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

                                   FORM 10-KSB

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

          For the fiscal year ended December 31, 1997

[   ]     TRANSITION  REPORT  UNDER  SECTION  13 OR 15(D)  OF THE  SECURITIES
          EXCHANGE ACT OF 1934 
          For the transition period from           to          .
                                         ---------    ---------

          Commission file number 0-20915

                               GEO PETROLEUM, INC.
                 (Name of Small Business Issuer in Its Charter)

         California                                     33-0328958
(State or other jurisdiction of             (I.R.S. Employer Identification No.)
incorporation or organization )

    501 Deep Valley Dr., Suite 300
    Rolling Hills Estates, California                     90274
(Address of principal executive offices)               (Zip Code)

Issuers telephone number (310) 265-0721

Securities registered under Section 12(b) of the Exchange Act:

                                   Name of each Exchange
       Title of each class         on which registered
       -------------------         ----------------------
             Common                NASD OTC Bulletin Board

           Securities registered pursuant to Section 12(g) of the Act:
                           Common Stock, No Par Value
                                (Title of Class)

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

Indicate by check mark if disclosure of delinquent  filers  pursuant to Item 405
of Regulation  S-B is not 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.
[   ]

The  Registrant's  revenues  for its fiscal  year ended  December  31, 1997 were
$1,299,759.   At  March  31,  1998,   8,226,632  shares  of  Common  Stock  (the
Registrant's only class of voting stock) were outstanding.  The aggregate market
value of the Common Stock on that date (based upon the closing price on the NASD
Electronic Bulletin Board on March 31, 1998 of $0.56) held by non-affiliates was
approximately $2,500,000.

Documents  incorporated  by  reference:  Certain  portions  of the  Registrant's
definitive proxy statement filed with the Commission  pursuant to Regulation 14A
- Part III,  Items 9, 10, 11, and 12.
Transitional  Small  Business  Disclosure Format.

[   ]YES [ X ]NO


<PAGE>


                                     PART I


ITEM 1. DESCRIPTION OF BUSINESS

GENERAL

         Geo Petroleum, Inc. ("Geo" or "the Company"), a publicly traded company
on  the  OTC  Bulletin  Board,  symbol  GOPL,  was  organized  as  a  California
corporation  in 1986 to  conduct  high  technology  energy  development  and the
environmentally  safe  disposal  of oilfield  waste.  Geo's giant Vaca Tar Sands
("Vaca") property in the Oxnard Field, Ventura County,  California, is the focus
of Geo's  development  strategy.  This property offers the opportunity  for: the
recovery  of heavy  oil using  Steam  Assisted  Gravity  Drainage  ("SAGD")  oil
recovery  methods;  and the expansion of industrial  waste disposal  operations,
whereby wastes are injected deep into subsurface wells.

         Geo's Vaca Tar Sands property  contains an estimated  216,000,000 gross
bbls of heavy oil in place.  Geo,  as  operator  with a 2/3  interest,  and Saba
Petroleum Company, as a farm-in  participant with a 1/3 interest,  will commence
development  with a SAGD pair of  parallel  horizontal  wells by 1999.  The SAGD
technology  is  expected  to  recover  more  than 50% of the oil in  place.  See
"Description of Property -- Oxnard Field."

         Disposal of non-hazardous  oilfield and industrial  wastes is a growing
sector of Geo's business.  The Company owns commercial disposal facilities under
a Class II permit,  at which  waste  liquids  produced by other oil and gas well
operators  are injected deep into the  subsurface  in wells below the Vaca.  The
California  Division  of Oil and Gas has given  Geo  permission  to inject  tank
bottoms,  spent drilling  fluid,  and other sludges in its disposal  wells.  The
waste streams are permanently  disposed of deep in the earth,  where they cannot
cause  pollution or liability  for cleanup.  All of the  Company's  revenue from
waste  disposal  services  arise from Capitan  Resources,  Inc., a related party
which operates the Company's  waste  disposal  well. The Company  recognizes its
share of waste  disposal  revenues as the services are provided by Capitan.  Geo
currently receives 75% of Capitan's gross revenues from waste disposal services.
The waste  disposal  services are operated by Capitan and the costs of operating
the water  disposal  services are borne by Capitan.  The Company is planning for
the merger of Capitan into the Company by September 30, 1998.  See  "Description
of Property - Environmental Services."

         See the  discussion  under  "Description  of Property" for  information
concerning Geo's principal oil and gas properties.

