SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                                   FORM 10-KSB
(Mark One)
   [ X ]     ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
                 SECURITIES EXCHANGE ACT OF 1934 [Fee Required]
                   For the fiscal year ended December 31, 1998
   [   ]     TRANSITION REPORT UNDER  SECTION 13 OR 15 (d) OF THE
                SECURITIES EXCHANGE ACT OF 1934 [No Fee Required]

                          Commission file number 0-8157

                          THE RESERVE PETROLEUM COMPANY
                 (Name of small business issuer in its charter)

Delaware                                                       73-0237060
(State or other jurisdiction of                               (IRS Employer
 incorporation or organization)                           identification number)

         6801 N. Broadway, Suite 300, Oklahoma City, Oklahoma 73116-9092
                (Address of principal executive offices)      (Zip Code)

Issuer's telephone number:                                   (405)848-7551
Securities registered under Section 12(b) of the Act: None

Securities registered under Section 12(g) of the Act: 
     Common stock $.50 Par Value      (Title of Class)

Check  whether the issuer (1) filed all reports  required to be filed by Section
13 or 15(d) of the  Securities  Exchange  Act  during the past 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
    ---    ---

Check if there is no disclosure of delinquent  filers in response to Item 405 of
Regulation  S-B  contained  herein,  and will not be  contained,  to the best of
registrant's   knowledge,   in  definitive   proxy  or  information   statements
incorporated  by reference  in Part III of this Form 10-KSB or any  amendment to
this Form 10-KSB. [ X ]

Issuer's  revenues for the fiscal year ended December 31, 1998 were  $2,714,094.
As of March 16, 1999,  there were  167,729.73  common  shares  outstanding.  The
aggregate market value of the voting stock held by non-affiliates was $3,307,588
as determined by the last reported sale which was February 18, 1999.


                       DOCUMENTS INCORPORATED BY REFERENCE

Items  9, 10,  11 and 12  required  by Part  III,  are  incorporated  herein  by
reference to the Company's proxy  statement to be mailed to security  holders on
or about April 6, 1999, in connection with its annual  stockholders'  meeting to
be held on May 4, 1999.
Transitional Small Business Disclosure Format (check one)  Yes       No  X 
                                                               ---      ---
See Exhibit Index on Page 39.

<PAGE>

                                TABLE OF CONTENTS


                                                                           Page


  Forward Looking Statements................................................  3
PART I
  Item  1.   Description of Business........................................  4
  Item  2.   Description of Properties......................................  7
  Item  3.   Legal Proceedings..............................................  8
  Item  4.   Submission of Matters to a Vote of Security Holders............  9

PART II
  Item  5.   Market for Common Equity and Related Stockholder Matters....... 10
  Item  6.   Management's Discussion and Analysis  of Financial Condition 
             and Results of Operations...................................... 10
  Item  7.   Financial Statements........................................... 18
  Item  8.   Changes in and Disagreements with Accountants on Accounting 
             and Financial Disclosure....................................... 39

PART III
  Item  9.   Directors, Executive Officers, Promoters and Control Persons
             Compliance with Section 16(a) of the Exchange Act.............. 39
  Item 10.   Executive Compensation......................................... 39
  Item 11.   Security Ownership of Certain Beneficial Owners and Management. 39
  Item 12.   Certain Relationships and Related Transactions................. 39
  Item 13.   Exhibits and Reports on Form 8-K............................... 39


<PAGE>












Forward Looking Statements.
--------------------------

In addition to historical information, from time to time the Company may publish
forward-looking  statements  relating to such matters as  anticipated  financial
performance,  business  prospects,  technological  developments,  new  products,
research and development activities,  year 2000 issues, and similar matters. The
Private  Securities  Litigation  Reform Act of 1995  provides a safe  harbor for
forward-looking  statements.  Although management believes that the expectations
reflected  in  such  forward   looking   statements   are  based  on  reasonable
assumptions,  a variety of factors could cause the Company's  actual results and
experience  to  differ   materially  from  the  anticipated   results  or  other
expectations expressed in the Company's  forward-looking  statements.  The risks
and uncertainties that may affect the operations,  performance,  development and
results  of the  Company's  business  include,  but  are  not  limited  to,  the
following:

     The  Company's  future  operating  results  will depend  upon  management's
     ability to employ and  retain  quality  employees,  forecast  revenues  and
     control expenses.  Any decline in operating revenues without  corresponding
     reduction in operating expenses could have a material adverse effect on the
     Company's business, results of operations and financial condition.

     Estimates  of future  revenues  from oil and gas sales are  derived  from a
     combination  of factors which are subject to significant  fluctuation  over
     any given period of time.  Reserve estimates by their nature are subject to
     revision in the short-term. The evaluating engineers consider all available
     production performance data, reservoir data and geological data, as well as
     make  estimates of  production  costs,  sale prices and the time period the
     property can be produced at a profit.  A change in any of the above factors
     can  significantly  change the timing  and  amount of net  revenues  from a
     property.

     The Company has no significant  long-term  sales contacts for either oil or
     gas. For the most part,  the price the Company  receives for its product is
     based  upon  the spot  market  price  which  in the  past  has  experienced
     significant  fluctuations.  Management  anticipates such price fluctuations
     will continue in the future, making any attempt at estimating future prices
     subject to significant error.

     Exploration and development costs have been the most significant  component
     of the  Company's  capital  expenditures  and are expected to remain so, at
     least in the near term.  Under the successful  efforts method of accounting
     for oil and  gas  properties  which  the  Company  uses,  these  costs  are
     capitalized  if the prospect is successful,  or charged to operating  costs
     and expenses if  unsuccessful.  Estimating  the amount of such future costs
     which may relate to  successful  or  unsuccessful  prospects  is  extremely
     imprecise, at best.

     The provisions for depreciation,  depletion and amortization of oil and gas
     properties   constitute  a  particularly   sensitive  accounting  estimate.
     Non-producing leaseholds are amortized over the life of the leasehold using
     a straight line method; however, when a leasehold is impaired or condemned,
     an  appropriate  adjustment to the provision is made at that time.  Forward
     looking estimates of such adjustments are very imprecise. The provision for
     impairment  of  long-lived  assets is determined by review of the estimated
     future cash flows from the individual properties.  A significant unforeseen
     downward adjustment in future prices and/or potential reserves could result
     in a material change in estimated  long-lived assets impairment.  Depletion
     and  depreciation  of oil and gas  properties are computed using the units-

<PAGE>

     of-production  method.  A  significant  unanticipated  change  in volume of
     production  or estimated  reserves  would  result in a material  unforecast
     change in the estimated depletion and depreciation provisions.

     In prior  years,  income from  available  for sale  securities  and trading
     securities have made substantial contributions to net income. Available for
     sale  securities  and  trading  securities  are used to invest  funds until
     needed in the Company's  capital investing and financing  activities.  When
     those funds are utilized, net income will be materially reduced.

     The Company's trading  securities  consist primarily of equity  securities.
     These securities are carried at fair value with unrealized gains and losses
     included in earnings.  The equity  securities  are traded on various  stock
     exchanges and/or the NASDAQ and over the counter markets.  Therefore, these
     securities  are  market-risk  sensitive  instruments.  The stock  market is
     subject to wide  price  swings in short  periods of time.  Should the stock
     market  experience  a  significant  down-turn,  the  Company  could  have a
     material loss from its equity investments.

     The  Company  has equity  investments  in which the  decisions  relating to
     day-to-day   operations   and   control  of  the   entities  is  vested  in
     organizations  and/or  individuals over which the Company has limited or no
     control.  These equity  investments make  substantial  contributions to the
     Company's net income.  The  Management of these  entities could at any time
     make decisions in their own best interests  which could  materially  affect
     the Company's net income,  or the value of the Company's  investments.  See
     Item  1  "Description  of  Business  -  Other  Business",  for  information
     regarding these equity investments.

The Reserve  Petroleum  Company  undertakes  no  obligation  to publicly  revise
forward-looking  statements to reflect events or circumstances  that arise after
the date hereof.  Readers should carefully review the risk factors  described in
other  documents  the Company  files from time to time with the  Securities  and
Exchange Commission,  including the Quarterly Reports on Form 10-QSB to be filed
by the Company in 1999 and any Current Reports on Form 8-K filed by the Company.


                                     PART I
                                     ------

Item 1.  Description of Business.

The Reserve  Petroleum  Company (the  "Company") is engaged  principally  in the
exploration  for and the  development of oil and natural gas  properties.  Other
business segments are not significant factors in the Company's  operations.  The
Company is a  corporation  organized  under the laws of the State of Delaware in
1931.

Oil and Natural Gas Properties.
------------------------------

For a summary of certain data relating to the  Company's oil and gas  properties
including production,  undeveloped acreage,  producing and dry wells drilled and
recent activity see Item 2,  "Description  of Properties".  For a discussion and
analysis of current and prior  years'  revenue and related  costs of oil and gas
operations, and a discussion of liquidity and capital resource requirements, see
Item 6, "Management's Discussion and Analysis of Financial Condition and Results
of Operations".

<PAGE>



Mineral Property Management. The Company owns non-producing mineral interests in
approximately  271,587 gross acres equivalent to 93,811 net acres. These mineral
interests  are  located in nine  states  with  57,101 net acres in the states of
Oklahoma  and Texas,  the area of  concentration  for the Company in its present
development programs.

A substantial  amount of the Company's oil and gas revenue has resulted from its
mineral property management.  In 1998 $1,017,891 (38%) of oil and gas sales were
from royalty interests as compared to $1,723,295 (62%) in 1997. For a discussion
and  analysis  of the  decrease  in royalty  interests  production,  see Item 6,
subheading,  "Operating Revenues". As a result of its mineral ownership, in 1998
the Company had royalty interests in 9 gross (.054 net) wells which were drilled
and completed as producing wells. See the following  paragraphs for a discussion
of mineral  interests in which the Company  chooses to  participate as a working
interest owner.

Development  Program. The development of a drilling program is usually initiated
in one of three ways. The Company may  participate  as a working  interest owner
with  a  third  party  operator  in the  development  of  non-producing  mineral
interests  which it  owns;  along  with  the  joint  interest  operator,  it may
participate in drilling additional wells on its producing leaseholds;  or if its
exploration program discussed below results in a successful exploratory well, it
may  participate  in the  development  of  additional  wells on the  exploratory
prospect.  In 1998, the Company completed 1 gross (.18 net) development oil well
which was in  process  at year end 1997.  Further  development  drilling  on the
prospect was deferred as a result of low oil prices.

