        $     -        1,000,000(1)         $        -
Chairman of the          1997        312,000       257,000          7,200(2)       750,000               193,000(3)
Board and Chief          1996        292,000        15,000          9,600(2)     1,202,500(4)            422,000(5)
Executive Officer

Denis J. Fitzpatrick     1998       $140,000     $  31,250        $     -          170,000(6)         $        -
Secretary, Vice          1997        118,000       102,000              -          125,000                25,000(7)
President and Chief      1996        105,000         5,000         15,000(8)       120,000(4)                  -
Financial Officer

Gustave E. Chew          1998       $200,000     $       -        $ 7,200(2)       150,000(9)         $        -
President,               1997            (10)            -              -          100,000(10)                 -
American International   1996            (10)            -              -                -                     -
Refinery, Inc.

William L. Tracy         1998       $100,000     $  13,500              -          106,000(11)        $        -
Treasurer and            1997         88,000        62,000              -           75,000                23,000(7)
Controller               1996            (12)            -              -                -                     -
</TABLE>
                                                                              22
<PAGE>


(1)   Includes 420,000 regular options which vest 25% per year beginning
      December 31, 1998 and 580,000 contingent options which will vest only if
      the Company's common stock trades at $5.00 per share for 15 consecutive
      days at any time before December 31, 1999.

(2)   Vehicle allowance.

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

(4)   The number of options shown were issued in substitution for previously
      outstanding options and re-issued in 1996. The exercise price is now $.50
      per share.

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

(6)   Includes 70,000 regular options which vest 25% per year beginning December
      31, 1998 and 100,000 contingent options which will vest only if the
      Company's common stock trades at $5.00 per share for 15 consecutive days
      at any time before December 31, 1999.

(7)   Deferred salary payment.

(8)   Mr. Fitzpatrick was paid $15,000 for living expenses incurred while
      working in the New York office.

(9)   Contingent options which will vest only if the Company's common stock
      trades at $5.00 per share for 15 consecutive days at any time before
      December 31, 1999.

(10)  Mr. Chew was hired in December 1997 and earned less than $100,000 during
      1997. He was granted 100,000 options as a signing bonus.

(11)  Includes 56,000 regular options which vest 25% per year beginning December
      31, 1998 and 50,000 contingent options which will vest only if the
      Company's common stock trades at $5.00 per share for 15 consecutive days
      at any time before December 31, 1999.

(12)  Mr. Tracy's compensation was less than $100,000 in 1996.

Note:   The contingent options will terminate if the Company's common stock does
        not trade at $5.00 per share for 15 consecutive days prior to December
        31, 1999.

STOCK OPTION PLAN

The Company has established a 1998 Stock Option Plan (the "1998 Plan"). The 1998
Plan was approved by the Board of Directors on May 29, 1998 and by the Company's
shareholders on June 29, 1998. The 1998 Plan is administered by the Board of
Directors of the Company or a Committee designated by them. Under the 1998 Plan
employees, including officers and managerial or supervising personnel, are
eligible to receive Incentive Stock Options ("ISO's") or ISO's in tandem with
stock appreciation rights ("SAR's"), and employees, Directors, contractors and
consultants are eligible to receive non-qualified stock options ("NQSO's") or
NQSO's in tandem with SAR's. Options may be granted under the 1998 Plan to
purchase an aggregate of 5,000,000 shares of Common Stock. If an option granted
under the 1998 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 1998 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.

                                                                              23
<PAGE>
Options may not be granted under the 1998 Plan after May 29, 2008. The exercise
price of the options granted under the 1998 Plan cannot be less than the fair
market value of the shares of Common Stock on the date the option is granted.
ISO's granted to shareholders owning 10% or more of the outstanding voting power
of the Company must be exercised at a price equal to at least 110% of the fair
market value of the shares of Common Stock on the date of grant. The aggregate
fair market value of Common Stock, as determined at the time of the grant with
respect to which ISO's are exercisable for the first time by any employee during
any calendar year, shall not exceed $100,000. Any additional Common Stock as to
which options become exercisable for the first time during any such year are
treated as NQSO's. The total number of options granted under the 1998 Plan, as
of March 31, 1999 was 2,107,000.

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, 1998, exercise information
and potential realizable value.

<TABLE>
<CAPTION>
                         Individual Grants                                                
                    -----------------------------                                        Potential Realizable
                    Number of         Percent of                                           Value at Assumed
                    Securities        Total Options                                      Annual Rates of Stock
                    Underlying        Granted to                                          Price Appreciation
                    Options           Employees in     Exercise       Expiration            for Option Term
  Name              Granted(#)        Fiscal Year      Price($/sh)       Date           5%($)          10%($)
  ----              ----------        -----------      -----------    -------           -----          ------
<S>                 <C>               <C>              <C>            <C>              <C>            <C>  
George Faris         1,000,000           47%             $2.00        06/29/03         $ -0-          $ -0-
                                                       
Denis Fitzpatrick      170,000            8%             $2.00        06/29/03         $ -0-          $ -0-
                                                       
Gustave E. Chew        150,000            7%             $2.00        06/29/03          $-0-           $-0-
                                                       
William L. Tracy       106,000            5%             $2.00        06/29/03         $ -0-          $ -0-
</TABLE>                                           
AGGREGATE OPTION EXERCISES IN 1998 AND OPTION VALUES AT DECEMBER 31, 1998

The table below includes the number of shares covered by both exercisable and
non-exercisable stock options owned by certain executive officers as of December
31, 1998. Also reported are the values for "in-the-money" options which
represent the positive spread between exercise price of any such existing stock
options and the year-end price.
<TABLE>
<CAPTION>
                                     Shares 
                           ------------------------
                           Acquired on     Value       Number of Unexercised               Value of Unexercised
Name                        Exercised      Realized       Options at Year End            In-the-money Options
----                        ---------      --------       -------------------            --------------------
                                                       Exercisable    Unexercisable   Exercisable  Unexercisable
                                                       -----------    -------------   -----------  -------------
<S>                                                      <C>             <C>             <C>              <C>   
George N. Faris              --                --        1,870,000       1,082,500       $683,434         $2,344

Denis J. Fitzpatrick           --              --          221,250         193,750       $ 68,546         $  515

Gustave E. Chew                --              --          100,000         150,000       $    -0-         $  -0-

William L. Tracy               --              --          115,250         116,750       $ 48,440         $  309
</TABLE>
EMPLOYMENT CONTRACT

Effective May 1, 1989, the Company entered into an employment agreement with
George N. Faris at an annual salary of $200,000, which agreement is renewed
annually. In 1992, the Board increased Dr. Faris' salary to $300,000 per year.
In April 1994, Dr. Faris voluntarily reduced his salary to $240,000 per year. In
February 1996, Dr. Faris' salary was reinstated to $300,000 per year. His
current salary is $330,000 per year.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

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

                                                                              24
<PAGE>

Item 12. SECURITIES OWNERSHIP OF MANAGEMENT AND PRINCIPAL SHAREHOLDERS

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

<TABLE>
<CAPTION>
Name and Address                            Amount and Nature of                     Percent
of Beneficial Holder(1)                     Beneficial Ownership                     of Class
-----------------------                     --------------------                     --------
<S>                                                <C>                                <C> 
George N. Faris                                    3,770,000(2)                       5.4%

Daniel Y. Kim                                        213,500(3)                          *

Donald G. Rynne                                      716,862(4)                       1.1%

William R. Smart                                     357,608(5)                          *

Richard W. Murphy                                     50,000(6)                          *

Denis J. Fitzpatrick                                 221,250(7)                          *

Gustave E. Chew                                      100,000(8)                          *

William L. Tracy                                     126,280(9)                          *

All officers and Directors
as a group (consisting of
8 persons)                                         5,555,500(10)                      7.7%
   
HW Partners, L.P.                                  7,275,774(11)                      9.9%
1601 Elm Street
Suite 4000
Dallas, TX 75201
    
</TABLE>

-------------
* Less than 1% of class

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

(2)   Includes 1,870,000 shares of common stock issuable upon the exercise of
      stock options owned by Dr. Faris. Excludes 1,082,500 options not
      exercisable within 60 days.

(3)   Includes 205,500 shares of common stock issuable upon the exercise of
      stock options owned by Dr. Kim..

(4)   Includes 210,000 shares of common stock issuable upon the exercise of
      stock options owned by Mr. Rynne.

(5)   Includes 267,000 shares of common stock issuable upon the exercise of
      stock options of common stock owned by Mr. Smart.

                                                                              25
<PAGE>



(6)   Includes 50,000 shares of common stock issuable upon the exercise of stock
      options owned by Mr. Murphy. Excludes 50,000 options not exercisable
      within 60 days.

(7)   Includes 221,250 shares of common stock issuable upon the exercise of
      stock options owned by Mr. Fitzpatrick. Excludes 193,750 options not 
      exercisable within 60 days.

(8)   Includes 100,000 shares of common stock issuable upon the exercise of
      stock options owned by Mr. Chew. Excludes 150,000 options not exercisable
      within 60 days.

(9)   Includes 126,000 shares of common stock issuable upon the exercise of
      stock options owned by Mr. Tracy. Excludes 116,750 options not exercisable
      within 60 days.

(10)  Includes all of the shares of common stock issuable upon the exercise of
      options described in Notes (2) through (9) above.

(11)  HW Partners, L.P. serves as investment advisor to Infinity Investors
      Limited, IEO Holdings Limited, Summit Capital Limited and Glacier Capital
      Limited, the registered owners of the 14% Convertible Notes and warrants
      to purchase Common Stock, and has been granted investment discretion over
      the securities of the Company owned by each of those funds. In this
      capacity, HW Partners, L.P. and its general partner, H.W. Finance, L.L.C.,
      may be deemed to have voting and dispositive power over such securities.
      Mr. Clark K. Hunt and Mr. Barrett Wissman are the principal officers of HW
      Partners, L.P. The terms of the 14% Convertible Notes and warrants provide
      that the number of shares that the registered owners may acquire upon
      conversion or exercise may not exceed that number that would render them,
      as a group, the beneficial owners of more than 9.99% of the then
      outstanding shares of Common Stock.

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, 1998 through December 31, 1998, all filing requirements applicable to
its officers, Directors and greater than 10 percent beneficial owners were
complied with, except that Mr. Rynne did not report the sale, during the first
quarter of 1998, of warrants to purchase 89,260 shares of the Company's Common
Stock for $16,000, and Mr. Smart did not report the purchase and sale of 5,000
shares of the Company's Common Stock in January 1998, which his broker
transacted without his knowledge or prior approval.


Item 13.         CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

During 1998 the Company's Chairman and CEO, Dr. George Faris, loaned the Company
an aggregate of $365,000 at an annual interest rate of 10% per annum. The
Company repaid $100,000 in April 1998 and the remainder in the first quarter of
1999.