         Geo has no  subsidiaries  and presently  holds interests in 6,880 gross
acres (6,430 net) of oil and gas leases or mineral rights,  of which 1,950 gross
acres (1,820 net) are developed for oil and gas production and 4,930 gross acres
(4,610 net) are undeveloped.  Geo owns no drilling rigs or equipment and engages
the  services of  independent  contractors  to perform its drilling and remedial
activities.  All of  Geo's  production  of oil and  gas is sold to  unaffiliated
purchasers. See "Business - Principal Purchasers." The Company also operates two
water disposal wells. See "Description of Property - Environmental Services."


<PAGE>

COMMON STOCK SPLIT

         On April 30, 1996,  the  Company's  common stock was split at a rate of
2.5505-for-1  in  accordance  with  a  resolution  of  the  Company's  Board  of
Directors. All references to the number of common stock shares contained in this
Form 10-KSB have been adjusted to reflect the stock split.

REGULATION

         The Company's  operations  are  regulated by certain  federal and state
agencies.  In particular,  oil and natural gas production and related operations
are or have been subject to price controls, taxes and other laws relating to the
oil and natural gas industry.  The Company  cannot predict how existing laws and
regulation may be interpreted by enforcement agencies or court rulings,  whether
additional laws and regulations will be adopted,  or the effect such changes may
have on its business or financial condition.

         The Company's  operations are subject to extensive  federal,  state and
local laws and regulations relating to the generation,  storage,  handling,  and
transportation of materials and their potential  discharge into the environment.
Permits are required for all of the Company's operations,  and these permits are
subject to revocation, modification and renewal by issuing authorities.

         Governmental  authorities  have the power to  enforce  compliance  with
their regulations,  and violations are subject to fines, injunctions or both. It
is  possible  that   increasingly   strict   requirements  will  be  imposed  by
environmental  laws and enforcement  policies  thereunder.  The Company does not
anticipate  that it will be required in the near future to expend  amounts  that
are material to the  Company's  financial  position or results of  operations by
reason  of  environmental  laws  and  regulations,  but  because  such  laws and
regulations  are  frequently  changed,  the  Company  is unable to  predict  the
ultimate cost of such compliance.

         The  Company  believes  that the oil and gas  industry  may  experience
increasing liabilities and risks under the Comprehensive Environmental Response,
Compensation  and  Liability  Act,  as well as other  federal,  state  and local
environmental  laws, as a result of increased  enforcement of environmental laws
by various  regulatory  agencies.  As an "owner" or "operator" of property where
hazardous  materials  may exist or be  present,  the  Company,  like all  others
engaged  in the oil and gas  industry,  could be liable  for the  release of any
hazardous  substances.  Although  the  Company  has  not  been  subject  to  the
imposition of "clean-up" orders by the government,  the potential for sudden and
unpredictable  liability  for  environmental  problems  is  a  consideration  of
increasing importance to the Company and the oil and gas industry as a whole.

         The  Company is  required  to comply  with  various  federal  and state
regulations regarding plugging and abandonment of oil and gas wells. The Company
provides reserves for the estimated cost of plugging and abandoning its wells on
a unit of production


<PAGE>

basis.  The  Company  maintains a $100,000  certificate  of deposit for state of
California  authorization  purposes  to  perform  additional  oil and  gas  well
recompletions.  These funds are subject to certain withdrawal restrictions until
completion of the work. The Company also has $60,000 in restricted  cash held in
government bonds,  $50,000 with the City of Los Angeles and $10,000 with Ventura
County, for the purposes of paying for any future environmental liabilities that
could  arise.  See  "Financial  Statements."  In addition,  the Company  carries
$2,000,000 in pollution insurance.

GLOSSARY

         The  following  are used in this report and the  definitions  contained
herein are provided for the convenience of the reader:

         Bbl or Barrel means 42 United States  gallons  liquid  volume,  usually
         used herein in reference to crude oil or other liquid hydrocarbons.

         Developed  Acreage means the number of acres of oil and gas leases held
         or owned, which are allocated or assignable to producing wells or wells
         capable of production.

         Development  Well means a well which is drilled to and  completed  in a
         known producing  formation adjacent to a producing well in a previously
         discovered field and in a stratigraphic horizon known to be productive.

         Exploration  means  the  search  for  economic  deposits  of  minerals,
         petroleum  and  other  natural  earth   resources  by  any  geological,
         geophysical, or geochemical technique.