Exploration Program. The Company's  exploration program is normally conducted by
purchasing  interests  in  prospects  developed by  independent  third  parties,
participating  in  third  party  exploration  of  Company  owned   non-producing
minerals,  developing  its own  exploratory  prospects or a  combination  of the
above.

The Company normally acquires interests in exploratory prospects from someone in
the industry with whom management has conducted  business in the past and/or has
confidence  in  the  quality  of  the  geological  and  geophysical  information
presented for  evaluation  by Company  personnel.  If  evaluation  indicates the
prospect is within the  Company's  risk  limits,  the Company may  negotiate  to
acquire an interest in the prospect and participate in a non-operating capacity.

The Company develops exploratory drilling prospects by identification of an area
of interest,  development of geological and geophysical information and purchase
of leaseholds  in the area.  The Company may then attempt to sell an interest in
the prospect to one or more companies in the petroleum  industry with one of the
purchasing  companies   functioning  as  operator.   Three  dimensional  seismic
technology is employed in the development of most prospects.

In 1998,  the Company had  fractional  interests in seven  prospects  which were
tested, including two prospects which were in process at December 31, 1998.

         A  second  test  well was  drilled  on a Garvin  County,  Oklahoma  gas
         prospect in which the Company had a 14% working interest. The test well
         resulted in condemnation of the prospect.

         The Company  participated in a shallow Harper County,  Kansas, gas play
         consisting of four separate acreage blocks in which the Company had 12%
         working  interests.  One test well on each  acreage  block was drilled,
         plugged and abandoned..  There are no plans to drill additional  wells;
         however, some of the acreage may be sold.

<PAGE>

         A test  well  was  drilled  on each of two gas  prospects  in  Woodward
         County,  Oklahoma in which the Company has a 27% working interest.  The
         wells were in process at year end and at March 15,  1999,  were waiting
         on pipeline hookup to complete final production testing.

Customers.  In 1998,  the Company had two customers  whose total  purchases were
greater than 10% of revenues from oil and gas sales. The purchases were $455,208
or 17% of total oil and gas sales by one purchaser, and $914,552 or 34% of total
oil and gas  sales by the  other.  The  $914,552  gross  sales  from the  second
purchaser  were the result of receipt of suspended  runs upon the final judgment
rendered in favor of the Company in a Texas quiet title  action as  discussed in
Item  3,  "Legal  Proceedings,"  and  Note  9,  to  the  accompanying  financial
statements.

The  Company  sells  most of its oil and gas on the  spot  market  or has  sales
contracts  that are based on the spot market  price.  A very minor amount of oil
and gas sales are made under fixed price contracts having terms of more than one
year.

Competition.  The oil and  gas  industry  is  highly  competitive  in all of its
phases.  The  availability  of a  ready  market  for the  Company's  oil and gas
production  depends on numerous  factors beyond its control,  including the cost
and availability of alternative  fuels, the level of consumer demand, the extent
of other  domestic  production  of oil and gas,  the  extent of  importation  of
foreign  oil  and  gas,  the  cost  of and  proximity  of  pipelines  and  other
transportation  facilities,  regulation by state and Federal authorities and the
cost of complying with applicable  environmental  regulations.  The Company is a
very minor  factor in the  industry  and must  compete  with other  persons  and
companies  having far greater  financial  and other  resources;  therefore,  the
Company's ability to develop prospects which are viable,  given current economic
conditions,  and  secure  the  financial  participation  of  other  persons  and
companies in exploratory drilling on these prospects is limited.

Regulation.  The  Company's  operations  are  affected  in  varying  degrees  by
political  developments  and  Federal and state laws and  regulations.  Although
released  from  Federal  price  controls,  interstate  sales of natural  gas are
subject to regulation by the Federal Energy Regulatory  Commission  (FERC).  Oil
and gas operations are affected by environmental laws and other laws relating to
the   petroleum   industry  and  both  are  affected  by   constantly   changing
administrative  regulations.  Rates of  production  of oil and gas have for many
years been subject to a variety of conservation  laws and  regulations,  and the
petroleum industry is frequently affected by changes in the Federal tax laws.

Generally,  the respective  state  regulatory  agencies will  supervise  various
aspects of oil and gas operations within the state and transportation of oil and
gas sold intrastate.

Environmental  Protection.  The operation of the various producing properties in
which the  Company  has an  interest  is  subject  to  Federal,  state and local
provisions  regulating discharge of materials into the environment,  the storage
of oil and gas products as well as the  contamination of subsurface  formations.
The  Company's  lease  operations  and  exploratory  activity have been and will
continue to be affected by  regulation  in future  periods.  However,  the known
effect to date has not been  material  as to capital  expenditures,  earnings or
industry competitive  position nor are estimated  expenditures for environmental
compliance expected to be material in the coming year. Such expenditures produce
no increase in productive  capacity or revenue and require more of  management's
time and  attention,  a cost which  cannot be  estimated  with any  assurance of
certainty.

Year 2000 Issue.   See Item 6 subheading, "Year 2000 Issue".
---------------

<PAGE>

Other Business.
--------------

The Company has net equity  (unaudited) of $156,579 in its 33% limited partner's
interest in an Oklahoma limited partnership which was formed in 1978 principally
to invest in Oklahoma  City real estate.  The  partnership  has  constructed  an
office building in Oklahoma City at a total cost of approximately $2,300,000 for
the land and building.  The Company has its office in the building under a lease
with the partnership. At December 31, 1998, the partnership had assets in excess
of liabilities of $474,480 and had net income of $53,520 for the year then ended
(unaudited).

The Company has net equity  (unaudited) of $192,778 at December 31, 1998, in its
9% interest in an Oklahoma limited  liability  company (LLC) which developed and
is operating a golf course in the Oklahoma City  metropolitan  area.  Through an
investment in a partnership, the LLC is participating in the development of real
estate  surrounding the golf course. The LLC had assets in excess of liabilities
of $2,304,832 at December 31, 1998, and net income of $275,290  (unaudited)  for
the year then ended.

The Company has a net equity (unaudited) of $ 95,904 at December 31, 1998 in its
10%  interest  in an  Oklahoma  limited  liability  company  which was formed in
December 1992 to purchase and hold certain Oklahoma City  metropolitan area real
estate as an investment.  The limited  liability company had assets in excess of
liabilities  of  $959,042  at  December  31,  1998,  and net income of  $335,240
(unaudited) for the year then ended.

Reference is made to Note 7 of the  accompanying  financial  statements for more
information about the partnership and limited liability companies.


Employees.
---------

At December 31, 1998, the Company had nine employees,  including  officers.  All
the  Company's  employees  devoted  a  portion  of  their  time to  duties  with
affiliated  companies and received  compensation  directly from those  companies
during 1998.

Item 2.    Description of Properties.

The  Company's  principal  properties  are oil and  natural  gas  properties  as
described below.

Oil and Natural Gas Operations.
------------------------------

Oil and Gas Reserves.  Reference is made to the unaudited supplemental financial
information   beginning  on  Page  34  for  working  interest  reserve  quantity
information.

Since  January 1,  1998,  the  Company  has filed no  reports  with any  Federal
authority  or agency  which  included  estimates  of total proved net oil or gas
reserves,  except for its annual 1997  report on Form 10-KSB and Federal  income
tax return for the year ended  December 31, 1997.  Those reserve  estimates were
identical.

Production.  The  average  sales  price  of oil and gas  produced  and,  for the
Company's  working  interests,  the average  production  cost (lifting cost) per
equivalent thousand cubic feet (MCF) of gas production is presented in the table
below for the years ended December 31, 1998,  1997 and 1996.  Equivalent MCF was
developed using approximate relative energy content.

<PAGE>
<TABLE>
<CAPTION>


                     Royalties                                             Working Interests                  
           ----------------------------              -------------------------------------------------------
                    Sales Price                              Sales Price                  Average Production
           ----------------------------              ---------------------------
               Oil               Gas                     Oil              Gas                  Cost per
             Per Bbl           Per MCF                 Per Bbl          Per MCF             Equivalent MCF    
             -------         ---------                 -------          -------             --------------
<S>          <C>                <C>                     <C>              <C>                     <C>  
1998         $12.07             $1.86                   $17.52           $1.91                   $ .49

1997         $19.33             $2.32                   $20.41           $2.59                   $ .76
1996         $19.76             $1.90                   $20.85           $1.99                   $ .77
</TABLE>

The sales price and average  production  cost per equivalent MCF as shown in the
above  schedule are skewed as the result of the 1998  receipt of suspended  runs
upon the final judgment in favor of the Company in a Texas quiet title action as
discussed  in Item  3,  "Legal  Proceedings,"  and  Note 9, to the  accompanying
financial  statements.  Also,  see Item 6,  under  the  subheading  "Results  of
Operations - Operating Revenues", for further analysis.

At December  31, 1998,  the Company had working  interests in 66 gross (7.5 net)
wells producing  primarily gas and/or gas liquids  (condensates) and had working
interests in 62 gross (3.4 net) wells  producing  primarily oil. These interests
were in 19,169 gross (2,062 net) producing  acres.  These wells include 44 gross
(.32 net) wells associated with secondary recovery projects.

Twenty-three  percent,  or 9,723 barrels of the Company's oil production  during
1998 was derived from royalty interests in mature West Texas water-floods.

Undeveloped Acreage. The Company's undeveloped acreage consists of non-producing
mineral interests and undeveloped leaseholds. The following table summarizes the
Company's gross and net acres in each:
<TABLE>
<CAPTION>

                                                       Acreage     
                                             ----------------------------
                                              Gross                  Net    
                                             -------              ------- 
<S>                                          <C>                   <C>   
Non-producing Mineral Interests              271,587               93,811
Undeveloped Leaseholds                        36,689               14,010
</TABLE>

Net  Productive and Dry Wells Drilled.  The following  table  summarizes the net
wells  drilled in which the Company had a working  interest  for the years ended
December 31, 1996 and thereafter, as to net productive and dry exploratory wells
drilled and net productive and dry development wells drilled.
<TABLE>
<CAPTION>

                         Number of Net Working Interest Wells Drilled          
                    -------------------------------------------------------
                         Exploratory                     Development       
                    -----------------------          -------------------
                    Productive        Dry            Productive       Dry   
                    ----------        ---            ----------       ---
<S>                   <C>            <C>               <C>           <C>
1998                    ---           .62               .18           ---
1997                   .66            .74               .24           .17
1996                   .88            .83               .31           .16
</TABLE>

Recent  Activities.  At December  31,  1998,  the  Company had two  Northwestern
Oklahoma exploratory gas wells in process in which the Company was participating
with a 27% working  interest in each well.  At March 15,  1999,  both wells were
awaiting gas pipeline hookup to complete final production testing.