                                                                              26
<PAGE>


                                     PART IV


Item 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 10-K

(a)  Documents Filed as Part of the Report

(1)  Financial Statements.                                              Page No.

        Reports of Independent Accountants                               F-1
        Consolidated Balance Sheets2
           December 31, 1998 and 1997                                    F-2
        Consolidated Statement of Operations
           Years Ended December 31, 1998, 1997 and 1996                  F-3
        Consolidated Statement of Cash Flows
           Years Ended December 31, 1998, 1997 and 1996                  F-4
        Consolidated Statement of Changes in
           Stockholders' Equity - Years Ended
           December 31, 1998, 1997 and 1996                              F-5
        Notes to Consolidated Financial Statements                       F-8
        Supplementary Oil and Gas Information                            F-25

(2)  Financial Statement Schedules.

None.

(3) Exhibits.

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

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

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

4.1   Form of Class A Warrant. (3)

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

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

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

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

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

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

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

                                                                              27
<PAGE>


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

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

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

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

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

4.14  1998 Stock Option Plan of the Registrant.(14)

4.15  1998 Stock Award Plan of the Registrant.(14)

4.16  14% Convertible Note due April 21, 2000 (12)

4.17  Securities Purchase Agreement dated April 21, 2000 (12)

4.18  Agreement and First Amendment dated April 21, 1998 to the Securities
      Purchase Agreement dated October 9, 1997. (12)

4.19  Form of Warrant issued pursuant to the Securities Purchase and Equity
      Agreements associated with Exhibits 4.17 and 4.20 (12)

4.20  Equity Financing Agreement dated April 21, 1998. (12)

4.21  Registration Rights Agreement dated April 21, 1998. (12)

4.22  Letter Agreement dated June 26, 1998 between the Registrant and certain
      investors. (13)

4.23  Convertible Debenture Purchase Agreement dated February 18, 1999. (15)

4.24  Form of 5% Convertible Secured Debenture dated February 18, 1999. (15)

4.25  Form of Warrant issued pursuant to Convertible Secured Debenture dated
      February 11, 1999. (15)

4.26  Form of Registration Rights Agreement dated February 18, 1999. (15)

4.27  Form of Mortgage and Security Agreement issued pursuant to the Convertible
      Secured Debentures dated February 11, 1999. (15) 10.1 Employment Agreement
      dated May 1, 1989 by and between George N. Faris and the Registrant. (1)

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

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

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

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

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

10.7  Consulting Agreement dated December 2, 1998. (15)

21.1  Subsidiaries of the Registrant.

27.1  Financial Data Schedule.

                                                                              28
<PAGE>

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

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

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

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

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

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

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

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

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

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

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

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

(12)  Incorporated by reference to the Registrants' Quarterly Report on Form
      10-Q-A for the quarter ended March 31, 1998

(13)  Incorporated by reference to the Registrants' Quarterly Report on Form
      10-Q-A for the quarter ended June 30, 1998

(14)  Incorporated by reference to the Registrants' Report on Form S-8 dated
      January 4, 1999.

(15)  Incorporated by referred to the Registrants' Report on Form 8-K dated
      March 1, 1999.

(b)  Reports on Form 8-K

     None.

                                                                              29
<PAGE>

                          INDEPENDENT AUDITOR'S REPORT

To the Board of Directors and Stockholders American International Petroleum
Corporation

We have audited the accompanying consolidated balance sheets of American
International Petroleum Corporation and Subsidiaries as of December 31, 1998 and
1997, and related consolidated statements of operations, stockholders' equity
and cash flows for each of the three years in the period ended December 31,
1998. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility to express an opinion on these
consolidated financial statements based on our audits.

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

In our opinion the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
American International Petroleum Corporation and Subsidiaries as of December 31,
1998 and 1997, and the results of their operations and their cash flows for each
of the three years in the period ended December 31, 1998, in conformity with
generally accepted accounting principles.

The Company reported a net loss of approximately $9.1 million during 1998, of
which approximately $4.6 million represented non-operating or non-cash items,
has commitments to fund the operations of its Kazakstan subsidiary (see Note 10)
and has a working capital deficit of approximately $4.9 million at December 31,
1998. The Company had limited revenue generating operating activities during
1998 and does not, as of December 31, 1998, have the resources to fulfill its
operating and capital commitments. The Company has a substantial amount of costs
capitalized in unevaluated oil and gas properties in its Kazakstan subsidiary
which relates to a foreign oil and gas concession. The Company will require a
substantial amount of additional capital expenditures to recover its investment
in the concession. These matters raise a substantial doubt about the Company's
ability to continue as a going concern. Management's plans in regards to these
matters are discussed in Note 2 to the financial statements.

HEIN + ASSOCIATES, LLP
Houston, Texas
March 30, 1999



                                       F-1
<PAGE>
          AMERICAN INTERNATIONAL PETROLEUM CORPORATION AND SUBSIDIARIES
          -------------------------------------------------------------
                           CONSOLIDATED BALANCE SHEETS
                           ---------------------------
<TABLE>
<CAPTION>
                                                                      December 31,
                                                              --------------------------

                                                                 1998           1997
                                                                 ----           ----
                   Assets
                   ------
<S>                                                                   <C>            <C>         
Current assets:
  Cash and cash equivalents                                       $   376,745    $ 3,721,350 
  Marketable securities, at market                                         --        735,958
  Accounts and notes receivable, net                                  548,442      1,831,008
  Inventory                                                         1,554,694        755,720
  Deferred financing costs                                              8,563        353,490
  Prepaid expenses                                                    829,654      1,244,277
                                                                  -----------    -----------
       Total current assets                                         3,318,098      8,641,803
                                                                  -----------    -----------
Property, plant and equipment:                                    
  Unevaluated oil and gas property                                 23,438,886     11,724,477
  Refinery property and equipment                                  36,935,705     22,816,897
  Other                                                               626,910        216,803
                                                                  -----------    -----------
                                                                   61,001,501     34,758,177
Less - accumulated depreciation, depletion,                       
  and amortization                                                 (4,707,103)    (3,894,015)
                                                                  -----------    -----------
       Net property, plant and equipment                           56,294,398     30,864,162
Notes receiviable, less current portion                             1,118,200      2,333,895
Other long-term assets, net                                           130,638             --
                                                                  -----------    -----------
                                                                  
       Total assets                                               $60,861,334    $41,839,860
                                                                  ===========    ===========
                                                                  
   Liabilities and Stockholders' Equity                           
   ------------------------------------                           
Current liabilities:                                              
  Short-term debentures                                           $        --    $ 6,075,931
  Notes payable - trade                                             1,725,350             --
  Notes payable - officers                                            266,850             --
  Accounts payable                                                  4,081,557      1,452,642
  Accrued liabilities                                               2,146,449      1,806,906
                                                                  -----------    -----------
       Total current liabilities                                    8,220,206      9,335,479
Long-term debt                                                      6,110,961           --
                                                                  -----------    -----------
       Total liabilities                                           14,331,167      9,335,479
                                                                  -----------    -----------
                                                                  
Commitments and contingent liabilities (Note 10)                           --             --
                                                                  
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,  65,992,328 and 48,436,576 shares issued          
    outstanding at December 31, 1998 and December 31, 1997,       
    respectively                                                  5,279,385        3,874,926
  Additional paid-in capital                                    129,711,531      107,987,091
  Accumulated deficit                                           (88,460,749)     (79,357,636)
                                                              -------------    -------------
       Total stockholders' equity                                46,530,167       32,504,381
                                                              -------------    -------------

Total liabilities and stockholders' equity                    $  60,861,334    $  41,839,860
                                                              =============    =============

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

                                      F-2
<PAGE>

          AMERICAN INTERNATIONAL PETROLEUM CORPORATION AND SUBSIDIARIES
          -------------------------------------------------------------
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                      --------------------------------------
<TABLE>
<CAPTION>
                                                                For the years ended December 31,
                                                           ------------------------------------------
                                                               1998            1997          1996
                                                               ----            ----          ----
<S>                                                            <C>             <C>            <C>
Revenues:
  Oil and gas production and
   pipeline fees                                           $        --    $    260,579    $ 1,364,581
  Refinery lease fees                                               --              --      2,467,606
  Refinery operating revenues                               11,394,009              --             --
  Other                                                        460,597         567,385        170,819
                                                           -----------    ------------    -----------
       Total revenues                                       11,854,606         827,964      4,003,006
                                                           -----------    ------------    -----------
Expenses:
  Lease operating                                                   --          98,766        613,336
  Costs of goods sold - refinery                            11,281,139              --             --
  General and administrative                                 5,097,468       4,627,598      3,076,357
  Depreciation, depletion and
   amortization                                                813,088         774,264      1,265,230
  Interest                                                   1,912,949       6,663,992      2,818,218
  Realized  and unrealized loss on marketable securities       359,325       6,053,298             --
  Loss on sale of subsidiaries                                      --         563,667             --
  Provison for bad debts                                     1,493,750              --        682,072
  Write-down of oil and gas properties                              --              --        200,000
                                                           -----------    ------------    -----------
       Total expenses                                       20,957,719      18,781,585      8,655,213
                                                           -----------    ------------    -----------

Net loss                                                   $(9,103,113)   $(17,953,621)   $(4,652,207)
                                                           ===========    ============    ===========

Net loss per share of common stock - basic and diluted     $     (0.17)   $      (0.43)   $     (0.16)
                                                           ===========    ============    ===========

Weighted-average number of shares
 of common stock outstanding                                53,741,498      41,309,102     29,598,832
                                                           ===========    ============    ===========
</TABLE>

 

        The accompanying notes are an integral part of these consolidated
                             financial statements.