         Exploration Well means a well drilled either in search of a new, as-yet
         undiscovered oil or gas reservoir or to greatly extend the known limits
         of a  previously  discovered  reservoir,  as  indicated  by  reasonable
         interpretation  of available  data, with the objective of completing in
         that reservoir.

         Field  means a  geographic  area in which a number  of oil or gas wells
         produce from a continuous reservoir.

         Mboe means one thousand barrels of oil equivalent.

         Mcf means one thousand cubic feet of natural gas.

         Net Acres or Net Wells  mean the sum of  fractional  ownership  working
         interests in gross acres or gross wells.

         Operator means the person or company  actually  operating an oil or gas
         well.

PRINCIPAL PURCHASERS AND MARKETING OF PRODUCTION

         VOLATILITY OF COMMODITY PRICES AND MARKETS

         Oil and gas prices  have been and are likely to continue to be volatile
and subject to wide  fluctuations  in response to any of the following  factors:
relatively  minor  changes in the  supply


<PAGE>

of and demand  for oil and gas;  market  uncertainty;  political  conditions  in
international  oil  producing  regions;  the extent of domestic  production  and
importation of oil in certain  relevant  markets;  the level of consumer demand;
weather conditions; the competitive position of oil or gas as a source of energy
as compared with other energy sources;  the refining capacity of oil purchasers,
the effect of regulation on the production,  transportation  and sale of oil and
natural gas, and other factors beyond the control of the Company.

         MARKETING OF PRODUCTION

         Crude oil  produced  in the Los Angeles  Basin is sold via  pipeline to
Kern Oil & Refining  Company,  and  approximated  88% of the Company's crude oil
sales for 1997.  Production of crude from the Oxnard  property is sold via truck
to Texaco  Trading and Refining  Co.  which,  during  1997,  purchased 3% of the
Company's  oil  production.  Natural gas  produced  from the Los  Angeles  Basin
properties is sold to Pacific Tube Company, an end user in Commerce, California,
and accounted for  approximately  54% of the Company's  share of gas sold during
1997. Natural gas from the Company's Strain Ranch and Angel Slough leases during
1997 was sold to Pacific Gas & Electric Co. and accounted for  approximately 46%
of the Company's share of gas sales during 1997.

         Alternative   purchasers   are  available  for  all  of  the  Company's
production, except for the Rosecrans, Strain Ranch and Angel Slough leases where
there is only one purchaser.  Loss of Pacific Tube Company as a purchaser would,
in all probability, result in a reduction in the price received for gas from the
Bandini-East Los Angeles properties, probably in the range of 20%, but would not
result in a loss of market for such gas.


ITEM 2.  DESCRIPTION OF PROPERTY

FORWARD LOOKING INFORMATION

         With the exception of historical information,  the matters discussed in
this  Report  contain   forward-looking   statements   that  involve  risks  and
uncertainties.  Reserve  information  presented  herein  is based  upon  reports
prepared by the Company's  independent  petroleum reservoir  engineers.  Reserve
estimates are  inherently  imprecise and estimates of new  discoveries  are more
imprecise  than those of producing oil and gas  properties.  Accordingly,  these
estimates are expected to change as future information becomes available.

         Proved oil and gas reserves are the estimated  quantities of crude oil,
natural gas and  natural  gas liquids  which  geological  and  engineering  data
demonstrate  with  reasonable  certainty to be  recoverable in future years from
known  reservoirs  under  existing  economic and  operating  conditions.  Proved
developed  oil and gas  reserves  are those  expected  to be  recovered  through
existing wells with existing equipment and operating methods.

         Although  the Company  believes  that its  expectations  are based upon
reasonable  assumptions,  it can  give  no  assurance  that  its  goals  will be
achieved. Important factors that could cause actual results to differ materially
from those in the forward-looking  statements  contained in this report


<PAGE>

include,  but are not  limited  to: the time and extent of changes in  commodity
prices  for  oil and  gas;  increases  in the  cost  of  conducting  operations,
including  remedial   operations;   the  extent  of  the  Company's  success  in
discovering,  developing and producing reserves; political conditions; condition
of capital  and equity  markets;  changes in  environmental  laws and other laws
affecting  the ability of the Company to explore for and produce oil and gas and
the cost of so doing; and other factors which are described in this report.