<PAGE>

Item 3.    Legal Proceedings.

In August  1993,  the  Company  filed an action  in the  District  Court of Leon
County,  Texas to quiet  title to its  13/32nd  interest  in  approximately  203
mineral acres associated with two producing oil and gas wells completed in 1988.
On October 29, 1998, the Supreme Court of the State of Texas denied the petition
for review filed by the  defendants  who had  appealed the judgment  rendered in
favor of the Company. Net proceeds of $854,042 ($914,552 gross) from oil and gas
sales held in suspense by the unit operator  plus  interest  thereon of $234,811
were  released to the Company on December 18,  1998,  and recorded as revenue at
that time.

An action was filed in the District Court of Robertson County,  Texas, seeking a
declaration  that the plaintiff owns an additional  interest in the  Brounkowski
Gas Unit. The Company was added as a Defendant in this action in December, 1997,
because it owns minerals included in the Brounkowski Unit. On September 3, 1998,
a Motion of Non-Suit  filed by the Plaintiff was heard in the District  Court of
Robertson County, Texas. The presiding judge executed an Order of Non-Suit,  and
on October 23, 1998, the operator of the Brounkowski Unit released all the funds
held in escrow for the Company.

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

           Not Applicable.


<PAGE>



                                     PART II


Item 5.    Market for Common Equity  and Related Stockholder Matters.

The  Company's  stock is traded  over the  counter  in the  United  States.  The
following  high and low bid  information is quoted on the OTC Bulletin Board and
the  National  Quotation  Bureau's  pink  sheets.  Prices do not include  retail
markup, markdown or commission.

<TABLE>
<CAPTION>
                                                        Quarterly Ranges       
                                               --------------------------------
                Quarter Ending                     High Bid           Low Bid  
            ----------------------             ---------------    -------------
<S>                <C>                               <C>             <C>    
                   03/31/97                          32 3/4           31 1/2
                   06/30/97                          34 3/4           32 3/4
                   09/30/97                          34 3/4           34 3/4
                   12/31/97                          36               34 3/4
                   03/31/98                          36               35 1/2
                   06/30/98                          36 1/4           36
                   09/30/98                          36 1/4           36 1/4
                   12/31/98                          36 1/4           31
</TABLE>

There was limited public trading in the Company's common stock in 1998 and 1997.
In 1998,  there were  twenty-five  brokered  trades  appearing in the  Company's
transfer ledger, and in 1997, there were twenty-one.

At March 10,  1999,  the Company had  approximately  1480 record  holders of its
common  stock.  The Company paid  dividends on its common stock in the amount of
$1.00 per share in the second  quarter of 1998 and 1997.  Management  intends to
recommend to the board of directors that the annual dividend remain at $1.00 per
share in 1999.

Item 6.   Management's  Discussion  and  Analysis  of  Financial  Condition  and
          Results of Operations.

Please refer to the  financial  statements  and related  notes in Item 7 of this
Form 10-KSB to supplement this discussion and analysis.

Year 2000 Issue.
---------------

Many  existing  computer  programs use only two digits to identify a year in the
date field (i.e.  12/31/98).  These programs were designed and developed without
considering the impact of the upcoming change in the century.  If not corrected,
many computer  applications  could fail or create erroneous results by or at the
Year 2000 (the "Year 2000 Issue").

With respect to its internal system, the Company has reviewed and tested all its
information  technology  and the  review has  disclosed  no  material  year 2000
problems.  All problems  discovered have been corrected.  Company personnel will
continue to review and test its internal system  throughout 1999 for the purpose
of identifying and resolving any as yet undetected year 2000 issues.

<PAGE>

Forwardlooking Statements.  Because of the nature of the Company's business, its
internal non-information  technology systems should not be of significance,  and
assessments to date have indicated  such. The Company is attempting to determine
the year 2000 status of third  parties  with which it has  significant  business
relationships.  Responses to date give limited assurance regarding the year 2000
issue.

All software used by the Company in processing  its  financial,  accounting  and
property  management  information  was developed in house by personnel  still on
staff.  The costs to date and any future  costs  expected to be incurred to make
the Company's software and internal systems compliant are not expected to have a
material effect on its financial position or results of operations.

Management's  review of the Company's year 2000 issues  indicate its most likely
reasonable worst case year 2000 scenarios as follows:

     A.  Internal Systems.  The most likely reasonable worst case scenario would
         be the failure  of  one or,  at most,  two  modules.  If such a failure
         should  occur,  the  Company  would  convert  the failed module(s) to a
         manual system.  Review of current activity  indicates the Company could
         convert to a manual system either  totally or partially  with little or
         no additional costs and minimal loss of efficiency.

     B.  Third Party Systems.  The most  likely  reasonable  worst case scenario
         would  be  a  delay  in  receipt of revenue from oil and gas sales from
         several major payors for a  period  of three to six months.  Management
         intends  to maintain its current healthy working capital position which
         will  allow  it  to  survive  a temporary substantial reduction in cash
         flow.

Liquidity and Capital Resources.
-------------------------------

Net working  capital was  $5,342,745  at December 31,  1998, a $1,067,538  (20%)
increase from December 31, 1997. Net working capital was increased by cash flows
from operations of $1,780,522,  cash  distributions  from equity  investments of
$102,000,  and  property  dispositions  of  $15,358.  Net  working  capital  was
decreased  by  additions  to property  and  equipment  of  $458,920,  payment of
dividends to stockholders of $169,793, purchase of treasury stock of $11,660, an
increase  in income  taxes  payable  of  $124,755  and a net  decrease  in other
accruals of $65,214.

Cash Flows From Operating Activities.  Cash paid for exploration and development
expenses charged to operations are directly related to expenditures for property
additions  and will be considered  in the  discussion  of investing  activities,
below.  Exclusive of the above noted exploration and development expenses,  cash
flows from  operations  were  $1,981,372 in 1998, a $519,484 (36%) increase from
1997. Of the  $1,981,372  cash flows from  operations,  $1,088,853  was from the
receipt of suspended  oil and gas runs and related  accrued  interest upon final
judgment  rendered  in favor of the  Company in a Texas  quiet  title  action as
discussed in Item 3, "Legal  Proceedings".  Exclusive of receipts related to the
above  noted  quiet  title  action,  cash flows  from  operations  exclusive  of
exploration  and  development  costs were  $892,519,  or 569,369 (39%) less than
1997.

Cash Flows  Applied  to  Investing  Activities.  Net cash  applied to  investing
activities were $1,573,594, a $844,926 (116%) increase from 1997, as an increase
in net cash applied to available  for sale  securities of $867,296 and decreased
cash  distributions  from equity  investments  of $23,500  were reduced by a net
decrease in cash applied to property and equipment of $45,870.

<PAGE>

Available for sale  securities  are primarily US Treasury Bills or Notes used to
store cash flows which are not needed immediately.  For the most part cash flows
with which these securities were purchased were from operating activities.  When
current  cash  requirements  are  greater  than  the  balance  of cash  and cash
equivalents,  the  additional  required  cash is drawn from  available  for sale
securities.

Property and equipment  additions are directly  related to the Company's oil and
gas exploration and development drilling activity. Expenditures for unsuccessful
exploratory and development drilling as well as geological and geophysical costs
are included in operating activities. Cash applied to property additions in 1998
included $458,920 classified as investing  activities and $200,850 classified as
operating  activities  for a  total  of  $659,770  as  compared  to a  total  of
$1,156,651  in 1997.  For the most part the  reduction  in cash  applied was the
result of deferral of prospect development because of low product prices.

Financing Activities.  Net cash flows applied to financing activities consist of
cash dividends on common stock and cash used for the purchase of treasury stock.
In 1998, cash dividends paid on common stock amounted to $169,793 as compared to
$164,819 in 1997.  Cash applied to the purchase of treasury stock was $11,660 in
1998 as compared to $3,320 in 1997.

Forward-looking  Summary.  Refer  to  page  3 for a  summary  of the  risks  and
uncertainties that may affect this forward-looking summary. The Company's latest
forecast for 1999 projects cash flow from  operations,  exclusive of exploration
and  development  costs charged to expense,  of $863,000.  Cash to be applied to
property  additions,  inclusive of exploration and development  costs charged to
operations,  is  estimated  at  $370,000,  and cash to be applied  to  financing
activities is estimated to be $170,000.  Therefore, given the projected level of
activity,  operating cash flows should provide the necessary  funds to meet 1999
cash requirements.

The  Company  and its  joint  owners  have  deferred  drilling  exploratory  and
development  prospects  because of the depressed  prices received for crude oil,
and to a lessor degree for natural gas. Should product prices improve,  or other
events occur which make the prospects risk analysis more  positive,  some or all
of the deferred  prospects may be drilled in 1999. Also,  should the exploratory
drilling result in a significant discovery that requires substantial development
drilling,  or should other investment  opportunities  become available,  capital
requirements  could  be far  more  than  the  Company  has  available.  If  such
circumstances occur, the Company may require external sources of financing.

Results of Operations.
---------------------

In 1998, net income, basic and diluted,  increased to $5.11 per share from $2.32
per share in 1997.  The most  significant  contribution  to the increase was the
receipt of oil and gas runs held in suspense plus interest thereon. This receipt
increased  income  after  income  taxes by about $3.52 per share as discussed in
Note  9,  to the  accompanying  statements.  The  above  noted  receipt  will be
discussed in more detail in the following  paragraphs  along with other material
line item changes in the statements of operations.

Operating  Revenues.  Operating revenues decreased $67,112 (2%) to $2,714,094 in
1998 from  $2,781,206 in 1997.  Lease bonuses and other  miscellaneous  revenues
increased  $21,692  to  $34,663,  while oil and gas sales  decreased  $88,804 to
$2,679,431.  Oil and gas sales for 1998 were  materially  affected  by the final
judgment  of the  Supreme  Court of the  State of Texas in the  Company's  favor
regarding a quiet title  action as discussed in Item 3 of this 10-KSB as well as
Note 9 to the accompanying  financial statements.  As a result of receipt of the
suspended prior years oil and gas runs upon final judgment, the Company recorded
additional  revenues of $914,552,  or 34% of 1998 total oil and gas sales. These
receipts were from the Alabama Ferry North Unit (AFNU), Leon County,  Texas. The
AFNU affect will be noted in the analysis and discussion below.