                                      F-3
<PAGE>

          AMERICAN INTERNATIONAL PETROLEUM CORPORATION AND SUBSIDIARIES
          -------------------------------------------------------------
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                      -------------------------------------
<TABLE>
<CAPTION>

                                                                        For the years ended December 31,
                                                                  -------------------------------------------
                                                                      1998           1997            1996
                                                                      ----           ----            ----
<S>                                                                   <C>            <C>             <C>         
Cash flows from operating activities:
  Net loss                                                        $(9,103,113)   $(17,953,621)   $(4,652,207)
  Adjustments to reconcile net loss to net
   cash provided (used) by operating activities:
     Depreciation, depletion, amortization and accretion of
          discount on debt                                          2,472,751       5,125,934      2,551,504
     Accretion of premium on notes receivable                        (208,886)       (167,167)          --
     Write-down of oil and gas properties                                  --              --        200,000
     Provision for bad debts                                        1,493,750              --        682,072
     Realized and unrealized loss on marketable securities            359,325       6,053,298             --
     Loss on sale  of subsidiaries                                         --         563,667             --
     Issuance of stock for compensation expense                       196,900          40,000        424,063
     Forgiveness of debt                                                   --         (50,342)            --
     Compensatory stock options                                            --         744,700             --
     Issuance of stock and options for services                       255,814         247,607             --
     Changes in assets and liabilities:
        Accounts and notes receivable                                 (48,684)         57,835       (681,659)
        Inventory                                                    (798,974)       (698,746)        44,992
        Prepaid and other                                             426,060      (1,387,484)      (370,274)
        Accounts payable and accrued liabilities                    2,968,458         (16,688)     2,352,361
                                                                  -----------    ------------    -----------
            Net cash provided by (used in) operating activities    (1,986,599)     (7,441,007)       550,852
                                                                  -----------    ------------    -----------
Cash flows from investing activities:
  Additions to oil and gas properties                              (8,512,328)     (2,663,694)    (1,590,165)
  Additions to refinery property and equipment                     (8,578,049)     (5,581,714)    (1,713,188)
  Proceeds from sales of marketable securities                        376,633       1,979,494             --
  Proceeds from sale of subsidiaries                                       --       1,764,548             --
  Other                                                               770,056         (94,191)       (10,176)
                                                                  -----------    ------------    -----------
             Net cash used in investing activities                 15,943,688)     (4,595,557)    (3,313,529)
                                                                  -----------    ------------    -----------
Cash flows from financing activities:
  Cash - restricted, loan collateral                                       --              --         65,201
  Net increase (decrease) in notes payable                          1,725,350        (237,162)       170,403
  Increase in Notes payable - officers                                266,850              --             --
  Repayments of long-term debt                                             --      (5,791,420)    (1,434,278)
  Proceeds from issuance of common stock and
    warrants, net                                                          --         447,810        745,302
  Proceeds from exercise of stock warrants
    and options                                                       738,482       1,272,333             --
  Proceeds from issuance of debentures, net                        11,855,000      20,055,295      3,064,889
                                                                  -----------    ------------    -----------
             Net cash provided by financing activities             14,585,682      15,746,856      2,611,517
                                                                  -----------    ------------    -----------
Net increase (decrease) in cash and
  cash equivalents                                                 (3,344,605)      3,710,292       (151,160)
Cash and cash equivalents at beginning of year                      3,721,350          11,058        162,218
                                                                  -----------    ------------    -----------

Cash and cash equivalents at end of year                          $   376,745    $  3,721,350    $    11,058
                                                                  ===========    ============    ===========

</TABLE>

              The accompanying notes are an integral part of these
                       consolidated financial statements.

                                      F-4
<PAGE>
          AMERICAN INTERNATIONAL PETROLEUM CORPORATION AND SUBSIDIARIES
          -------------------------------------------------------------
            CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
            ---------------------------------------------------------
<TABLE>
<CAPTION>

                                                    Common stock          Additional
                                                 -------------------       paid-in      Accumulated
                                                 Shares       Amount        capital        deficit         Total
                                                 ------       ------      ----------     -----------       -----  

<S>                                                <C>         <C>            <C>            <C>            <C>
Balance, January 1, 1998                       48,436,576   $3,874,926   $107,987,091   $(79,357,636)   $32,504,381
Conversions of debentures                      13,794,032    1,103,521     14,422,859             --     15,526,380
Issuance of stock in lieu of current
    liabilities                                 1,506,347      120,508      1,549,209             --      1,669,717
Issuance of stock for compensation                 50,000        4,000        192,900             --        196,900
Issuance of stock and options for services        100,000        8,000        247,814             --        255,814
Issuance of stock for refinery property
     and equipment - Reg S Offering             1,500,000      120,000      1,567,500             --      1,687,500
Issuance of stock options and warrants                 --           --        936,459             --        936,459
Options and warrants exercised                    605,373       48,430        690,052             --        738,482
Imputed interest on debentures
    convertible at a discount to market                --           --      2,117,647             --      2,117,647
Net loss for the year                                  --           --             --     (9,103,113)    (9,103,113)
                                               ----------   ----------   ------------   ------------    -----------
Balance, December 31, 1998                     65,992,328   $5,279,385   $129,711,531   $(88,460,749)   $46,530,167
                                               ==========   ==========   ============   ============    ===========
</TABLE>

       The accompanying notes are an integral part of these consolidated
                             financial statements.

                                      F-5
<PAGE>
          AMERICAN INTERNATIONAL PETROLEUM CORPORATION AND SUBSIDIARIES
          -------------------------------------------------------------
            CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
            ---------------------------------------------------------
<TABLE>
<CAPTION>
                                                                    Common stock          Additional        Stock
                                                                    ------------            paid-in       purchase 
                                                                 Shares        Amount       capital       warrants 
                                                                ---------    ----------   ------------   ----------

<S>                                                                <C>          <C>          <C>            <C>        
Balance, January 1, 1997                                        34,458,921   $2,756,714   $ 78,677,265   $1,297,754

Conversions of debentures                                        7,246,882      579,751      8,763,271           --
Issuance of stock in lieu of current
    liabilities                                                    243,459       19,477        214,082           --
Issuance of stock for compensation                                 100,000        8,000         32,000           --
Issuance of stock  for services                                    260,000       20,800        226,807           --
Issuance of stock - Reg S Offering                               1,635,593      130,847        314,465           --
Issuance of stock for oil and gas properties - Reg S Offering    3,250,000      260,000      8,275,938           --
Issuance of stock warrants for oil and gas properties                   --           --        718,750           --
Issuance of stock warrants                                              --           --      6,264,411           --
Options and warrants exercised                                   1,241,721       99,337        694,189           --
Imputed interest on debentures
    convertible at a discount to market                                 --           --      1,763,459           --
Compensatory stock options                                              --           --        744,700           --
Net loss for the year                                                   --           --             --           --
                                                                ----------   ----------   ------------   ----------

Balance, December 31, 1997                                      48,436,576   $3,874,926   $106,689,337   $1,297,754
                                                                ==========   ==========   ============   ==========
</TABLE>
                           [RESTUBED TABLE FOR ABOVE
<TABLE>
<CAPTION>
                                                                                           
                                                                   Accumulated                  
                                                                     deficit         Total      
                                                                   ------------    ------------ 
                                                                                                
<S>                                                                     <C>             <C>     
Balance, January 1, 1997                                           $(61,404,015)   $ 21,327,718 
                                                                                                
Conversions of debentures                                                    --       9,343,022 
Issuance of stock in lieu of current                                                            
    liabilities                                                              --         233,559 
Issuance of stock for compensation                                           --          40,000 
Issuance of stock  for services                                              --         247,607 
Issuance of stock - Reg S Offering                                           --         445,312 
Issuance of stock for oil and gas properties - Reg S Offering                --       8,535,938 
Issuance of stock warrants for oil and gas properties                        --         718,750 
Issuance of stock warrants                                                   --       6,264,411 
Options and warrants exercised                                               --         793,526 
Imputed interest on debentures                                                                  
    convertible at a discount to market                                      --       1,763,459 
Compensatory stock options                                                   --         744,700 
Net loss for the year                                               (17,953,621)    (17,953,621)
                                                                   ------------    ------------ 
                                                                                                
Balance, December 31, 1997                                         $(79,357,636)   $ 32,504,381 
                                                                   ============    ============ 

</TABLE>





        The accompanying notes are an integral part of these consolidated
                             financial statements.

                                      F-6
<PAGE>

          AMERICAN INTERNATIONAL PETROLEUM CORPORATION AND SUBSIDIARIES
          -------------------------------------------------------------
            CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
            ---------------------------------------------------------
<TABLE>
<CAPTION>

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

        The accompanying notes are an integral part of these consolidated
                             financial statements.


                                      F-7
<PAGE>
          AMERICAN INTERNATIONAL PETROLEUM CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - GENERAL, ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES: 
   
American International Petroleum Corporation (the "Company") was incorporated in
the State of Nevada and, through its wholly-owned subsidiaries, is the owner of
a refinery in Lake Charles, Louisiana, a refinery and terminal in St. Marks,
Florida, a 26,000 barrel asphalt transport barge, and a 70% working interest in
an oil and gas concession in Kazakstan. The Company is also seeking domestic and
international oil and gas properties and projects.

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

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

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

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

Principles of consolidation 

The consolidated financial statements of the Company include the accounts of the
Company and its wholly-owned subsidiaries, American International Refinery, Inc.
("AIRI"), American International Marine, Inc. ("AIM"), St. Marks Refinery, Inc.
("SMR") American International Petroleum Kazakstan ("AIPK"), American Eurasia
Petroleum Corporation ("AEPC"), American International Petroleum Corporation
Holding, Inc. ("AIPC Holdings), AIPCC and PAIPC.

Intercompany balances and transactions are eliminated in consolidation.

Cash and cash equivalents 

All liquid short-term instruments purchased with original maturities 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.

                                       F-8
<PAGE>
Marketable Securities

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

The Company held 2,943,818 shares of MIP at December 31, 1997. During the year
the Company sold or dispersed 1,440,557 shares for net cash proceeds of
$1,979,494. The realized losses on shares disposed of during 1997 was $901,616.
The unrealized loss on shares available for sale at December 31, 1997 was
$5,151,682. The MIP stock was deemed permanently impaired at December 31, 1997
and the unrealized loss at that date was recognized as a loss during 1997. The
impairment is reflected in realized and unrealized loss on marketable securities
in the accompanying Statement of Operations. During 1998, the Company sold all
its remaining shares of MIP for net cash proceeds of $376,633, recording a
realized loss of $359,325.

Inventory 

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

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. No costs related to
production, general corporate overhead, or similar activities have been
capitalized. Individual countries are designated as separate cost centers. All
capitalized costs plus the undiscounted future development costs of proved
reserves are depleted using the unit-of-production method based on total proved
reserves applicable to each country. Under the full cost method of accounting,
unevaluated property costs are not amortized. A gain or loss is recognized on
sales of oil and gas properties only when the sale involves significant
reserves. Costs related to acquisition, holding and initial exploration of
concessions in countries with no proved reserves are initially capitalized and
periodically evaluated for impairment.
    