         The  proved  developed  and  undeveloped  oil and gas  reserve  figures
presented  in this report are  estimates  based on reserve  reports  prepared by
independent petroleum engineers. The estimation of reserves requires substantial
judgment  on the  part  of  the  petroleum  engineers,  resulting  in  imprecise
determinations,  particularly  with  respect to new  discoveries.  Estimates  of
reserves and of future net revenues  prepared by different  petroleum  engineers
may vary substantially,  depending, in part, on the assumptions made, and may be
subject to material adjustment.  Estimates of proved undeveloped reserves, which
comprise a substantial portion of the Company's reserves,  are, by their nature,
much less certain than proved developed reserves.

         The  accuracy  of  any  reserve  estimate  depends  on the  quality  of
available  data  as  well  as  engineering  and  geological  interpretation  and
judgment.   Results  of  drilling,  testing  and  production  or  price  changes
subsequent to the date of the estimate may result in changes to such  estimates.
The  estimates of future net revenues in this report  reflect oil and gas prices
and production costs as of the date of estimation,  without  escalation,  except
where  changes in prices were fixed under  existing  contracts.  There can be no
assurance  that such prices will be  realized or that the  estimated  production
volumes will be produced  during the periods  specified in such reports.  Proven
reserves are estimates of hydrocarbons to be recovered in the future.

         Reservoir  engineering is a subjective  process of estimating the sizes
of underground  accumulations of oil and gas that cannot be measured in an exact
way.  The  accuracy  of any  reserve  estimate  is a function  of the quality of
available data and of engineering  and geological  interpretation  and judgment.
Reserve  reports of other  engineers  might  differ from the  reports  contained
herein.  Results of drilling,  testing, and production subsequent to the date of
the estimate may justify  revision of such estimate.  Future prices received for
the sale of oil and gas may be  different  from  those used in  preparing  these
reports.  The amounts and timing of future  operating and development  costs may
also differ from those used. Accordingly,  reserve estimates are often different
from the quantities of oil and gas that are ultimately recovered.

         Since December 31, 1997 (the date of the estimates and the date of this
report),  oil and gas prices have generally declined.  At December 31, 1997, the
price of Buena Vista  California  Crude Oil (a  California  benchmark  crude) as
quoted by several California refiners,  was $13.70 per barrel and the comparable
price at May 21,  1998 was


<PAGE>

$9.45 per barrel.  Prices received by the Company during the comparable  periods
for natural gas were $2.6662 per Mcf and $2.3529 per Mcf, respectively.  At such
dates, the estimated reserves and future net revenues may be subject to material
downward or upward  revision based upon  production  history,  results of future
development,  prevailing  oil and gas  prices  and  other  factors.  A  material
decrease  in  estimated  reserves or future net  revenues  could have a material
adverse effect on the Company and its  operations.  References in this report to
the Company's  engineers are to Sherwin L. Yoelin,  Petroleum  Engineers,  Inc.,
which firm is the Company's independent petroleum engineer.

OXNARD FIELD

         DRILLING AND PRODUCTION ACTIVITIES

         The Vaca Tar  Sands on Geo's  property  in the  Oxnard  Field,  Ventura
County, California,  contain an estimated 216,000,000 gross bbls of heavy oil in
place. Geo, as operator with a 2/3 interest,  and Saba Petroleum  Company,  as a
farm-in participant with a 1/3 interest,  will commence  development with a SAGD
pair of parallel  horizontal  wells by 1999. The SAGD  technology is expected to
recover more than 50% of the oil in place.

         Geo and Saba will share equally in the cost of  development  until Saba
has invested  $5,000,000.  Thereafter,  Saba will pay one-third of the costs and
receive one-third of the revenues,  and Geo will pay two-thirds of the costs and
receive  two-thirds of the  revenues.  As to the wells for which Saba has paid a
disproportionately  higher share of the costs, Saba can recover its costs out of
one-half of production revenues, after which its interest in these wells will be
reduced to one-third.  In order to finance its share of the  development  costs,
Geo plans to obtain financing  through a private  placement.  Larry R. Burroughs
will direct the development of the Vaca Tar Sands for Geo and Saba.

         SAGD is a process  which  consists of drilling two parallel  horizontal
wells,  with one spaced  approximately  15 feet above the other,  with the lower
well located at the bottom of the producing zone. The wells extend  horizontally
for as far as 2,600 feet. Steam is injected into the upper well at a temperature
of approximately 500 degrees  Fahrenheit.  The steam lowers the viscosity of the
oil so that it becomes as fluid as water.  The oil then  gravitates to the lower
horizontal  well,  and then flows  with high  temperatures  (above  400  degrees
Fahrenheit)  and  pressures  to the surface  through  the lower  well.  The well
production  rates  increase each year until the tenth year,  and then  gradually
decline after achieving a productive life of approximately 17 years.