<PAGE>

The following  table  presents a price and volume  analysis of oil and gas sales
for the years ended  December  31, 1998 and 1997.  The table does not include an
analysis of revenues  from  miscellaneous  oil and gas  products  which  totaled
$11,081 in 1998 and $14,734 in 1997 .

<TABLE>
<CAPTION>

                                                                  Variance          
                                                        --------------------------
             Production                   1998              Price         Volume        1997   
             ----------                 ---------       -----------    -----------  -----------
<S>                                    <C>                 <C>              <C>        <C>
             Oil -


             Bbls (000 omitted)               70                             29           41
             $(000 omitted)            $   1,120            (266)           574          812
             Unit Price                $   15.86           (3.77)                      19.63
             Gas -
             MCF (000 omitted)               821                             19          802
             $(000 omitted)            $   1,549            (438)            46        1,941
             Unit Price                $    1.89            (.53)                       2.42

</TABLE>

Revenues  from oil sales  increased  $307,569  (38%) to  $1,119,694 in 1998 from
$812,125 in 1997.  The volume of oil sales  increased  29,251  barrels (Bbls) to
70,618  Bbls in 1998 from 41,367 Bbls in 1997,  resulting  in a positive  volume
variance  of  $574,192.  The unit price of oil sales  declined  $3.77 per Bbl to
$15.86 per Bbl resulting in a negative price variance of $266,623.

Included in the above oil sales is the receipt of AFNU prior  period oil runs of
36,737  Bbls at an  average  price of  $18.75  per Bbl for a total of  $688,976.
Exclusive of the AFNU  receipt,  revenues  from oil sales would have been 33,881
Bbls at an average  price of $12.71 for total oil sales of $430,719.  The volume
of sales would have been reduced 7,486 Bbls from 1997, and the average price per
Bbl would have  decreased  $6.92  resulting  in a negative  volume  variance  of
$146,950. Exclusive of the AFNU sales, for the most part, the reduction in sales
volume  of 7,486  Bbls  resulted  because  of the  decline  in  production  from
properties in the Austin Chalk area of Texas, as offset by  approximately  3,000
Bbls of new  production  which came on line. The price received for oil sales is
based on the spot market price over which the Company has no control.

Revenues from natural gas sales fell  $392,720  (20%) to $1,548,656 in 1998 from
$1,941,376 in 1997. The sales volume  increased 18,804 thousand cubic feet (MCF)
resulting in a favorable volume variance of $45,505;  however, the average price
received  declined $.53 per MCF to $1.89 per MCF  resulting in a negative  price
variance of $438,225.

Included in the above gas sales,  is AFNU prior year  receipts  of $225,552  for
138,409 MCF of natural gas at an average  price of $1.63 per MCF.  Exclusive  of
the AFNU  receipts,  gas sales would have been  $1,323,104,  or a $618,272 (32%)
decrease from 1997. The Company would have had a decrease in volume  produced of
119,605 MCF to 682,820 MCF for a negative  volume  variance of  $282,444,  and a
decrease  in  average  price per MCF of $.48 to $1.94 per MCF would  result in a
negative  price  variance  of  $335,828.  Exclusive  of the AFNU  receipts,  the
decrease in volume produced was the result of a normal decline in the ability of
older properties to produce. Of the total decrease in production of 119,605 MCF,
the #1 Brounkowski,  a Robertson  County,  Texas royalty  interest which came on
line in 1995 was  responsible  for 64,968 MCF, or 54%. The Company sells most of
its gas on the spot market or has contracts  which are based on the spot market.
Sales made under  fixed  price  contracts  with terms  longer  than one year are
insignificant.

<PAGE>

Operating Costs and Expenses. Operating cost and expenses fell $735,184 (27%) to
$2,023,869  in 1998.  Decreases  in  exploration  expenses  of  $626,896  (79%),
depreciation, depletion, amortization and valuation provisions of $105,697 (13%)
and general  administrative  and other  expense of $43,719  (6%) were  partially
offset by an increase in production costs of $41,127 (11%).

     Production costs. For the most part, the $41,127 increase was the result of
additional lease operating expense relating to new production which came on line
in late  1997  and  1998,  as  well as the  workover  of  some  older  producing
properties.

     Exploration Expense. Under the successful efforts method of accounting used
by the Company,  geological and geophysical  costs are expensed as incurred,  as
are the costs of  unsuccessful  exploratory  drilling.  The costs of  successful
exploratory drilling are capitalized.  Total costs of exploration,  inclusive of
geological and geophysical  costs, were $607,910 in 1998 and $1,175,729 in 1997.
Cost charged to operations were $168,255 in 1998 and $795,151 in 1997, inclusive
of geological and geophysical expense of $94,070 in 1998 and $75,130 in 1997.

     Depreciation,  Depletion,  Amortization  and Valuation  Provisions  (DD&A).
Major components are the provision for impairment of  non-producing  leaseholds,
provision for impairment of long-lived assets, depletion of producing leaseholds
and depreciation of tangible and intangible lease and well costs.  Non-producing
leaseholds  are amortized  over the life of the leasehold  using a straight line
method  except when the  leasehold is impaired or  condemned by drilling  and/or
geological interpretation of seismic data; if so, an adjustment to the provision
is made at the time of impairment.  The provision for impairment was $122,204 in
1998 and $164,859 in 1997.

As discussed in Note 11 to the  accompanying  financial  statements,  accounting
principles  require the recognition of an impairment  loss on long-lived  assets
used  in  operations   when   indicators  of  impairment  are  present  and  the
undiscounted  cash flows estimated to be generated by those assets are less than
the  assets  carrying  amount.  Reviews  were  performed  in both 1998 and 1997,
resulting in the recognition of impairment  losses totaling $184,835 in 1998 and
$226,986 in 1997.

The depletion and  depreciation  of oil and gas  properties  are computed by the
units-of-production  method. The amount expensed in any year will fluctuate with
the  change  in  estimated  reserves  of oil and gas or a change  in the rate of
production.  The provisions for depletion and  depreciation  totaled $418,420 in
1998 a $20,780 (5%) decrease from 1997.

     General,  Administrative  and Other Expenses (G&A). The $43,719 drop in G&A
was mostly caused by a $50,094  decrease in franchise and property  taxes in the
State of Texas resulting from declining oil and gas prices and volumes.  Also of
significance  was a $21,382  decrease in legal fees because of  finalization  of
major  legal  proceedings,  and a $17,721  increase  in  payroll  expense  which
resulted mostly from a retirement bonus.

     Equity  Earnings in  Investees.  Equity  earnings  decreased  $88,649 (55%)
mostly  because of a reduction in real estate sales of an investee which invests
in Oklahoma City metropolitan area real estate.

Other  Income,  Net.  This line item  consist of interest  and other  investment
income as offset by investment losses and various other non-operating income and
expense. Other income, net increased $204,232 (97%) in

<PAGE>

1998. As discussed in Note 9 to the  accompanying  financial  statements,  final
judgement was rendered in favor of the Company in a Texas quiet title action. In
December,  1998,  the Company  received  the oil and gas runs which were held in
suspense  plus  $234,811 in accrued  interest  thereon.  The interest  income is
included herein. The increase in interest income was reduced by about $33,000 by
recognition of a net unrealized loss on trading securities.

Provisions for Income Taxes. In 1998, the Company had a calculated provision for
income tax of  $320,937  for an  effective  tax rate of 27% as the  current  tax
expense of $244,811 was  increased by a deferred  tax  provision of $76,126.  In
1997,  a  calculated  provision  for income tax of $3,473  resulted  because the
current tax expense of $107,446  exceeded  the deferred tax benefit of $103,973.
See Note 6 to the  accompanying  financial  statements  for an  analysis  of the
various components of income taxes for both 1998 and 1997.

Forward-looking  Summary.  Please  refer to Page 3 for a summary  of some of the
risks and  uncertainties  that may affect these  forward-looking  statements.  A
projection  of the  results of  operations  for 1999 as  compared to 1998 actual
results follows:
<TABLE>
<CAPTION>

                                                                                    (000 Omitted) 
                                                                        ---------------------------------------             
                                                                                                    Net Income
                                                                        Estimate       Actual        Increase
                                                                            1999          1998      (Decrease) 
                                                                        ----------   ----------     ----------
<S>                                                                     <C>          <C>            <C>    
             Operating Revenues                                         $   1,560    $    2,714       (1,154)


             Operating Costs & Expenses:
                Production                                                    340           410          (70)
                Exploration & Development                                     159           168           (9)
                DD&A                                                          650           735          (85)
                G&A                                                           662           711          (49)
                                                                        ----------   ----------    -----------
                                                                            1,811         2,024         (213) 
                                                                        ----------   ----------    -----------
             Operating Income (Loss)                                         (251)          690         (941)
             Equity Earnings in Investees                                      80            74            6
             Other Income, Net                                                234           414         (180)
                                                                        ----------   ----------    -----------
             Income Before Taxes                                               63         1,178       (1,115)
             Provision for Income Tax                                           8           321         (313)

                Net Income                                              $      55    $      857    $    (802)
                                                                        ==========   ==========    ===========
</TABLE>

     Operating  Revenues.  Revenues  from oil and gas  sales  are  estimated  at
$1,523,000  for 1999, or a $1,156,000  (43%)  decrease from 1998.  The following
price and volume  analysis of 1999  forecast  sales as compared with 1998 actual
oil and gas sales  provides a breakout of the various  components  and projected
variances from 1998.
<PAGE>
<TABLE>
<CAPTION>


                                                                  Variance               
                                        Forecast        --------------------------     Actual
             Production                   1999              Price         Volume        1998   
             ----------                 ---------       -----------    -----------  -----------
<S>                                     <C>                <C>             <C>      <C>
             Oil -

             Bbls (000 omitted)               29            ----            (41)          70
             $(000 omitted)             $    318            (144)          (658)    $  1,120
             Unit Price                 $  11.20           (4.66)           ----    $  15.86
             Gas -
             MCF (000 omitted)               611            ----           (210)         821
             $(000 omitted)             $  1,205               9           (393)    $  1,549
             Unit Price                 $   1.97             .08            ----    $   1.89
</TABLE>


As  discussed  above,  included  in actual 1998 oil and gas sales is $914,552 of
prior years oil and gas sales (AFNU sales)  resulting from the final judgment in
a Texas quiet title action.  The following  price and volume  analysis  excludes
AFNU sales from 1998 actual sales

<TABLE>
<CAPTION>
                                                                                        
                                                                  Variance           Excluding
                                        Forecast        --------------------------      AFNU
             Production                   1999              Price         Volume        1998   
             ----------                 ---------       -----------    -----------  -----------
<S>                                     <C>                <C>             <C>      <C>
             Oil -

             Bbls (000 omitted)               29            ----             (5)            34
             $(000 omitted)            $     318              (46)          (67)    $      431
             Unit Price                $   11.20            (1.51)          ----    $    12.71
             Gas -
             MCF (000 omitted)               611             ----           (72)           683
             $(000 omitted)            $   1,205               19          (137)    $    1,323
             Unit Price                $    1.97              .03           ----    $     1.94
</TABLE>


Excluding AFNU sales, the projected  decline in 1999 revenues from 1998 would be
$242,000  (14%).  Oil  production  is projected to fall $67,000 as a result of a
reduction in volume and $46,000 because of a decline in average price per Bbl. A
projected  $137,000  volume  decline  in gas  sales  is  reduced  $19,000  by an
estimated increase in average price per MCF.