Costs not subject to amortization:

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

                                            December 31,
                          -------------------------------------------------
                             1998               1997                1996
                             ----               ----                ----

Colombia:
    Acquisition costs     $       -          $     -             $1,101,277

Peru:
    Exploration costs             -                -              4,457,964

Kazakstan:
    Acquisition Cost        11,724,477         11,724,477             -
    Exploration Cost        10,748,427             -                  -

Other
     Acquisition cost          965,982             -                 89,389
                           -----------        -----------        ----------
                           $23,438,886        $11,724,477        $5,648,630
                           ===========        ===========        ==========

                                       F-9
<PAGE>
Acquisition costs of unproved properties not subject to amortization at December
31, 1998, 1997 and 1996, respectively, consists mainly of lease acquisition
costs related to unproved areas. On February 25, 1997 the Company sold all of
its wholly owned subsidiaries operating in Columbia and Peru. The period in
which the amortization cost of the Kazakstan properties will commence is subject
to the results of the Company's exploration program, which will begin in
1999.ertain geological and general and administrative costs are capitalized into
the cost pools of the country cost centers. Such costs include certain salaries
and benefits, office facilities, equipment and insurance. Capitalized general
and administrative costs are directly related to the Company's exploration and
development activities in Colombia and Peru and totaled $48,404 and $331,355 for
the years ended December 31, 1997 and 1996, respectively. Capitalized
geological, G&A costs for Kazakstan and Other totaled $11,164,180 and $2,437,289
for 1998 and 1997, 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. The independent reservoir engineer's report of
Estimated Future Reserves and Revenues is based on information available "as of"
the date of such Report. Upward or downward revisions to the estimated value and
volume of oil and gas reserves may occur based on circumstances occurring, and
information obtained, subsequent to the date of the engineer's report. (See
"Supplementary Oil and Gas Information for the Years Ended December 31, 1998,
1997 and 1996 - Oil and Gas Reserves.

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

Property and equipment - other than oil and gas properties

Property and equipment are carried at cost and included interest on funds
borrowed to finance construction. Capitalized interest was $7,055,340, $341,000
and $43,427 in 1998, 1997 and 1996, respectively. Depreciation and amortization
are calculated under the straight-line method over the anticipated useful lives
of the assets, which range from 5 to 25 years. Major additions are capitalized.
Expenditures for repairs and maintenance are charged against earnings.
Depreciation, depletion and amortization expense on property and equipment were
$813,088, $774,264, and $1,265,230 for the years ended December 31, 1998, 1997
and 1996, respectively.

Revenue recognition

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

Discounts and premiums

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

Earnings per share 

The FASB issued Statement of Financial Accounting Standards No. 128, entitled
Earnings Per Share, during February 1997. The new statement, which is effective
for financial statements issued after December 31, 1997, including interim
periods, establishes standards for computing and presenting earnings per share.
The new statement requires retroactive restatement of all prior-period earnings
per share data presented. The new statement did not have a material impact upon
previously presented earnings per share information. Options to purchase
7,100,681 and 7,774,707 shares of common stock at various prices were
outstanding during 1998 and 1997, respectively, but were not included in the
computation of diluted EPS because the options' exercise price was greater than
the average market price of the common shares. Earnings per share of common
stock are based on the weighted-average number of shares outstanding. Basic and
diluted earnings per share were the same for all years presented.

                                      F-10

<PAGE>
   
<TABLE>
<CAPTION>
                                                For the Year Ended 1998
                                                -----------------------
                                                     Shares
                                    Income           Weighted Avg.         Per Share
                                    (Numerator)      (Denominator          Amount
                                    -----------      ------------          ---------
<S>                                <C>               <C>                   <C>    
Basic EPS:
Loss available to                  $ (9,103,113)         53,741,498          $ (0.17)
 Common Shareholders

Effect of Dilutive Securities
 Warrants and Options (1)(2)                                  8,384

Diluted EPS:
Loss available to                  $ (9,103,113)         53,749,882          $ (0.17)
 Common Shareholders
</TABLE>
(1) The effect of these shares in the Dilutive EPS were not reflected in the
original 10-K Filing as they were anti-dilutive in accordance with paragraph 13,
of SFAS 123.

(2) Options and warrants to purchase 7,090,848 shares of common stock at various
prices were outstanding at December 31, 1998, but were not included in the
computation of diluted EPS because the exercise price was greater than the
average market price of the common shares or the options were not vested at
December 31, 1998.

Foreign currencyoreign 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
functional currency of the AIPK subsidiary is U.S. dollars, as the Company
negotiates all transactions based upon U.S. dollar-equivalents and the Company
is providing all of the funding requirements of AIPK. The Company anticipates
little, if any, currency and exchange risks during the initial three to five
years of its operations in Kazakstan due to the Company negotiating all
transactions in U.S. dollars. Any revenues generated from Kazakstan during this
period are planned to be reinvested in the Company's projects in Kazakstan.
Subsequently, the Company will be exposed to the currency and exchange risks,
which typically present themselves in the Confederate of Independent States
("CIS") countries. The Company collected sales of oil and gas in Colombia and
Peru in local currency and utilized those receipts for local operations.
Periodically, funds were transferred from U.S. accounts to Columbia or Peru and
converted into pesos or soles, respectively, when local currency was
insufficient to meet obligations payable in local currency. Foreign exchange
losses in 1997 were $75,878. Foreign exchange gains were $63,763 in 1996.
    
Deferred charges 

The Company capitalizes certain costs, primarily commissions and legal fees,
associated with the offering and sale of debentures. Such costs are amortized as
interest expense over the life of the related debt instrument. Sales of
debentures and notes were $12,000,000, $20,537,000, and $3,065,000 in 1998,
1997, and 1996, respectively. Debenture costs of $1,126,930, $3,253,035 and
$289,000 were amortized in the years 1998, 1997 and 1996, respectively.

Stock-based compensation 

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

Fair Value of Financial Instruments

The fair value of financial instruments, primarily accounts receivable, accounts
payable and notes payable, closely approximate the carrying values of the
instruments due to the short-term maturities or recent issuance of such
instruments.
   
                                      F-11
    

<PAGE>
Comprehensive Income (Loss)

Comprehensive income is defined as all changes in stockholders' equity,
exclusive of transactions with owners, such as capital investments.
Comprehensive income includes net income or loss, changes in certain assets and
liabilities that are reported directly in equity such as translation adjustments
on investments in foreign subsidiaries, and certain changes in minimum pension
liabilities. The Company's comprehensive income (loss) was equal to its net
income (loss) for all periods presented in these financial statements.

Long Lived Assets

The Company reviews for the impairment of long-lived assets and certain
identifiable intangibles whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. An impairment loss
would be recognized when estimated future cash flows expected to result from the
use of the asset and its eventual disposition is less than its carrying amount.
The Company has not identified any impairment loss during 1998, 1997 and 1996.

Estimates 

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of certain assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the related reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates. Management believes
that the estimates are reasonable. The Company's financial statements are based
on a number of significant estimates including the valuation of unevaluated oil
and gas properties which are the basis for the calculation of impairment of oil
and gas properties. The Company's reserve estimates are determined by an
independent petroleum engineering firm. However, management emphasizes that
reserve estimates are inherently imprecise and that estimates of more recent
discoveries and reserves associated with non-producing properties are more
imprecise than those for producing properties with long production histories. It
is reasonably probable that the estimates of reserves associated with the
concession in Kazakstan will materially change during the next year.
       
Reclassifications

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

Accounting for Income Taxes

The Company uses the asset and liability approach for financial accounting and
reporting for income taxes. Under this method, deferred tax assets and
liabilities are determined based on differences between financial reporting and
tax bases of assets and liabilities. Valuation allowances are recorded to reduce
deferred tax assets when it is more likely than not that a tax benefit will not
be realized.

New Accounting Standards

In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, ?Accounting for Derivative Instruments
and Hedging.? The new statement requires all derivatives to be recorded on the
balance sheet at fair value and establishes new accounting rules for hedging
instruments. The statement is effective for years beginning after June 15, 1999.
The Company is assessing the impact of this statement will have on the
Consolidated Financial Statements


NOTE 2 - MANAGEMENT PLANS

The Company reported a net loss of approximately $9.0 million during 1998, of
which approximately $4.6 million represented non-operating or non-cash items,
has commitments to fund the operations of its Kazakstan subsidiary (see Note 10)
and has convertible debentures totaling approximately $3 million (see Note 6),
which may or may not be converted to common stock, that mature in April 2000.
The Company intends to be very conservative with its spending overseas during
1999. As of March 1999, the Company's existing working capital was insufficient
to provide all the funds it requires to complete its minimum work program in
Kazakstan during 1999. However, if necessary, the Company believes it can obtain
a deferral of the minimum requirements in Kazakstan. Management of the Company
has been seeking sources of capital to enable the Company to fund its operating
activities and to fulfill these and other commitments, which may arise in 1999
and beyond.
   
                                      F-12
    
<PAGE>
As of March 1, 1999, the Company had a backlog of asphalt sales of approximately
$6.5 million. The Company expects to operate the Refinery at a minimum of 20%
capacity during 1999. Coupled with currently-available sources of non-equity
financing, at these levels of capacity and with existing levels of feedstock and
other costs in place, the Company would expect sufficient positive operating
margins to support all Refinery and corporate expenditures in 1999. As
operations at the Refinery expand during 1999, the Company plans, to the extent
possible, to prudently obtain bank or other conventional, non-equity financing
to replace its existing convertible debt and provide the supplemental funds
necessary to support its operations and minimal work program in Kazakstan. The
Company is currently having discussions with a major investment banking firm,
which has expressed interest in providing approximately $40 million in high
yield debt, and with various smaller firms for lesser amounts of debt to
supplement the cash flow from the Company's operations during 1999. If the
Company is unable to derive the necessary working capital from the Refinery, St.
Marks and AIM, or from a joint venture partner in Kazakstan, to support its
operations during 1999, or obtain the necessary financing to adequately
supplement or provide all of its funding needs, its ability to continue
operations could be materially and adversely effected.