         Geo plans to  commence  development  by  redrilling  one of the  twenty
vertical wells now located on the property.  By redrilling,  Geo will obtain tax
credits on the oil  production  pursuant to Section 29 of the  Internal  Revenue
Code. The Code states tax credits cannot apply to production from new wells. The
current tax credit is $6.10 for each barrel  produced,  and will  escalate  with
inflation  until the  termination of the credit on December 31, 2002. Each lower
well will be a redrill of a presently existing Vaca Tar Sands vertical well. The
wells will extend horizontally for as far as 1,300 feet.

         The use of the SAGD  process in the field  represents  one of its first
applications  in the United  States,  although  the  process has been widely and
successfully  used in the vast heavy oil fields of Canada,  where the method was
invented.  Dr. Roger Butler,  credited with the invention of SAGD, Al Albertson,


<PAGE>

P.Eng.  (a  steaming  expert),  and Larry  Burroughs,  P.Eng.,  will guide Geo's
redrilling and development program.

         At the time Geo bought the property  from Sun Oil Company in 1990,  the
SAGD  method  was in an  experimental  stage and  unknown in this  country.  Geo
produced the Vaca using conventional methods in the wells drilled by Sun and its
predecessor,  and achieved a production  rate of 275 barrels of oil per day. Low
oil prices and Geo's financial  limitations  have caused a cutback in production
in recent years.

         Geo bought the property after an evaluation by an independent  engineer
concluded  that  "the Vaca Tar Sands  have all of the  necessary  rock and fluid
property   characteristics   needed  for  very  successful   steam   stimulation
operations.  These desirable  qualities  include massive,  shallow (1,900 feet),
good quality reservoir sands, permeability greater than 1,500 millidarcies,  oil
saturation greater than 80 percent, porosity greater than 30 percent, sufficient
reservoir pressure,  excellent sand continuity, and large oil reserves." Sun had
purchased the property in 1984 for  $14,000,000  and invested over $3,900,000 in
production facilities and drilling.

         Geo's  Vaca  property  is  fully   equipped  for  the   transportation,
processing,  storage,  and sale of oil,  the  separation  and  disposal of waste
water,  and for the  injection  of high  pressure  steam  into  the  wells.  The
equipment, in general, consists of: heated and insulated oil flow lines; gas and
water pipelines; an automatic well tester; 9,600 barrels of oil storage capacity
in three  insulated,  heated  tanks;  waste  water  disposal  tanks;  two  steam
generators  capable of producing  high quality steam at rates of 24,000,000  BTU
per hour; tank heaters;  a water treatment plant; a vapor recovery  system;  oil
shipping  equipment;  a fresh water well to provide unlimited good quality water
for steam  generation;  and an injection  well to dispose of all water  produced
with the oil. The property is also in close  proximity to several oil  pipelines
and a rail line.

         The Geo/Saba  joint  venture will be entitled to the use of all of said
facilities and equipment,  subject to payment of operating  costs.  The Geo/Saba
joint  venture  will be  entitled  to 100  percent  of  federal  and  state  tax
deductions  accruing from expenditure of their funds, in addition to their share
of the Section 29 tax credit.  Tax  deductions in 1998 will  approximate 70 - 80
percent of the funds invested.

         Under Sec. 29 of the Internal  Revenue Code, a tax credit is allowed to
producers of  "Non-Conventional  Fuels." The tax credit for 1998 is estimated at
$6.10 per barrel, but will not be computed by the IRS until 1999 after inflation
adjustment  figures  are  published.  In the opinion of Geo's  counsel,  the tax
credit will be available  to the Geo/Saba  joint  venture and is  applicable  to
production from all redrilled Vaca Tar Sands wells. The previous owners of Geo's
property,  and the  owners of  offsetting  leases,  have taken the tax credit on
production from the Vaca Tar Sands since 1980, the first year of the credit. The
credit is adjusted for inflation each year.

         Geo treats the  production  from existing  wells in the Oxnard Field as
oil from  "non-conventional"  sources,  which  thus  qualifies  for tax  credits
provided under Section 29 of the Internal  Revenue Code. For the year 1997, this
credit amounted to $6.10 per produced barrel, and is subject to annual increases
with  inflation.  At such time as the Company has an  obligation  to pay federal
income taxes,  the accrued credits may be used to offset directly any taxes due.
Geo has, in the past,


<PAGE>

secured  funds  for  operations  on this  lease by  entering  into  transactions
designed to provide  these  credits to investors in exchange for  payments.  Geo
intends to continue  such funding on an ad hoc basis.  Funding from such sources
would not,  however,  be  sufficient  to develop the  property  to any  material
extent.