The  projected  decline  in oil and gas  volumes  assumes a normal  decline  for
properties which produced in 1998 and no new production  coming on line in 1999.
The average  price used for the 1999  projections  of revenues  from oil and gas
sales is  management's  most recent estimate of the average price to be received
for the year 1999. It should be noted that March 23, 1999 spot market prices for
oil were $15.38 per Bbl and lower, and spot market prices for gas were $1.81 per
MCF and lower.

     Operating Costs and Expenses.  Operating cost and expenses are projected at
$1,811,000 for 1999, a $213,000 (11%) decrease from 1998.  Production  costs are
estimated  to be $70,000  (17%) less than 1998  because of a reduction  of gross
production  taxes resulting from an estimated  decrease in oil and gas sales for
1999.

<PAGE>

Management's  current  estimate of total  exploration and development  costs for
1999  is  $370,000,  of  which  $159,000  is  estimated  to be  charges  against
operations and $211,000 capitalized as proven properties.  Of the $370,000 total
estimated costs,  $20,000 is geological and geophysical  expense, and all of the
remaining  $350,000 could be capitalized or expensed  depending upon the results
of drilling.  Also,  if the Company's  exploration  is  successful,  significant
additional   costs  could  be  incurred  for  development   drilling  and  lease
acquisition.

DD&A is projected to decline $85,000 (12%) because of reduced production volumes
and  reduced  depreciable  basis  because  of  prior  years  long  lived  assets
impairments.

G&A is estimated to be $49,000 (7%) less than 1998.  Legal fees should  continue
to fall.  Also,  Texas  franchise  and property  taxes  should  decline with the
projected decrease in Texas oil and gas revenue.

     Other  Income,  Net.  Other income,  net is estimated to decrease  $180,000
(43%). The decline in interest income  resulting  because of the 1998 receipt of
$234,811  interest  upon final  judgment in a Texas quiet title action should be
reduced by additional  interest income resulting from projected  increase in the
average balance of security investments.

<PAGE>



Item 7.   Financial Statements.


           Index to Financial Statements.

                                                                           Page

           Report of Independent Certified Public Accountants - 
           Grant Thornton LLP                                               19

           Balance Sheets - December 31, 1998 and 1997                      20

           Statements of Operations - Years Ended December 31, 1998 
           and 1997                                                         22

           Statement of Stockholders' Equity - December 31, 1998 and 1997   23

           Statements of Cash Flows - Years Ended December 31, 1998 
           and 1997                                                         24

           Notes to Financial Statements                                    26

           Unaudited Supplemental Financial Information                     34

<PAGE>







               Report of Independent Certified Public Accountants
               --------------------------------------------------





Board of Directors
The Reserve Petroleum Company

We have audited the accompanying balance sheets of The Reserve Petroleum Company
(a  Delaware  corporation)  as of December  31,  1998 and 1997,  and the related
statements of  operations,  stockholders'  equity,  and cash flows for the years
then ended.  These financial  statements are the responsibility of the Company's
management.  Our  responsibility  is to express  an  opinion on these  financial
statements based on our audits.

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

In our opinion,  the financial  statements  referred to above present fairly, in
all material  respects,  the financial position of The Reserve Petroleum Company
as of December 31, 1998 and 1997, and the results of its operations and its cash
flows for the years then ended in conformity with generally accepted  accounting
principles.








GRANT THORNTON LLP

Oklahoma City, Oklahoma
March  12, 1999





<PAGE>


                          THE RESERVE PETROLEUM COMPANY
                                 BALANCE SHEETS

                                     ASSETS
                                     ------
<TABLE>
<CAPTION>

                                                                               December 31,                
                                                                ---------------------------------------- 
                                                                     1998                      1997      
Current Assets:                                                 ---------------            --------------
<S>                                                             <C>                        <C>          
     Cash and Cash Equivalents (Note 2)                         $      339,015             $     313,540
     Available for Sale Securities  (Notes 2 & 5)                    4,538,772                 3,306,740
Trading Securities (Notes 2 & 5)                                       450,768                   447,266
     Receivables                                                       152,460                   278,741
     Refundable Income Taxes                                              ----                    75,424
     Prepayments & Deferred Income Taxes                                13,127                     5,625
                                                                ---------------            --------------
                                                                     5,494,142                 4,427,336
                                                                ---------------            --------------
Investments:
    Partnership and Limited
      Liability Companies (Notes  2 & 7)                               462,951                   490,587
    Other                                                               19,048                    16,230
                                                                ---------------            --------------
                                                                       481,999                   506,817
                                                                ---------------            --------------
Property, Plant & Equipment (Notes 2 & 11):
    Oil & Gas Properties, at Cost Based on the
       Successful Efforts Method of Accounting
           Unproved Properties                                         668,332                   597,284
Proved Properties                                                    4,189,787                 4,228,063
                                                                ---------------           ---------------
                                                                     4,858,119                 4,825,347
       Less - Valuation Allowance and Accumulated
           Depreciation, Depletion & Amortization                    3,751,113                 3,427,157
                                                                ---------------           ---------------
                                                                     1,107,006                 1,398,190
                                                                ---------------           ---------------
     Other Property & Equipment, at Cost                               324,104                   324,104
       Less - Accumulated Depreciation & Amortization                  179,192                   169,195
                                                                ---------------           ---------------
                                                                       144,912                   154,909
                                                                ---------------           ---------------
                                                                     1,251,918                 1,553,099
                                                                ---------------           ---------------
Other Assets                                                           407,569                   478,137
                                                                ---------------           ---------------
                                                                $    7,635,628            $    6,965,389
                                                                ===============           ===============
</TABLE>

(continued)
See Accompanying Notes
<PAGE>


                          THE RESERVE PETROLEUM COMPANY
                                 BALANCE SHEETS

(concluded)

                      LIABILITIES AND STOCKHOLDERS' EQUITY
                      ------------------------------------
<TABLE>
<CAPTION>

                                                                                December 31,                

                                                                       1998                     1997      
Current Liabilities:                                            ---------------           ---------------
<S>                                                             <C>                       <C>           
    Accounts Payable                                            $       45,656            $       93,044
    Income Taxes Payable                                                49,331                     ----
    Other Current Liabilities
       Gas Balancing Commitment                                         41,410                    45,344
       Other                                                            15,000                    13,741
                                                                ---------------           ---------------
                                                                       151,397                   152,129
                                                                ---------------           ---------------

Dividends Payable (Note 3)                                             125,210                   132,094
                                                                ---------------           ---------------


Commitments & Contingencies (Note 7)

Stockholders' Equity (Notes 3 & 4)
    Common Stock                                                        92,368                    92,368
    Additional Paid-in Capital                                          65,000                    65,000
Retained Earnings                                                    7,388,288                 6,698,773
                                                                ---------------           ---------------
                                                                     7,545,656                 6,856,141

    Less  - Treasury Stock, at Cost                                    186,635                   174,975
                                                                ---------------           ---------------
                                                                     7,359,021                 6,681,166
                                                                ---------------           ---------------
                                                                $    7,635,628            $    6,965,389
                                                                ===============           ===============
</TABLE>

See Accompanying Notes




<PAGE>


                          THE RESERVE PETROLEUM COMPANY
                            STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>

                                                                       Year Ended December 31,       
                                                               
                                                                      1998                  1997    
Operating Revenues:                                             ---------------         -------------
<S>                                                             <C>                     <C>         
    Oil & Gas Sales (Note 9)                                    $    2,679,431          $  2,768,235
Lease Bonuses & Other                                                   34,663                12,971
                                                                ---------------         -------------
                                                                     2,714,094             2,781,206
                                                                ---------------         -------------                               
Operating Costs and Expenses:
     Production                                                        410,341               369,213
Exploration                                                            168,255               795,151
     Depreciation, Depletion, Amortization
         & Valuation Provisions                                        735,456               841,153
     General, Administrative and Other                                 709,817               753,536
                                                                ---------------         -------------
                                                                     2,023,869             2,759,053
                                                                ---------------         -------------
Income  from Operations                                                690,225                22,153
Equity Earnings in Investees                                            73,796               162,445
Other Income, Net (Note 9)                                             414,339               210,107
                                                                ---------------         -------------
Income before Income Taxes                                           1,178,360               394,705
Provisions for Income Taxes (Notes 2 & 6)                              320,937                 3,473
                                                                ---------------         -------------
Net Income                                                      $      857,423          $    391,232
                                                                ===============         =============
Per Share Data (Notes 2 & 9):
     Net Income, Basic and Diluted                              $         5.11          $       2.32
                                                                ===============         =============
     Cash Dividends                                             $         1.00          $       1.00
                                                                ===============         =============
Weighted Average Shares Outstanding, Basic and Diluted                 167,947               168,404
                                                                ===============         =============
</TABLE>


See Accompanying Notes

<PAGE>




                          THE RESERVE PETROLEUM COMPANY
                        STATEMENT OF STOCKHOLDERS' EQUITY
                    FOR THE TWO YEARS ENDED DECEMBER 31, 1998