NOTE 3 - ACCOUNTS AND SHORT-TERM NOTES RECEIVABLE: 

Accounts and notes receivable are shown below:
<TABLE>
<CAPTION>
                                                                   December 31, 
                                                                   ------------         
                                                           1998                   1997
                                                           ----                   ----
<S>                                                     <C>                    <C>        
Accounts receivable - trade                             $ 1,499,651            $ 1,020,145
Note receivable - Gold Line (See Note 8)                    900,732                900,732
Current portion - Note receivable - MIP                   1,515,750              1,537,808
Other                                                        46,936                293,200
                                                        -----------            -----------
                                                          3,963,069              3,751,885
Less - allowance for doubtful accounts                   (3,414,627)            (1,920,877) 
                                                        -----------            -----------
                                                        $   548,442            $ 1,831,008
                                                        ===========            ===========
</TABLE>
       
NOTE 4 - OTHER LONG-TERM ASSETS:

Other long-term assets consist of the following:
<TABLE>
<CAPTION>
                                                                   December 31, 
                                                                   ------------         
                                                           1998                   1997
                                                           ----                   ----
<S>                                                     <C>                    <C>        
  Notes receivable - MIP (See Note 1), net of
   discount of $69,255 and $284,634, respectively        $1,118,200            $ 3,871,703
Less - current portion - MIP                                    -               (1,537,808)
                                                         ----------            -----------
                                                         $1,118,200            $ 2,333,895
                                                         ==========            ===========
</TABLE>
NOTE 5 - ACCRUED LIABILITIES: 

Accrued liabilities consist of the following:
<TABLE>
<CAPTION>
                                                                   December 31, 
                                                                   ------------         
                                                           1998                   1997
                                                           ----                   ----
<S>                                                     <C>                    <C>        

Accrued payroll                                          $   35,756             $   63,068
Accrued interest                                             47,206                 47,206
Corporate taxes                                             171,768                 99,484
Excise taxes                                              1,246,684              1,376,170
Property taxes                                              175,000                  -
Sales Taxes                                                 107,135                  -
Other                                                       362,900                220,978
                                                         ----------             ----------
                                                         $2,146,449             $1,806,906
                                                         ==========             ==========
</TABLE>
   
                                      F-13
    
<PAGE>
NOTE 6 - SHORT TERM DEBT
<TABLE>
<CAPTION>
                                                                   December 31, 
                                                                   ------------         
                                                           1998                   1997
                                                           ----                   ----
<S>                                                     <C>                    <C>        
14% - $10,000,000 Unsecured convertible debenture 
   net of unamortized discount of $3,924,069 - due
   October 15, 1998, effective interest rate - 51%*      $      -               $6,075,931

10% - $265,000 unsecured demand note due to officers -
 includes interest of $1,850 due at December 31, 1998.      266,850                   -

Trade notes payable - various notes due from one 
  month to twelve months interest ranges from 6.5% to
  14.5%, includes $171,314 interest due at December 
  31, 1999 - collateralized by accounts receivable, 
  inventory, and certain fixed assets.                    1,725,350                   -    
                                                         ----------             ----------
                                                         $1,992,200             $6,075,931
                                                         ==========             ==========
</TABLE>
*Convertible after April 15, 1998 into the Company's common stock at the lesser
of $6.25, 85% of market, or the lowest average market price for any five
consecutive trading days following April 15, 1998.


NOTE 7 - LONG-TERM DEBT:
<TABLE>
<CAPTION>
                                                                   December 31, 
                                                                   ------------         
                                                           1998                   1997
                                                           ----                   ----
<S>                                                     <C>                    <C>        
14% - $12,000,000 unsecured convertible debenture, 
 due April 21, 2000, net of unamortized financing 
 cost of $362,659, Effective interest rate - 40%*      $6,110,961             $      -
</TABLE>

*Convertible into the Company's common stock at the average of the lowest five
(5) consecutive daily weighted average sales prices of the common stock as
reported by Bloomberg, LP for the forty (40) trading days ending on the day
prior to the date of conversion.

   
                                      F-14
    

<PAGE>
The effective interest rate as stated for debt instruments does not necessarily
reflect the actual cash cost to the Company for that specific debt instrument.
The effective interest rate reflects presumed incremental yield the holder of
the debt instrument may derive from the discounted conversion rate of such
instrument and the fair value of warrants issued to debt holders. During 1998,
the Company sold convertible debentures totaling $12,000,000. During 1998,
$15,526,380 of convertible debentures were converted into the Company's common
stock at discounts to market of 15%.

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 at December 31, 1996.
In February 1996, in order to enhance the business strength of the lessee of its
Refinery and to assist it in securing a new government contract, the Company
agreed to reduce the fully reserved principal balance of its note receivable
from the lessee to $900,732 from $1,801,464.

During the third and fourth quarters of 1996, Gold Line began to fall behind in
their monthly lease fee payments to AIRI, even though it was processing an
average in excess of 400,000 barrels of feedstock per month during these
periods. On February 3, 1997, the Company delivered a Default Notice to Gold
Line informing Gold Line of various items of default under the Lease Agreement,
including non-payment of lease fees totaling approximately $567,000 and 1996
real estate taxes of approximately $208,000. Subsequent Notices of Default were
also delivered to Gold Line covering additional items of default, including an
additional $287,000 in unpaid lease fees and $29,000 of unpaid insurance
premiums (which premiums were paid by AIRI). On February 18, 1997, the Company
delivered a Termination Notice and Notice to Vacate, pursuant to the Lease
Agreement, whereby the Company gave written notice to Gold Line to vacate the
leased premises five days from the date the Notice was delivered. Gold Line did
not comply with the Company's Notice to Vacate, so on February 26, 1997 the
Company filed suit against Gold Line. On March 20, 1997, the court terminated
the Lease Agreement and ordered Gold Line to vacate the refinery premises within
24 hours of the Order, with which Gold Line complied.

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

NOTE 9 - STOCK OPTIONS AND WARRANTS: 

Outstanding warrants and options

At December 31, 1998, 1997 and 1996, 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
        1998            1997              1996            Price                    Date
        ----            ----              ----            -----                    ----
<S>                    <C>               <C>             <C>                   <C>    
       200,000              -                   -           $2.000              August 24, 1999(4)
     1,210,000              -                   -           $2.000              December 31, 1999(2)
       100,000              -                   -           $2.600              April 21, 2003(4)
        25,000              -                   -           $3.000              April 21, 2003(4)
             -              -           5,957,347           $4.000              March 1, 1997(3)
             -              -              20,000          $30.625              July 14, 1997(2)
        15,000              -                   -           $1.375              June 29, 2003(1) (2)
</TABLE>
   
                                      F-15
    
<PAGE>
<TABLE>
<CAPTION>
<S>                 <C>                 <C>               <C>                   <C>    
             -              -             282,500           $0.500               December 31, 1997(1)(2)
             -      5,957,207                   -           $4.000               March 1, 1998(3)
             -              -             150,000           $2.000               March 31, 1998(2)
     1,518,500              -                   -           $2.000               April 21, 2003(1)(2)
             -              -              20,000           $0.500               August 3, 1998(1)(2)
             -        100,000                   -           $0.487               January 31, 1999(4)
        22,681         22,681                   -           $2.131               July 22, 1999(4)
       864,000        960,000                   -           $2.713               August 6, 1999(4)
             -      1,500,000                   -           $6.250               October 9, 1999(4)
     1,500,000              -                   -           $2.000               October 9, 1999(4)
             -              -           1,550,000           $0.500               October 21, 1999(1)(2)
     1,781,000      1,852,500                   -           $0.500               December 31, 1999(1)
        50,000         50,000              50,000           $0.500               November 1, 2000(1)
             -         61,547                   -           $0.469               July 15, 2001(4)
             -        100,000                   -           $1.000               July 15, 2001(4)
             -         10,500              10,500           $0.475               July 16, 2001(4)
             -          8,333               8,333           $0.415               August 19, 2001(4)
        16,667         16,667              16,667           $0.413               August 20, 2001(4)
         8,420         18,519              18,519           $0.406               October 31, 2001(4)
             -         20,000                   -           $0.500               November 11, 2001(4)
             -         10,000                   -           $0.500               November 12, 2001(4)
     1,500,000              -                   -           $2.000               October 9, 1999(4)
       100,000              -                   -           $2.000               December 1, 2002(1)
             -              -                   -           $3.000               October 14, 2002(4)
       782,000              -                   -           $2.000               June 29, 2003(1)
             -         30,000                   -           $0.398               April 1, 2002(4)
        60,000         60,000                   -           $0.398               June 6, 2002(4)
       200,000        200,000                   -           $2.000               July 30, 2002(4)
             -        197,500                   -           $6.250               October 14, 2002(4)
       197,500              -                   -           $3.000               October 14, 2002(4)
             -         10,000                   -           $0.500               November 5, 2002(4)
             -        100,000                   -           $4.280               December 1, 2002(1)
       100,000              -                   -           $2.000               December 1, 2002(1)
     1,500,000      1,518,750                   -           $1.050               December 31, 2002(1)
    ----------     ----------           ---------
    11,750,768     12,804,204           8,083,866
    ==========     ==========           =========
</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 1998
    or 1997 as indicated in the table.

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

(4) Other non-employee warrants.

     Stock option plans 

1995 Plan

The Company established a 1995 Stock Option Plan (the "1995 Plan"). The 1995
Plan was approved by the Board of Directors on November 8, 1995 and by the
Company?s shareholders on July 11, 1996. The 1995 Plan is administered by the
Board of Directors of the Company or a Committee designated by them. Under the
1995 Plan employees, including officers and managerial or supervising personnel,
are eligible to receive Incentive Stock Options ("ISO's") or ISO's in tandem
with stock appreciation rights ("SAR's"), and employees, Directors, contractors
and consultants are eligible to receive non-qualified stock options ("NQSO's")
or NQSO's in tandem
   
                                      F-16
    
<PAGE>
with SAR's. Options may be granted under the 1995 Plan to purchase an aggregate
of 3,500,000 shares of Common Stock. If an option granted under the 1995 Plan
terminates or expires without having been exercised in full, the unexercised
shares subject to that option will be available for a further grant of options
under the 1995 Plan. Options may not be transferred other than by will or the
laws of descent and distribution and, during the lifetime of the optionee, may
be exercised only by the optionee.

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

1998 Plan

Under the Company's 1998 Stock Option Plan (the "1998 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 5,000,000 shares may be
issued and no options may be granted after ten years from the date the 1998 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 and 1998 Stock Option Plans for the years ended December
31, 1996, 1997 and 1998 was as follows:

                                                               Weighted Average
                                        Number of                Exercise Price
                                          Shares                   Per Share

Outstanding, January 1, 1996               305,500                      $1.28
Canceled                                  (302,500)                     $1.00
Granted                                  1,902,500                      $0.50
Expired                                    (3,000)                     $30.00

Outstanding, January 1, 1997             1,902,500                      $0.50
Canceled                                (1,852,500)                     $0.50
Granted                                  3,471,250                      $0.84
Expired                                          -                          -

Outstanding, January 1, 1998             3,521,250                      $0.83
Canceled                                   (68,750)                     $.074
Granted                                  2,007,000                      $2.00
Exercised                                 (21,500)                      $.050

Outstanding January 1, 1999              5,438,000                      $1.23

As of December 31, 1998, options to acquire 3,229,000 shares of the Company's
common stock with exercise prices ranging from $0.50 to $2.00, were fully vested
and exercisable at a weighted average exercise price of $0.82 per share. The
remaining 2,209,000 options, with exercise prices ranging from $0.50 to $2.00,
having a weighted average exercise price of $1.84 per share, will vest through
2003.
   
                                      F-17
    
<PAGE>
If not previously exercised, options outstanding at December 31, 1998, will
expire as follows: 2,991,000 options expire on December 31, 1999; 50,000 options
expire on November 1, 2000; 1,500,000 options expire on December 31, 2002;
100,000 options expire on December 1, 2002; and 797,000 options expire on June
29, 2003. The weighted average grant date fair value of the options issued
during 1996 and the weighted average exercise price of those options amounted to
$0.34 and $0.50, respectively. The weighted average grant date fair value of the
options issued during 1997 and the weighted average exercise price of those
options amounted to $0.75 and $0.85, respectively. The weighted average grant
date fair value of the options issued during 1998 and the weighted average
exercise price of those options amounted to $0.68 and $2.00, respectively.

The 2,007,000 options during 1998 were granted with exercise prices greater than
the stock price on the grant date. During 1997, 1,852,500 options were granted
whose exercise price was less than the stock price on grant date. These options
were existing options issued in prior years and whose expiration date was
extended in 1997 to December 31, 1999. The option exercise price was not changed
during 1997. Under generally accepted accounting practices, the extension of
these expiration dates constitutes a new issue of options. New issues in 1997 of
1,618,750 options were granted with exercise prices greater than the stock price
on grant date.

The 1998 Plan was submitted to and approved by the Company's stockholders at its
annual meeting in 1998.

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>
                                                      1998               1997                1996
                                                      ----               ----                ----
<S>                            <C>             <C>                <C>                   <C>    
Net loss                       As reported     $  (9,103,113)      $ (17,953,621)       $(4,652,207)
                               Pro forma         (10,545,636)        (19,325,148)        (4,851,124)

Net loss per common share      As reported     $       (0.17)      $       (0.43)       $     (0.16)
                               Pro forma               (0.20)              (0.47)             (0.16)
</TABLE>
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 4.7% to 5.5%; volatility of 169.1%, no assumed dividend yield; and
expected lives of one to five years.

Options that were issued to employees during previous fiscal years at an
exercise price of $1.00 per share, were revalued at $.50 per share during 1996.
During 1997, the expiration date of these options was extended from December 31,
1997 until December 31, 1999. In accordance with SFAS 123 the revaluation and/or
the extension of the expiration dates of the options constitutes a new issuance
of options. In 1997, $744,000 was charged to compensation expense and is
reflected in the net loss as reported.

NOTE 10 - COMMITMENTS AND CONTINGENT LIABILITIES: 

IRS Excise Tax Claim 

In May 1992, AIRI was 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 claimed that AIRI failed to comply with an administrative procedure that
required sellers and buyers in tax-free transactions to obtain certification
from the IRS. The Company believes that AIRI complied with the substance of the
then existing requirements and that such sales were either tax-free or such
excise taxes were paid by the end-users of such products. AIRI offered to
negotiate a settlement of this matter with IRS Appeals since early 1993. Such
negotiations included face-to-face meetings, numerous phone calls and written
transmittals and several offers of settlement by both the Company and the IRS.
During these negotiations, the IRS Appeals officers offered to waive
   
                                      F-18
    
<PAGE>
all of the penalties and 75% of the amount of the proposed tax liability.
However, AIRI rejected this offer and requested the IRS' National Office to
provide technical advice to its Appeals officers. After numerous conferences and
discussions with the National Office in 1995, the National Office issued an
adverse Technical Advice Memorandum ("TAM") to its Appeals Office in Dallas,
Texas, to the effect that AIRI should be liable for the tax on the sale of
diesel fuel for the first three quarters of 1989. However, subsequent to the
issuance of the TAM, the IRS Appeals officer indicated to AIRI that the IRS
still wanted to negotiate a settlement. In 1998, the Company reached a final
agreement (the "IRS Agreement") with the IRS to settle this matter by agreeing
to pay an aggregate of $646,633 in tax, plus interest accrued for the applicable
periods involved. In the IRS Agreement, the IRS waived all penalties and 75% of
the amount of the originally proposed tax liability. The Company continues to
maintain that it is not liable for the excise taxes at issue, but agreed to
settle the dispute at a significantly lower amount of liability in order to
bring this long-running issue to conclusion. In February 1999, the Company paid
all amounts due to the IRS on this matter, which totaled approximately $1.3
million. (See Note 15)

Environmental Lawsuit

In January 1994, a lawsuit captioned Paul R. Thibodeaux, et al. (the
"Plaintiffs") v. Gold Line Refinery Ltd. (a limited partnership), Earl Thomas,
individually and d/b/a Gold Line Refinery Ltd., American International Refinery,
Inc., Joseph Chamberlain individually (collectively, the "Defendants") (Docket
No. 94-396), was filed in the 14th Judicial District Court for the Parish of
Calcasieu, State of Louisiana. Subsequently, several parties were joined as
plaintiffs or defendants in the lawsuit. The lawsuit alleged, among other
things, that the defendants, including AIRI, caused or permitted the discharge
of hazardous and toxic substances from the Lake Charles Refinery into the
Calcasieu River. The plaintiffs sought an unspecified amount of damages,
including special and exemplary damages. In October 1997, the Plaintiffs and
Defendants agreed upon a cash settlement, of which the Company's share of
$45,000 was placed into escrow in October 1997 and paid in 1998. This matter has
been fully and finally settled during the first quarter of 1998 and all claims
have been dismissed with prejudice as to all defendants, which includes the
Company and AIRI.

Employment agreements 

The Company has an employment agreement with its chief executive officer under
which the officer receives a base salary of $330,000 annually.

Transfer of Funds - U.S. and Foreign

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

Gold Line Defaults 

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

Lease commitments 

The Company leases office space under two operating leases which all expire in
2003 and 2006. Future minimum annual payments under these operating leases are
$455,000, $459,000, $464,000, $474,000 and $479,000 for 1999, 2000, 2001, 2002,
and 2003, respectively.
   
                                      F-19
    
<PAGE>
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:

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

Minimum rentals                     $150,530       $158,313      $307,912
Less - sublease rentals                 -           (21,740)     (130,437)
                                    --------       --------      --------
Total rent expense                  $150,530       $136,573      $177,475
                                    ========       ========      ========

Other Contingencies 

In addition to certain matters described above, the Company and its subsidiaries
are party to various legal proceedings. 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.

Neste Trifinery V. American International Refinery, Inc. Etc. Cause No.
98-11453; in the 269th Judicial District; in and For Harris County, Texas
Plaintiff, Neste Trifinery, has filed suit in a Harris County District Court
against the Company and its wholly-owned subsidiary, American International
Refinery, Inc. ("AIRI"). Neste Trifinery has asserted claims for recovery of
compensatory and punitive damages based on the following theories of recovery;
(1) breach of contract, (2) disclosure of confidential information; and (3)
tortious interference with existing contractual relations. Generally, Neste
Trifinery has alleged that in connection with the due diligence conducted by the
Company and AIRI of the business of Neste Trifinery, the Company and AIRI had
access to confidential or trade secret information and that the Company and AIRI
have exploited that information, in breach of an executed Confidentiality
Agreement, to the detriment of Neste Trifinery. Neste Trifinery seeks the
recovery of $20,000,000 in compensatory damages and an undisclosed sum in
connection with its claim for the recovery of punitive damages.

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

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

On February 26, 1998, the Company entered into a Letter Agreement with DSE,
Inc., the parent corporation of St. Marks Refinery, Inc., whereby the Company
agreed to purchase or lease the refinery and terminals facility located at St.
Marks, Florida. Thereafter, St. Marks Refinery, Inc. elected to terminate its
storage agreement with Neste Trifinery. On March 10, 1998, Neste sued St. Marks
Refinery, Inc. in the United states District Court for the Northern District of
Florida, Case No. 4:98cv86-WS, and sought an injunction to prevent immediate
termination of its storage agreement. Following an evidentiary hearing, the
District Judge denied Neste's application for injunctive relief and adopted the
recommendations of the Magistrate, who found in part that Neste had failed to
prove a substantial likelihood of success on the merits. The District Court's
order was appealed by Neste to the United States Court of Appeals for the
Eleventh Circuit, but the Appellate Court denied Neste's motion for injunction
pending appeal. On appeal, the federal court found in favor of Neste and issued
a judgement related thereto for $175,000, which was paid by the Company on
behalf of St. Marks in March 1999. However, DSE, Inc. has agreed to reimburse
the Company $75,000 of the $175,000, pursuant to DSE, Inc.'s indemnification of
the Company included in the Stock Purchase Agreement under which the Company
purchased St. Marks. The remaining $100,000 will be capitalized as acquisition
cost of the St. Marks Refinery.

Kazakstan

On May 12, 1997, the Company, through its wholly-owned subsidiary, American
International Petroleum Kazakstan ("AIPK"), entered into an agreement with Med
Shipping and Trading S.A. ("MED"), a Liberian corporation to buy from MED, in
exchange for a
   
                                      F-20
    
<PAGE>
combination of cash and stock, a 70% working interest in a Kazakstan concession.
As part of the acquisition, the Company is required to perform certain minimum
work programs over the next five years which consists of the acquisition and
processing of 3,000 kilometers of new seismic data, reprocessing 500 kilometers
of existing seismic data, and a minimum of 6,000 linear meters of exploratory
drilling. In addition, the Company assumed an obligation to pay the Kazakstan
Government three annual payments of $200,000 each beginning July 1998 for the
purchase of existing seismic and geological data on the Kazakstan concession.

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

Year 2000 Issues

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

NOTE 11 - INCOME TAXES: 

The Company reported a loss from operations during 1996, 1997, and 1998 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 $68,000,000 which expire in years 1998 through
2018. Due to a change in control, as defined in Section 382 of the Internal
Revenue Code ("382"), which occurred in 1994 and 1998, 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 1998 is approximately $38,000,000, of which the Company will be limited
as to the amount that can be used in each year going forward under the 382
rules.

The components of the Company's deferred tax assets and liabilities are as
follows:
<TABLE>
<CAPTION>
                                                                                          December 31, 
                                                                                          ------------                           
                                                                                1998                     1997
                                                                                ----                     ----
<S>                                                                        <C>                        <C>    
Deferred taxes:
     Net operating loss carryforwards                                       $ 14,807,000              $  10,088,000

     Unrealized loss on marketable securities                                          -                  1,932,000
     Allowance for doubtful accounts                                           1,300,000                    720,000

     Accrued liabilities                                                               -                     13,000

     Depreciation, depletion, amortization and impairment                     (1,650,000)                (1,603,000)

Net deferred tax asset                                                        14,457,000                 11,150,000
                                                                            ------------              -------------

Valuation allowance                                                         $(14,457,000)             $ (11,150,000)
                                                                            ============              =============

</TABLE>
The valuation allowance relates to the uncertainty as to the future utilization
of net operating loss carryforwards. The increase in the valuation allowance
during 1998 of approximately $3,307,000 primarily reflects the increase in the
Company's net operating loss carryforwards during the year.
   