<TABLE>
<CAPTION>




                                                                          Additional
                                                         Common             Paid-in           Retained           Treasury
                                                          Stock             Capital           Earnings             Stock  
                                                   ----------------     ---------------   ---------------     --------------
<S>                                                <C>                  <C>               <C>                 <C>           
 Balance at January 1, 1997                        $       92,368       $       65,000    $     6,475,980     $    (171,655)
    Net Income                                               ----                 ----            391,232              ----
    Cash Dividends on Common Stock                           ----                 ----           (168,439)             ----

    Purchase of Treasury Stock                               ----                 ----               ----            (3,320)
                                                   ----------------     ---------------   ---------------     --------------
Balance at December 31, 1997                               92,368               65,000          6,698,773          (174,975)

    Net Income                                               ----                 ----            857,423              ----

    Cash Dividends on Common Stock                           ----                 ----           (167,908)             ----

    Purchase of Treasury Stock                               ----                 ----               ----           (11,660)
                                                   ---------------      ---------------   ----------------    --------------

Balance at December 31, 1998                       $       92,368       $       65,000    $     7,388,288     $    (186,635)
                                                   ===============      ===============   ================    ===============
</TABLE>








See Accompanying Notes


<PAGE>


                          THE RESERVE PETROLEUM COMPANY
                            STATEMENTS OF CASH FLOWS
                Increase (Decrease) in Cash and Cash Equivalents
<TABLE>
<CAPTION>

                                                                       Year Ended December 31,        
                                                                -------------------------------------
                                                                      1998                   1997     
Cash Flows from Operating Activities:                           ---------------        --------------
   Cash Received-
<S>                                                             <C>                   <C>          
     Oil and Gas Sales                                          $    2,785,843        $    2,826,730
     Lease Bonuses and Rentals                                          34,663                 1,683
     Agricultural Rentals & Other                                       11,188                12,893
   Cash Paid-
     Production Costs                                                 (415,556)             (362,511)
     Exploration and Development Expenses                             (200,850)             (636,677)
     General Suppliers, Employees and Taxes,
       Other than Income                                              (737,918)             (776,651)
   Interest Received                                                   437,753               141,330
   Interest Paid                                                       (11,250)              (11,250)
   Dividends Received on Trading
     Securities                                                          9,735                 8,993
   Purchase of Trading Securities                                   (2,856,372)           (1,796,067)
   Sale of Trading Securities                                        2,843,342             1,786,880
   Income Taxes Paid                                                  (120,056)             (370,142)
                                                                ---------------       ---------------
     Net Cash Provided by Operating
       Activities                                                    1,780,522               825,211
                                                                ---------------       ---------------

Cash Flows from Investing Activities:
   Sale and Maturity of Available for
     Sale Securities                                                 1,353,669             1,209,258
   Purchase of Available for Sale Securities                        (2,585,701)           (1,573,994)
   Property Dispositions                                                15,358                30,542
   Property Additions                                                 (458,920)             (519,974)
   Cash Distributions from Equity Investments                          102,000               125,500
                                                                ---------------        ---------------
      Net Cash Applied to Investing Activities                  $   (1,573,594)       $     (728,668)
                                                                ---------------        ---------------
</TABLE>


(Continued)

See Accompanying Notes

<PAGE>


(Concluded)
                          THE RESERVE PETROLEUM COMPANY
                            STATEMENTS OF CASH FLOWS
                Increase (Decrease) in Cash and Cash Equivalents
<TABLE>
<CAPTION>

                                                                        Year Ended December 31,        
                                                                --------------------------------------
                                                                     1998                   1997     
Cash Flows Applied to Financing Activities:                     ---------------       ---------------
<S>                                                             <C>                   <C>             
   Dividends Paid to Shareholders                               $     (169,793)       $      (164,819)
   Purchase of Treasury Stock                                          (11,660)                (3,320)
                                                                --------------        ----------------
     Total Cash Applied to Financing  Activities                      (181,453)              (168,139)
                                                                ---------------       ----------------
Net Change in Cash and Cash Equivalents                                 25,475                (71,596)
Cash and Cash Equivalents at Beginning of Year                         313,540                385,136
                                                                ---------------       ----------------
Cash Equivalents at End of Year                                        339,015        $       313,540
                                                                ===============       ================
Reconciliation of Net Income to Net
     Cash Provided by Operating Activities:
Net Income                                                      $      857,423        $       391,232
Net Income Increased (Decreased) by -
     Net Change in -
       Unrealized Holding (Gains) Losses
            on Trading Securities                                       32,451                 (5,142)
       Accounts Receivable                                             107,351                 61,607
       Interest and Dividends Receivable                                18,505                (38,331)
       Income Taxes Refundable/Payable                                 124,755               (262,697)
       Accounts Payable                                                (27,616)                34,849
       Trading Securities                                              (35,953)               (27,373)
      Equity Earnings in Investees                                     (73,796)              (162,445)
      Loss (Gain) on Disposition of Property
       & Equipment                                                     (13,445)               127,727
     Depreciation, Depletion, Amortization
       and Valuation Provisions                                        735,456                841,153
     Change in Cash Value of Officers'
       Life Insurance                                                  (16,801)               (27,408)
     Change in Deferred Taxes                                           76,126               (103,972)
     Gas Balancing Liabilities                                          (3,934)                (3,989)
                                                                ---------------       ----------------
Net Cash Provided by Operating Activities                       $    1,780,522        $       825,211
                                                                ===============       ================
</TABLE>
See Accompanying Notes

<PAGE>


                          THE RESERVE PETROLEUM COMPANY
                          NOTES TO FINANCIAL STATEMENTS

Note 1 - NATURE OF OPERATIONS
         --------------------

       The Company is principally engaged in oil and natural gas exploration and
       development with an area of concentration in Texas and Oklahoma.

Note 2 - SUMMARY OF ACCOUNTING POLICIES
         ------------------------------

       Property and Equipment
       ----------------------
       Oil  and gas  properties  are  accounted  for on the  successful  efforts
       method.  The acquisition,  exploration and development costs of producing
       properties  are   capitalized.   All  costs   relating  to   unsuccessful
       exploration,   geological  and  geophysical   costs,  delay  rentals  and
       abandoned  properties  are  expensed.  Lease  costs  related to  unproved
       properties  are  amortized  over the life of the lease  and are  assessed
       periodically. Any impairment of value is charged to expense.

       Depreciation,  depletion  and  amortization  of producing  properties  is
       computed  on the  units-of-production  method  on a  property-by-property
       basis. The units-of-production  method is based primarily on estimates of
       proved  reserve  quantities.   Due  to  uncertainties  inherent  in  this
       estimation  process,  it is at least  reasonably  possible  that  reserve
       quantities will be revised in the near term.

       Other  property  and  equipment  is  depreciated  on  the  straight-line,
       declining-balance or other accelerated methods.

       The following  estimated useful lives are used for the different types of
       property:

                  Buildings and improvements                10 to 20 years
                  Office furniture & fixtures                5 to 10 years
                  Automotive equipment                       5 to  8 years

       Impairment  losses  are recorded  on long-lived assets used in operations
       when indicators of impairment are present and the undiscounted cash flows
       estimated to be generated by those  assets  are  less  than  the  assets'
       carrying amount.  See Note 11 for discussion of impairment losses.

       Investments
       -----------
       The Company  accounts for its  investments  in a partnership  and limited
       liability  companies  on the  equity  basis and  adjusts  the  investment
       balance  to  agree  with  its  equity  in the  underlying  assets  of the
       entities. See Note 7 for additional information.

       Trading  securities,  which consist primarily of equity  securities,  are
       carried at fair  value  with  unrealized  gains and  losses  included  in
       earnings.

       Available for sale securities,  which consist  primarily of US Government
       securities,  are carried at fair value with  unrealized  gains and losses
       reported as a component of other comprehensive income, when material.

<PAGE>


       Cash & Cash Equivalents
       -----------------------
       The Company considers all highly liquid debt instruments purchased with a
       maturity  of three  months or less to be cash  equivalents.  The  Company
       maintains  its cash in bank  deposit  accounts  which at times may exceed
       federally  insured limits.  The Company believes it is not exposed to any
       significant credit risk on such accounts.

       Income Taxes
       ------------
       Deferred  income  taxes are provided for  significant  carryforwards  and
       temporary differences using the liability method.

       Net Income Per Share
       --------------------
       Net Income per share is calculated  based on the weighted  average of the
       number of shares outstanding during the year.

       Concentrations of Credit Risk and Major Customers
       -------------------------------------------------
       The Company's  receivables  relate  primarily to sales of oil and natural
       gas to purchasers with operations in Texas and Oklahoma.  The Company had
       one purchaser in 1997 and two purchasers in 1998 whose  purchases were in
       excess of 10% of total oil and gas sales.  In 1997,  those purchases were
       $698,367,  or 25% of total oil and gas sales. In 1998, the purchases were
       $455,208 or 17% of total oil and gas sales by one purchaser, and $914,552
       or 34% of  total  oil and gas  sales by the  other.  The  $914,552  gross
       receipts  from the  second  purchaser,  were the  result  of  receipt  of
       suspended runs upon the final  judgment  rendered in favor of the Company
       in a Texas quiet title action as discussed in Note 9.

       Use of Estimates
       ----------------
       The preparation of the financial  statements in conformity with generally
       accepted accounting  principles requires management to make estimates and
       assumptions  that affect the amounts reported in the financial statements
       and accompanying notes. Actual results could differ from those estimates.

 Note 3 - DIVIDENDS PAYABLE
          -----------------

       Dividends  payable include amounts that are due to stockholders  whom the
       Company has been unable to locate and uncashed  dividend  checks of other
       stockholders.