                                      F-21
    
<PAGE>

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

Financial instruments which potentially expose the Company to concentrations of
credit risk consist primarily of trade accounts receivable and notes receivable
and marketable securities. For investments, fair value equals quoted market
price. Trade accounts receivable outstanding at December 31, 1998 has been
collected in the normal course of business. MIP notes receivable of $1,515,750
received in the sale of the Colombia and Peru properties, as previously
discussed, was due during 1998 and in default and has been fully reserved at
December 31, 1998. An additional MIP notes receivable of $1,118,200 also
received in the sale mentioned above and due in 2000 is payable out of
production from the Colombia properties. This note is carried at full value at
December 31, 1998 and the Company has no reason to believe that it will not
collect this receivable. Fair value of fixed-rate long-term debt and notes
receivable are determined by reference to rates currently available for debt
with similar terms and remaining maturities. As of December 31, 1998, 100% of
the Company's long-term debt which was issued during the second quarter of 1998,
matures during 2000. As a result, the Company believes the carrying value of its
receivables and long-term debt approximates fair value. The reported amounts of
financial instruments such as cash equivalents, accounts receivable, accounts
payable, short-term debt, and accrued liabilities approximate fair value because
of their short-term maturities. The MIP notes receivable were recorded at a
discount to yield a fair market interest rate. The Company believes the
effective interest rate on the MIP notes approximates market rates at December
31, 1998.

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

<TABLE>
<CAPTION>

                                                    1998                                                      1997            
                                                    -----------------------                     ---------------------------------
                                        Carrying                 Fair                           Carrying              Fair
                                          value                  value                            value               value  
                                          -----                  -----                            -----               -----
<S>                                     <C>                  <C>                                <C>                <C>       
MIP Notes Receivable                    $1,118,200           $1,118,200                         $3,871,703         $3,871,703

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

Short-term debt                         $1,992,200           $1,992,200                         $6,075,931         $6,075,931

Long-term debt                          $6,110,961           $6,110,961                                  -                  -
</TABLE>

NOTE 13 - GEOGRAPHICAL SEGMENT INFORMATION: 


The Company has four reportable segments which are primarily in the business of
exploration, development, production and oil and natural gas and the refining
and marketing of petroleum products. The accounting policies of the segments are
the same as those described in the summary of significant accounting policies.
The Company evaluates performances based on profit and loss before income and
expenses items incidental to their respective operations. The Company's
reportable statements are managed separately because of their geographic
locations. Financial information by operating segment is presented below:

                                      F-22

<PAGE>




Financial information, summarized by geographic area, is as follows:
<TABLE>
<CAPTION>

                                                         Geographic Segment
                                                         ------------------
                                                                                                             Consolidated
1998                                United States       Colombia             Peru        Kazakstan                Total   
----                                -------------       --------             ----        ---------           ------------

<S>                                  <C>                 <C>                  <C>           <C>                <C>
Sales and other
   Refinery operating revenue(1)    $11,394,009         $ -                $ -          $        -           $ 11,394,009
Interest income and other
   corporate revenues                                                                                             460,597
                                                                                                             ------------

Total revenue                                                                                                  11,854,606
Refinery costs and operating
   expense                           14,214,767            -                 -          $         -            14,214,767
                                    -----------         ---------          ---------    -----------          ------------

Operating profit (loss)             $(2,820,758)        $  -               $ -          $         -          $ (2,360,061)
                                    ===========         =========          =========    ===========
General corporate expense                                                                                       4,830,003
Interest expense                                                                                                1,912,949
                                                                                                             ------------

Net loss                                                                                                     $(9,103,113)
                                                                                                             ============

Identifiable assets
     at December 31, 1998           $35,234,530         $  -               $ -          $22,677,073          $ 57,911,603
                                    ===========         =========          =========    ===========          ============

Corporate assets                                                                                             $  2,949,731
                                                                                                             ------------

Total assets at
     December 31, 1998                                                                                       $ 60,861,334
                                                                                                             ============

Depreciation, depletion
     and amortization               $   813,088         $  -               $  -         $         -          $    813,088 
                                    ===========         =========          =========    ===========          ============

Capital Expenditures,
     net of cost recoveries         $15,494,897         $  -               $  -         $10,748,427          $ 26,243,324
                                    ===========         =========          =========    ===========          ============
</TABLE>

(1)  Refinery sales to Conoco accounted for 19% of the Company's sales during
     the year.


                                      F-23

<PAGE>

<TABLE>
<CAPTION>


                                                         Geographic Segment
                                                         ------------------
                                                                                                            Consolidated
1997                                United States     Columbia          Peru          Kazakstan               Total   
----                                -------------     --------          ----          ---------          -------------

<S>                                <C>                <C>                <C>           <C>                    <C>    
Sales and other
     operating revenue              $    23,298      $   292,947    $         -    $         -          $     316,245
Interest income and other
     corporate revenues                                                                                       511,719

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

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


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

Net loss                                                                                                 $(17,953,651)


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


Corporate assets                                                                                            8,955,756

Total assets at
     December 31, 1997                                                                                  $  41,839.860
                                                                                                        =============

Depreciation, depletion
     and amortization               $   704,048      $    70,216    $        -     $         -          $       
                                    ===========      ===========    ===========    ===========          =============
744,264


Capital Expenditures,
     net of cost recoveries         $ 5,606,031      $         -    $         -    $11,724,477          $  17,330,508
                                    ===========      ===========    ===========    ===========          =============
</TABLE>



                                      F-24


<PAGE>

<TABLE>
<CAPTION>


                                                           Geographic Segment
                                                           ------------------
                                                                                                            Consolidated
1996                                United States     Colombia               Peru        Kazakstan              Total   
----                                -------------     --------               ----                           ------------


Sales and other
<S>                                  <C>              <C>             <C>             <C>       <C>          <C>         
     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               $   773,498         $491,732          $        -   $            -        $ 1,265,230
                                    -----------      -----------          ----------   --------------        ===========

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

                                      F-25


<PAGE>
                                                                               

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

The Company has issued shares of common stock and common stock warrants in the
acquisitions and conversions of the following noncash transactions:

<TABLE>
<CAPTION>

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

<S>                                                           <C>                   <C>              <C>       
Conversion of debentures                                      $15,526,380           $9,343,022       $2,000,000
Stock issued in lieu of current liabilities                     1,669,717              233,559          168,902
Issuance of warrants related to convertible debentures            936,459            6,264,411             -
Issuance of stock - unearned compensation                         196,900                -              424,063
Issuance of stock - compensation                                    -                   40,000             -
Issuance of stock - services                                      128,125              247,607             -
Issuance of stock and warrants - for oil and gas properties         -                9,254,688             -
Issuance of stock- for refinery and equipment                   1,687,500                -
</TABLE>

Cash paid for interest, net of amounts capitalized, was $62,532 $765,312 and
$808,477, during 1998, 1997, and 1996, respectively. Cash paid for corporate
franchise taxes was $60,078, $70,003, and $114,128, during 1998, 1997 and 1996,
respectively.

NOTE 15 - SUBSEQUENT EVENTS: 

Financing

In January 1999, the Company sold a $1,800,000 Bridge Note in a private
placement to a single investor. The proceeds of the sale were used for working
capital. The principal was repaid in full with proceeds derived from the sale in
February 1999 of a $10,000,000 principal amount of 5% Secured Convertible
Debentures due February 18, 2004. The remaining proceeds were utilized to redeem
$3.5 million of principal from the Company's 14% Convertible Notes due April 21,
2000; to pay off approximately $1.3 million in excise taxes and interest due to
the Internal Revenue Service pursuant to a settlement agreement; and for working
capital. (See Note 5 and Note 10)

Litigation

On February 26, 1998, the Company entered into a Letter Agreement with DSE,
Inc., the parent corporation of St. Marks Refinery, Inc., whereby the Company
agreed to purchase or lease the refinery and terminals facility located at St.
Marks, Florida. Thereafter, St. Marks Refinery, Inc. elected to terminate its
storage agreement with Neste Trifinery. On March 10, 1998, Neste sued St. Marks
Refinery, Inc. in the United states District Court for the Northern District of
Florida, Case No. 4:98cv86-WS, and sought an injunction to prevent immediate
termination of its storage agreement. Following an evidentiary hearing, the
District Judge denied Neste's application for injunctive relief and adopted the
recommendations of the Magistrate, who found in part that Neste had failed to
prove a substantial likelihood of success on the merits. The District Court's
order was appealed by Neste to the United States Court of Appeals for the
Eleventh Circuit, but the Appellate Court denied Neste's motion for injunction
pending appeal. On appeal, the federal court found in favor of Neste and issued
a judgement related thereto for $175,000, which was paid by the Company on
behalf of St. Marks in March 1999. However, DSE, Inc. has agreed to reimburse
the Company $75,000 of the $175,000, pursuant to DSE, Inc.'s indemnification of
the Company included in the Stock Purchase Agreement under which the Company
purchased St. Marks. The remaining $100,000 will be capitalized as acquisition
cost of the St. Marks Refinery.

NOTE 16 - EMPLOYEE BENEFITS:

During the fourth quarter of 1997 the Company established a defined contribution
401(k) Plan for its employees. The plan provides participants a mechanism for
making contributions for retirement savings. Each employee may contribute
certain amounts of eligible compensation. In July 1998, the Company amended the
plan to include a Company matching contribution provision. The plan allows for
the Company to match employee contributions into the plan at the rate of $0.50
for each $1.00 contributed by the employee, with a Company matching contribution
limited to a maximum of 5% of the employee salary. To be eligible for the
Company matching program, employees must be employed by the Company for 90 days.
Employer contributions vest evenly over three years from the employee's
anniversary date. The Company had contributions for the year ended December 31,
1998 totaling approximately $60,000.


                                      F-26



<PAGE>



               
                      SUPPLEMENTARY OIL AND GAS INFORMATION
              FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996

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


                                      F-27

<PAGE>


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


Capitalized costs relating to oil and gas activities and costs incurred in oil
and gas property acquisition, exploration and development activities for each
year are shown below:
                                                                            
<TABLE>
<CAPTION>
CAPITALIZED COSTS
                                                         Colombia                              Peru                   
                                               --------------------------------      ---------------------------- 
                                               1998        1997       1996           1998       1997      1996    
                                               ----        -----      ----           ----       ----      ----    
<S>                                             <C>        <C>       <C>              <C>        <C>   <C>        
Unevaluated property not
   subject to amortization                     $  -     $      -    $ 1,101,277      $  -       $  -   $4,457,964 
Proved and unproved
   properties                                     -            -     31,934,991      $  -          -      200,000 
            
Accumulated deprecia-
   tion, depletion and
   amortization                                   -            -     19,870,122      $  -          -      200,000 
                                               --------------------------------      ---------------------------- 
Net Capitalized costs                          $  -     $      -    $13,166,146      $  -       $  -   $4,457,964 
                                               ================================      ============================ 
Costs incurred in oil and gas
 property acquisition,
exploration and
development activities

Property acquisition
   costs - proved and
   unproved properties                         $  -     $      -    $         -      $  -       $  -   $        - 
Exploration Costs                                              -              -         -                       - 
Development costs                                 -            -        719,954         -          -            - 
Results of operations for oil
and gas producing activities

Oil and gas sales                              $  -     $292,947    $ 1,364,581      $  -       $  -   $        - 
                                               --------------------------------     ----------------------------- 
                                                                         
Lease operating costs                             -       98,766        611,857                                 - 
Depreciation, depletion
   and amortization                               -       70,216        491,732         -          -            - 
Provision for reduction
   of oil and gas properties                      -            -              -         -          -      200,000 
                                                -------------------------------      ---------------------------- 
                                  
                                                  -      168,982      1,103,589         -          -      200,000 
                                                -------------------------------       --------------------------- 
Income (loss) before
   tax provision                                  -      123,965        260,992         -           -    (200,000)
Provision (benefit) for
   income tax                                     -            -              -         -           -           - 
                                                 ------------------------------      ---------------------------- 
Results of operations                          $  -     $123,965    $   260,992      $  -       $   -  $  (200,00)
                                               ================================      ============================ 
</TABLE>
(1)      Unevaluated property not subject to amortization reflected in 1998
         includes Kazakstan properties and non-Kazakstan oil and gas properties.