<PAGE>



Note 4 - COMMON STOCK
         ------------ 

       The following table summarizes the changes  in  common  stock  issued and
       outstanding:
<TABLE>
<CAPTION>

                                                                           Shares of
                                                     Shares                Treasury                  Shares
                                                     Issued                  Stock                Outstanding  
                                               ------------------      ------------------      ------------------ 
<S>                                                  <C>                      <C>                    <C>       
         January 1, 1997, $.50
         par value stock, 400,000
         shares authorized                           184,735.28               16,256.55              168,478.73

         Purchase of stock                                  ---                  166.00                ( 166.00)
                                               ------------------      ------------------      ------------------

         December 31, 1997, $.50
         par value stock, 400,000
         shares authorized                           184,735.28               16,422.55              168,312.73

         Purchase of stock                                  ---                  583.00                 (583.00)
                                               ------------------      ------------------      ------------------

         December 31, 1998, $.50
         par value stock, 400,000
         shares authorized                           184,735.28               17,005.55              167,729.73
                                               ==================      ==================      ==================
</TABLE>

Note 5 - INVESTMENTS IN DEBT AND EQUITY SECURITIES
         -----------------------------------------
     
     At December 31, 1998 and 1997,  the  difference  between the aggregate fair
     value  and  amortized  cost  basis of  available  for sale  securities  was
     immaterial;  therefore,  reporting of comprehensive income is not required.
     At December 31, 1998,  all  available for sale  securities  mature prior to
     September 17, 1999.  In 1998  proceeds  from sales of  securities  prior to
     maturity totaled $255,383 with no significant  realized gains or losses. In
     1997 proceeds from sales of securities prior to maturity totaled  $691,602,
     with no significant realized gains or losses.

     As to the trading securities, unrealized holding gains (losses) included in
     earnings was ($32,451) for 1998 and $5,142 for 1997.




<PAGE>



Note 6 - INCOME TAXES
         ------------

       Components of deferred taxes follow:
<TABLE>
<CAPTION>

                                                                            December 31,                
                                                               -------------------------------------
                                                                     1998                  1997       
       Assets                                                   ---------------       ---------------
<S>                                                             <C>                   <C>           
           Leasehold Costs                                      $      174,479        $      351,904
           Gas Balancing Receivable                                     52,379                52,379
           Lease and Well Equipment                                         85                   256
           Long-Lived Asset Impairment                                 131,173               139,798
           Geological and Geophysical Costs                               ----                 5,877
           Marketable Securities                                         7,501                  ----
                                                                ---------------       ---------------
                                                                       365,617               550,214
           Valuation Allowance                                            ----                 ----
                                                                ---------------       --------------
                                                                       365,617               550,214
                                                                ---------------       ---------------
       Liabilities
           Equity Investments                                            6,212                 6,756
           Marketable Securities                                          ----                 3,742
           Intangible Development Costs                                257,846               362,030
                                                                ---------------       ---------------
                                                                       264,058               372,528
                                                                ---------------       ---------------

       Net Deferred Tax Asset                                   $      101,559        $      177,686
                                                                ===============       ===============
       Change in Valuation Allowance for the Year               $         ----        $         ----
                                                                ===============       ===============
</TABLE>

       The  following  table  summarizes  the current and  deferred  portions of
income tax expense.
<TABLE>
<CAPTION>

                                                                        Year Ended December 31,       
                                                                -------------------------------------
                                                                      1998                  1997      
       Current Tax Expense:                                     ---------------       ---------------
<S>                                                             <C>                   <C>    
           Federal                                              $      244,811        $      107,446
           State                                                          ----                  ----
                                                                ---------------       ---------------
                                                                       244,811               107,446
       Deferred  Provision (Benefit)                                    76,126              (103,973)
                                                                ---------------       ---------------
       Total Provision                                          $      320,937        $        3,473
                                                                ===============       ===============
</TABLE>


<PAGE>


     The total  provision  for income tax  expressed as a  percentage  of income
     before income tax was 27% in 1998 and .88% in 1997.  These  amounts  differ
     from the amounts  computed by applying the statutory US Federal  income tax
     rate of 35% for 1998 and 1997 to income  before income tax as summarized in
     the following reconciliation:

<TABLE>
<CAPTION>

                                                                        Year Ended December 31,        
                                                                -------------------------------------
                                                                     1998                    1997      
                                                                ---------------       ---------------
<S>                                                             <C>                   <C>           
     Computed Federal Tax                                       
         Provision                                              $      412,426        $      138,147
     Increase (Decrease) in Tax  From:
         Allowable Depletion in Excess of
              Depletion for Financial Statements                       (77,223)             (117,909)
          Non-conventional Fuel Credit                                  (7,849)               (8,953)
         Corporate Graduated Tax Rate
              Structure                                                 (7,840)               (6,070)
         Dividend Received Deduction                                    (2,385)               (2,203)
         Other                                                           3,808                   461
                                                                ---------------       ---------------
         Provision for   Income Tax                             $      320,937        $        3,473
                                                                ===============       ===============
         Effective Tax Rate                                                 27%                  .88%
                                                                ===============       ===============
</TABLE>
<PAGE>


Note 7 - INVESTMENTS AND RELATED COMMITMENTS AND CONTINGENT LIABILITIES
         --------------------------------------------------------------
        The  Company  has a 33%  interest  in  Broadway  Sixty-Eight,  Ltd.,  an
        Oklahoma  limited  partnership  (the  Partnership).  The Partnership had
        assets in excess of  liabilities  of $474,480 and $420,960,  at December
        31, 1998 and 1997, respectively, and its net income for the periods then
        ended were $53,520 and $22,663.

        The Partnership was organized for the purpose of owning and operating an
        office building which was constructed in Oklahoma City,  Oklahoma,  at a
        total  cost for the  land  and  building  of  approximately  $2,300,000.
        Although the Company invested as a limited partner, along with the other
        limited partners,  it has signed an indemnity agreement to reimburse the
        general partner for any losses suffered from operating the Partnership.

        The office  building is  financed  by a mortgage  loan with a balance of
        $621,466 at December 31, 1998. The loan matures in 2002 with interest at
        New York prime rate capped at 8 1/2% until  December  1998.  The loan is
        collateralized  by a first  mortgage on the land and  building,  and the
        assignment of leases and rents.

        The  Company  leases its  corporate  office  from the  Partnership.  The
        operating  lease under which the space was rented  expired  December 31,
        1994, and the space is currently  rented on a  year-to-year  basis under
        the terms of the expired lease. Rent expense was $26,353 and $27,388 for
        the years ended December 31, 1998 and 1997, respectively.

        The Company has a 9%  interest in the Coffee  Creek Golf Course  Limited
        Liability Company (LLC), an Oklahoma limited liability company.  The LLC
        has  developed  and is  operating  a golf  course  on real  property  it
        acquired in Oklahoma. Through an investment in a partnership, the LLC is
        participating  in the development of real property  surrounding the golf
        course.  At  December  31,  1998,  the  Company's  net equity in the LLC
        totaled $192,778, ($240,002 at December 31, 1997).

        In December, 1992 the Company invested $90,000 for a 10% interest in OKC
        Industrial  Properties,  L.C., an Oklahoma  limited  liability  company,
        which was formed to purchase and hold certain Oklahoma City metropolitan
        area real estate as an  investment.  At December 31, 1998, the Company's
        net equity in the limited  liability  company was  $95,904,  compared to
        $93,978 at December 31, 1997.

<PAGE>


Note 8 -  COSTS INCURRED IN OIL AND GAS PROPERTY ACQUISITION, 
          --------------------------------------------------
          EXPLORATION, AND DEVELOPMENT ACTIVITIES
          ---------------------------------------

       All of the Company's oil and gas  operations  are within the  continental
       United  States.  In  connection  with  its oil and  gas  operations,  the
       following costs were incurred:
<TABLE>
<CAPTION>

                                                 Year Ended December 31,         
                                              -----------------------------
                                                   1998             1997      
       Acquisition of Properties              ------------      -----------
<S>                                           <C>               <C>        
              Unproved                        $   380,592       $   186,921
              Proved                          $      ----       $     -----

       Exploration Costs                      $   168,936       $   795,691
       Development Costs                      $    58,382       $   193,117
</TABLE>


Note 9 -LEGAL PROCEEDINGS
        -----------------

       In August 1993, the Company filed an action in the District Court of Leon
       County, Texas to quiet title to its 13/32nd interest in approximately 203
       mineral acres  associated  with two producing oil and gas wells completed
       in 1988.  On October 29,  1998,  the Supreme  Court of the State of Texas
       denied the petition for review filed by the  defendants  who had appealed
       the judgment rendered in favor of the Company.

       Net proceeds of $854,042  ($914,552 gross) from oil and gas sales held in
       suspense by the unit  operator  plus  interest  thereon of $234,811  were
       released to the Company on December 18, 1998,  and recorded as revenue at
       that time.  For the year ending  December  31,  1998,  the effect of this
       transaction   increased  the  Company's  net  income  after  the  related
       provision for income taxes by approximately  $655,000 or $3.90 per common
       share outstanding.

Note 10 - FINANCIAL INSTRUMENTS
          ---------------------

       The following table includes various  estimated fair value information as
       of  December  31, 1998 and 1997 as required  by  Statement  of  Financial
       Accounting Standards No. 107,  "Disclosures about Fair Value of Financial
       Instruments"  (SFAS  107).  Such  information,   which  pertains  to  the
       Company's financial  instruments,  is based on the requirements set forth
       in SFAS 107 and does not  purport to  represent  the  aggregate  net fair
       value of the  Company.  The  carrying  amounts in the table below are the
       amounts at which the financial  instruments are reported in the financial
       statements.

       All of the Company's  financial  instruments  are held for purposes other
       than trading, except for trading securities.
<PAGE>


       The  following  methods and  assumptions  were used to estimate  the fair
       value of each class of financial  instruments for which it is practicable
       to estimate that value:

       1.      Cash and Cash Equivalents
               -------------------------
       The carrying amount approximates fair value because of the short maturity
       and highly liquid nature of those instruments.

       2.      Available for Sale Securities
               -----------------------------
       The estimated fair values are based upon quoted market prices.
       3.      Trading Securities
               ------------------
       The estimated fair values are based upon quoted market prices.
       4.      Dividends Payable
               -----------------
       Due to the  uncertainty  regarding  when such amounts will be paid, it is
       not practicable to estimate fair value.