(2)      Unevaluated property not subject to amortization reflected in 1997
         includes Kazakstan properties only.

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


                                      F-28


<PAGE>


<TABLE>
<CAPTION>
CAPITALIZED COSTS                            
                                                             Kazakstan/Other                           Total     
                                                  ----------------------------------     --------------------------------------
                                                  1998(1)       1997(2)      1996(3)       1998        1997            1996
                                                  -------       -------      -------        ----        ----           ----
<S>                                                 <C>        <C>           <C>           <C>         <C>             <C>
Unevaluated property not
   subject to amortization                        $23,438,886  $11,724,477   $89,389     $23,438,886  $11,724,477   $ 5,648,630
Proved and unproved
   properties                                              -            -    371,665               -            -    32,506,656
Accumulated deprecia-
   tion, depletion and
   amortization                                            -             -   371,655               -            -    20,441,787   
                                                 -----------------------------------     --------------------------------------    
Net Capitalized costs                            $23,438,886   $11,724,477   $89,389     $23,438,886  $11,724,477   $17,713,499  
                                                 ===================================     ======================================   
Costs incurred in oil and gas
 property acquisition,
exploration and
development activities

Property acquisition
   costs - proved and
   unproved properties                           $23,438,886   $11,724,477        -      $23,438,886  $11,724,477   $         -
Exploration Costs                                          -             -        -                -            -       744,549
Development costs                                          -             -        -                -            -       719,954
Results of operations for oil
and gas producing activities

Oil and gas sales                                $         -   $         -   $    -      $         -  $   292,947   $ 1,364,581
                                                  ---------------------------------      --------------------------------------
                                             
Lease operating costs                                      -             -        -                -        98,766      611,857
Depreciation, depletion
   and amortization                                        -             -        -                -        70,216      491,732
Provision for reduction
   of oil and gas properties                               -             -        -                -             -      200,000
                                                  ---------------------------------      --------------------------------------
                                                           -             -        -                -       168,982    1,303,589
                                                  ---------------------------------      --------------------------------------
Income (loss) before
   tax provision                                           -             -        -                -       123,965       60,992
Provision (benefit) for
   income tax                                              -             -        -                -             -            -
                                                   --------------------------------      --------------------------------------
Results of operations                              $       -   $       -     $    -      $         -  $          -  $   123,965
                                                   ================================      ======================================
</TABLE>

                                      F-29

<PAGE>



OIL AND GAS RESERVES:

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

The following table represents the Company's net interest in estimated
quantities of proved developed and undeveloped reserves of crude oil,
condensate, natural gas liquids and natural gas and changes in such quantities
at December 31, 1998, 1997 and 1996. Net proved reserves are the estimated
quantities of crude oil and natural gas which geological and engineering data
demonstrate with reasonable certainty to be recoverable in future years from
known reservoirs under existing economic and operating conditions. Proved
developed reserves are proved reserve volumes that can be expected to be
recovered through existing wells with existing equipment and operating methods.
Proved undeveloped reserves are proved reserve volumes that are expected to be
recovered from new wells on undrilled acreage or from existing wells where a
significant expenditure is required for recompletion.

<TABLE>
<CAPTION>
                                          United States                    Colombia                          Total
                                       -------------------         -------------------------       ---------------------------
                                       Oil             Gas             Oil           Gas               Oil             Gas
                                       BBLS            MCF             BBLS          MCF               BBLS            MCF
                                     -------          ------       ----------     ----------       -----------      ----------
<S>                                 <C>              <C>            <C>           <C>                <C>            <C>       
January 1, 1996                          -               -          4,106,480     11,381,400         4,106,480      11,381,400
       Revisions of
       previous estimates                -               -             34,372      3,298,000            34,372       3,298,000
       Extensions, discoveries
       and other additions               -               -               -            -                  -              -
       Production                        -               -           (130,433)        -               (130,433)         -     
                                     -------          ------       ----------    -----------       -----------     -----------
December 31, 1996                        -               -          4,010,419     14,679,400         4,010,419      14,679,400
       Revisions of
       previous estimates                -               -               -            -                  -              -
       Extensions, discoveries
       and other additions               -               -               -            -                  -              -
       Sales of reserves                 -               -         (3,892,146)   (14,679,400)       (3,892,146)    (14,679,400)
       Production                        -               -           (118,273)        -               (118,273)         -    
                                     -------          ------       ----------    -----------       -----------     -----------
December 31, 1997                        -               -               -            -                  -              -
       Revisions of
       previous estimates                -               -               -            -                  -              -
       Extensions, discoveries
       and other additions               -               -               -            -                  -              -
       Sales of reserves                 -               -               -            -                  -              -
       Production                        -               -               -            -                  -              -       
                                     -------          ------       ----------    -----------       -----------     -----------
December 31, 1998                        -               -               -            -                  -              -     
                                     =======          ======       ==========    ===========       ===========     ===========
</TABLE>


<TABLE>
<CAPTION>
                                          United States                    Colombia                          Total
                                       -------------------         -------------------------       ---------------------------
                                       Oil             Gas             Oil           Gas               Oil             Gas
                                       BBLS            MCF             BBLS          MCF               BBLS            MCF
                                     -------          ------       ----------     ----------       -----------      ----------
<S>                                 <C>              <C>            <C>           <C>                <C>            <C>   
Net proved developed reserves

January 1, 1996                          -               -          1,012,896      5,100,000         1,012,896       5,100,000
December 31, 1996                        -               -            948,721      6,321,100           948,721       6,321,000
December 31, 1997                        -               -               -            -                  -              -
December 31, 1998                        -               -               -            -                  -              -

</TABLE>

   
                                      F-30
    

<PAGE>


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

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


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                
                                      -----------------------------------------
                                         1998            1997             1996
                                         ----            ----             ----
Future cash inflows                   $     -          $     -      $61,173,696
Future development costs                    -                -      (12,170,000)
Future production costs                     -                -       (8,012,891)
Future income tax expenses                  -                -                - 
                                      -------          -------      -----------
Future net cash flows                       -                -       40,990,805
Annual discount 10% rate                    -                -      (19,088,789)
                                      -------          -------      -----------
Standardized measure discounted
      future net cash flows           $     -          $     -      $21,902,016
                                      =======          =======      ===========

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

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

Estimated future income taxes were eliminated in 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, 1996.


   
                                      F-31
    


<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 $0 in 1998, a decrease of $21,902,016 in 1997 and an increase of
$9,542,869, in 1996. The principal sources of change were as follows:

<TABLE>
<CAPTION>
                                                     For the years ended December 31, 
                                             -----------------------------------------------      
                                                1998            1997                1996
                                             ----------     ------------         -----------

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

</TABLE>

   
                                      F-32
    


<PAGE>


INDEPENDENT AUDITOR'S REPORT ON SCHEDULE


Stockholders and Board of Directors
American International Petroleum Corporation
New York, New York

We have audited the consolidated financial statements of American International
Petroleum Corporation and its subsidiaries as of December 31, 1998 and 1997, and
for each of the years in the three-year period ended December 31, 1998. Our
audits for such years also included the financial statement schedule of American
International Petroleum Corporation and its subsidiaries, listed in Item 14-2,
for each of the years in the three-year period ended December 31, 1998. This
financial statement schedule is the responsibility of the Company's management.
Our responsibility is to report on this schedule based on our audits. In our
opinion, such financial statement schedule, when considered in relation to the
basic financial statements taken as a whole, presents fairly in all material
respects the information set forth therein.



HEIN + ASSOCIATES
Houston, Texas
March 30, 1999










   
                                      F-33
    


<PAGE>


          AMERICAN INTERNATIONAL PETROLEUM CORPORATION AND SUBSIDIARIES
                 SCHEDULE I - VALUATION AND QUALIFYING ACCOUNTS
                                 (in thousands)


<TABLE>
<CAPTION>

                                         Balance at       Additions Charged            Deductions:           
                                        Beginning of         to Costs and         Accounts Written off
Description                                 Year               Expenses             Against Allowance       Balance at End of Year
-----------                             ------------      -----------------       --------------------      ----------------------
<S>                                        <C>                  <C>                        <C>                       <C>
December 31, 1996                                                                                     
Allowance for Doubtful Accounts            $ 1,239              $  682                     $ -                       $1,921

December 31, 1997
Allowance for Doubtful Accounts            $ 1,921              $    -                     $ -                       $1,921

December 31, 1998
Allowance for Doubtful Accounts            $ 1,921              $1,494                     $ -                       $3,415

</TABLE>






   
                                      F-34
    


<PAGE>




                                   SIGNATURES

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

                  AMERICAN INTERNATIONAL PETROLEUM CORPORATION
   
Dated:  May 6, 1999
    
                                                  By:  /s/ Denis J. Fitzpatrick
                                                       -------------------------
                                                       Denis J. Fitzpatrick
                                                       Chief Financial Officer

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

By:  /s/ George N. Faris                                  Date:  May 6, 1999
     ----------------------------
     George N. Faris, Chairman
     of the Board of Directors
     and Chief Executive Officer

By:  /s/ Denis J. Fitzpatrick                             Date:  May 6, 1999
     ----------------------------
     Denis J. Fitzpatrick
     Vice President, Secretary,
     Principal Financial and
     Accounting Officer

By:                                                       Date:
     ----------------------------
     Donald G. Rynne, Director

By:  /s/ Daniel Y. Kim                                    Date:  May 6, 1999
     ----------------------------
     Daniel Y. Kim, Director

By:  /s/ William R. Smart                                 Date:  May 6, 1999
     ----------------------------
     William R. Smart, Director

By:  /s/ Richard W. Murphy                                Date:  May 6, 1999
     ----------------------------
     Richard W. Murphy, Director

    


<PAGE>


                                  Exhibit Index

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

21.1                Subsidiaries of the Registrant

27.1                Financial Data Schedule