       The carrying amounts and estimated fair values of the Company's financial
       instruments are as follows:
<TABLE>
<CAPTION>

                                                                    1998                                 1997              
                                                     ---------------------------------       ------------------------------
                                                        Carrying            Estimated          Carrying         Estimated
                                                         Amount            Fair Value           Amount          Fair Value 
                                                     --------------      --------------      --------------   --------------
     Financial Assets
<S>                                                  <C>                 <C>                 <C>              <C>          
       Cash and Cash Equivalents                     $     339,015       $     339,015       $     313,540    $     313,540
       Available for Sale Securities                     4,538,772           4,538,772           3,306,740        3,306,740
       Trading Securities                                  450,768             450,768             447,266          447,266
     Financial Liabilities
       Dividends Payable for which it is
         Not practicable to estimate fair value           (140,210)                N/A            (142,094)             N/A
</TABLE>

Note 11 -  LONG-LIVED ASSETS IMPAIRMENT LOSS
           ---------------------------------

     Certain oil and gas  producing  properties  have been deemed to be impaired
     because the assets,  evaluated  on a  property-by-property  basis,  are not
     expected to recover their entire  carrying value through future cash flows.
     Impairment  losses  totaling  $184,835  and  $226,986  for the years  ended
     December 31, 1998 and 1997, respectively, are included in the Statements of
     Operations  in the line item,  Depreciation,  Depletion,  Amortization  and
     Valuation  Provisions.  Impairment losses for 1998 were determined based on
     December 31, 1998 reserve  studies and were recorded in the fourth  quarter
     of 1998. The estimated  discounted  future net cash flows from the impaired
     properties were considered to be the fair value of the properties.



<PAGE>




                  UNAUDITED SUPPLEMENTAL FINANCIAL INFORMATION


<PAGE>


                                                         SUPPLEMENTAL SCHEDULE 1


                          THE RESERVE PETROLEUM COMPANY
                 WORKING INTERESTS RESERVE QUANTITY INFORMATION
                                   (Unaudited)
<TABLE>
<CAPTION>

                                                             Years Ended December 31,         
                                                      ---------------------------------------
                                                            1998                    1997       
                                                      ---------------         ---------------
Oil & Natural Gas Liquids (Bbls)                       
<S>                                                   <C>                     <C>   
     Proved Developed and
       Undeveloped Reserves
         Beginning of Year                                    53,590                  72,648
         Revisions of Previous Estimates                      25,908                 (24,918)
         Extensions and Discoveries                            7,387                  17,571
         Production                                          (49,082)                (11,711)
         Sale of Reserves in Place                              ----                  ----
                                                      ---------------         ---------------
         End of Year                                          37,803                  53,590
                                                      ===============         ===============
     Proved Developed Reserves
         Beginning of Year                                    53,590                  72,648
         End of Year                                          37,803                  53,590
Gas (MCF)
     Proved Developed and Undeveloped
         Reserves Beginning of Year                        1,921,324               2,097,886
         Revisions of Previous Estimates                      49,799                 (29,287)
         Extensions and Discoveries                           10,727                 158,608
         Production                                         (414,124)               (305,883)
         Sale of Reserves in Place                              ----                  ----
                                                      ---------------         ---------------
         End of Year                                       1,567,726               1,921,324
                                                      ===============         ===============
     Proved Developed Reserves
         Beginning of Year                                 1,921,324               2,097,886
         End of Year                                       1,567,726               1,921,324
</TABLE>


(continued)
 See notes on next page
<PAGE>
                                                         SUPPLEMENTAL SCHEDULE 1


                          THE RESERVE PETROLEUM COMPANY
                 WORKING INTERESTS RESERVE QUANTITY INFORMATION
                                   (Unaudited)


(Concluded)


Notes     1.    Estimates of royalty interests reserves have  not  been included
                because the information  required for  the  estimation  of  said
                reserves  is  not  available.  The Company's share of production
                from  its  net  royalty  interests  was  21,537  Bbls of oil and
                407,106 MCF  of  gas  for  the year ended December 31, 1998, and
                29,656  Bbls of oil and  496,543  MCF of gas for the year  ended
                December 31, 1997.

          2.    The preceding table sets forth estimates of the Company's proved
                developed  oil and gas  reserves,  together  with the changes in
                those  reserves as prepared by the  Company's  engineer  for the
                years ended December 31, 1998 and 1997. All reserves are located
                within the United States.

          3.    The  Company  emphasizes  that the  reserve  volumes  shown  are
                estimates  which by their  nature are subject to revision in the
                near  term.  The  estimates  have  been  made by  utilizing  all
                available  geological  and  reservoir  data,  as well as  actual
                production   performance  data.  These  estimates  are  reviewed
                annually  and are revised  upward or  downward,  as warranted by
                additional performance data.

          4.    As discussed in Note 9 to the accompanying financial statements,
                in December 1998, the Company received proceeds from oil and gas
                sales  upon the final  judgement  in its favor of a Texas  quiet
                title action. Because the Company had no assurance the judgement
                would be rendered in its favor, the oil and gas reserves related
                thereto were not included in proved developed reserves until the
                proceeds were released from suspense by the unit operator.  As a
                result,  both the Revisions of Previous Estimates and Production
                line items for 1998  include  36,737  barrels of oil and 138,409
                MCF of gas which were  produced in prior years,  but received in
                1998.


<PAGE>

                                                         SUPPLEMENTAL SCHEDULE 2




                          THE RESERVE PETROLEUM COMPANY
            STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS
                      RELATING TO PROVED WORKING INTERESTS
                              OIL AND GAS RESERVES
                                   (Unaudited)
<TABLE>
<CAPTION>



                                                                   At December 31,            

                                                            1998                    1997      
                                                      ---------------         ---------------
<S>                                                   <C>                     <C>           
Future Cash Inflows                                   $    3,517,878          $    5,228,433
Future Production and
     Development Costs                                    (1,172,954)             (1,399,487)
Future Income Tax Expense                                   (683,975)             (1,081,773)
                                                      ---------------         ---------------
Future Net Cash Flows                                      1,660,949               2,747,173
     10% Annual Discount for
     Estimated Timing of Cash Flows                         (474,621)               (771,752)
                                                      ---------------         ---------------
Standardized Measure of Discounted
     Future Net Cash Flows                            $    1,186,328          $    1,975,421
                                                      ===============         ===============
</TABLE>

      Estimates  of future  net cash  flows from the  Company's  proved  working
      interests  oil and gas  reserves  are  shown  in the  table  above.  These
      estimates, which by their nature are subject to revision in the near term,
      are based on prices in effect at year end, with no escalation,  except for
      fixed and determinable amounts attributable to gas under provisions of the
      Natural Gas Policy Act (NGPA).  The development  and production  costs are
      based on year-end  cost  levels,  assuming  the  continuation  of existing
      economic  conditions.  Cash flows are further reduced by estimated  future
      income tax expense calculated by applying the current statutory income tax
      rates to the pretax net cash flows less  depreciation  of the tax basis of
      the properties and depletion applicable to oil and gas production.


<PAGE>
                                                         SUPPLEMENTAL SCHEDULE 3


                          THE RESERVE PETROLEUM COMPANY
              CHANGES IN STANDARDIZED MEASURE OF DISCOUNTED FUTURE
         NET CASH FLOW FROM PROVED WORKING INTERESTS RESERVE QUANTITIES
                                   (Unaudited)
<TABLE>
<CAPTION>



                                                                  Year Ended December 31,         
                                                         ---------------------------------------
                                                              1998                     1997      
                                                         ---------------         ---------------
Standardized Measure,
<S>                                                      <C>                     <C>           
     Beginning of Year                                   $    1,975,421          $    3,292,966

     Sales and Transfers, Net of
       Production Costs                                      (1,301,791)               (744,224)

     Net Change in Sales and Transfer
       Prices, Net of Production Costs                         (436,455)             (1,438,049)

     Extensions, Discoveries and Improved
       Recoveries, Net of Future Production
       and Development Costs                                     38,687                 378,187
     Revisions of Quantity Estimates                            207,508                (334,597)
     Accretion of Discount                                      275,430                 463,368
Net Change in Income Taxes                                      289,835                 561,837
     Changes in Production Rates
       (Timing) and Other                                       137,693                (204,067)
                                                         ---------------         ---------------
Standardized Measure,
     End of Year                                         $    1,186,328          $    1,975,421
                                                         ===============         ===============
</TABLE>
<PAGE>



Item 8.   Changes  in  and  Disagreements  with  Accountants  on  Accounting and
          Financial Disclosure.

Not Applicable


                                    PART III


Items 9, 10, 11, and 12 are  incorporated  by reference to the  Company's  proxy
statement  to be  mailed  to  security  holders  on or about  April  6,  1999 in
connection with its annual stockholders' meeting to be held on May 4, 1999.

Item 13.      Exhibits and Reports on Form 8-K.

 (a)       Exhibits

     The  following  documents  are exhibits to this Form 10-KSB.  Each document
marked by an asterisk is hereby  incorporated  herein by  reference  to the same
document previously filed with the Securities and Exchange Commission.
<TABLE>
<CAPTION>


Exhibit                                                           S.E.C.                  Exhibit
Reference              Description                            Report (Date)                Number                   Page
---------              -----------                            -------------                ------                   ----
<S>                 <C>                                     <C>                             <C>                      <C>        
    3.1             *Restated Certificate of
                     Incorporation dated
                     November 1, 1988                       10-KSB    (12/96)                3.1                     39

    3.2             *By-Laws
                     dated November 1, 1988                 10-KSB    (12/96)                3.2                     48

     27              Financial Data Schedule                10-KSB    (12/98)                 27                     41
</TABLE>

 (b).                Reports on Form 8-K.

           Reports on Form 8-K have been filed with the  Securities and Exchange
           Commission  during the last  quarter  of the  period  covered by this
           report as follows:
<TABLE>
<CAPTION>

   Item                         Report                       Financial
  Reported                       Date                     Statement Filed
  --------                       ----                     ---------------
<S>                       <C>                                    <C>                         
5.Other Events            December 18, 1998                      No

</TABLE>

<PAGE>


                                   SIGNATURES


In  accordance  with  Section  13 or 15(d) of the  Securities  Exchange  Act the
registrant  caused  this  report to be signed on its behalf by the  undersigned,
thereunto duly authorized.

                                    THE RESERVE PETROLEUM COMPANY
                                             (Registrant)



                                       /s/ Mason W. McLain                     
                                    ------------------------------
                                    By:    Mason W. McLain, President
                                    (Principal Executive Officer)




                                       /s/ Jerry L. Crow                        
                                    ------------------------------
                                    By:    Jerry L. Crow, 2nd Vice President
                                    (Principal Financial and Accounting Officer)


Date:  March   25, 1999




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



  /s/ Mason W. McLain                                  /s/  Jerry L. Crow      
---------------------------                        ----------------------------
Mason W. McLain (Director)                         Jerry L. Crow (Director)
March  25,  1999                                   March  25, 1999



  /s/ Robert L. Savage                                 /s/ R.T. McLain          
---------------------------                         ---------------------------
Robert L. Savage (Director)                         R.T. McLain  (Director)
March  25, 1999                                     March  25, 1999