         Geo and Gerald T. Raydon, Chairman and C.E.O. and principal shareholder
of  Geo,  jointly  acquired  26 oil  wells  and  oil  and  gas  leases  covering
approximately  625 acres of land in the area of Oxnard from Oryx Energy in 1990,
for  a  consideration  of  $150,000.  See  "Certain  Relationships  and  Related
Transactions."  On April 1, 1994,  Geo  acquired all but five percent of the 25%
interest held by Mr. Raydon in the Oxnard Field for a  consideration  consisting
solely of Common Stock.

     The  production  in this field is from the  prolific  and massive  Vaca Tar
Sands which is found at depths of between  1,950 and 2,400 feet. In 325 acres of
the leases,  the  thickness of the  oil-saturated  sand  averages 225 feet.  The
reservoir is highly  porous (32%) and permeable  (1,800 Md.).  The oil is heavy,
approximately  6 - 8 degrees API,  and is highly  viscous.  Consequently,  steam
injection is necessary to heat the oil and reduce its  viscosity,  permitting it
to flow readily  through the well bores. In existing  operations,  Geo generates
steam at the  surface  and  injects  it into  the  producing  formation  through
vertical wells. The heat permeates the formation,  and Geo then pumps the oil in
a  conventional  manner.  Because of the use of steam,  current  operations  are
comparatively expensive while the price received for the oil is relatively low.

         Geo's  independent  petroleum  engineers  have  estimated  that  proved
developed producing and proved developed  non-producing reserves in Geo's Oxnard
Field leases  amounted as of December 31, 1997,  to 611,175 net barrels.  Proved
undeveloped  reserves were a net 26,091,000  barrels,  based on expected results
from the use of conventional  drilling methods.  In order to produce these total
reserves,  the Company  would be required to obtain  about  $28,900,000  for the
drilling  of 36 SAGD  wells.  Future  net  revenues  of  $224,382,297  would  be
achieved,  having  a  present  net  worth,  discounted  at  10%  per  annum,  of
$102,102,469, according to the report of an independent petroleum engineer.

         The  costs  of  full  SAGD   development   are  expected  to  be  about
$45,000,000.  The revenues  using the SAGD method are expected to be greater but
have not yet been calculated in a full engineering  study.  Although the Company
has agreed to  transfer  one-third  of its  interests  to Saba in  exchange  for
$5,000,000  in  drilling  funds,  the Company  expects  that the use of the SAGD
method could cause its net reserves to increase over the level now projected for
conventional well recoveries as a result of the projected increase in recoveries
by use of such method.  There is no assurance that the SAGD process will achieve
the desired results.

         Geo's leases have no current  drilling  obligations nor do they require
the payment of rentals to keep the leases in good standing. The leases reserve a
royalty  of  14%  of  gross   revenues  to  the  lessor.   Vertical  wells  cost
approximately $265,000 to drill and complete for production.



<PAGE>

         The Company in 1995  received a  conditional  use permit  from  Ventura
County,  allowing it to drill 120 wells on part of its property.  Older drilling
permits  are in effect as to the  balance  of Geo's  property,  and allow for an
adequate number of wells to develop the property.  Steaming  operations  require
compliance  with various  environmental  regimes,  including  those  designed to
protect air  quality.  Geo's  operations  have been  permitted  by the local air
pollution control district and have been found to be in compliance with relevant
requirements.  There  is no  assurance  that  such  operations  will  remain  in
compliance.

         INDUSTRIAL WASTE DISPOSAL ACTIVITIES

         Disposal of non-hazardous  oilfield and industrial  wastes is a growing
sector of Geo's business.  The Company owns commercial disposal facilities under
a Class II permit,  at which  waste  liquids  produced by other oil and gas well
operators  are injected deep into the  subsurface  in wells below the Vaca.  The
California  Division  of Oil and Gas has given  Geo  permission  to inject  tank
bottoms,  spent drilling  fluid,  and other sludges in its disposal  wells.  The
waste streams are permanently  disposed of deep in the earth,  where they cannot
cause pollution or liability for cleanup.

         The Company  currently has contracts  with,  among others,  AERA Energy
L.L.C. (a consortium owned by Shell & Mobil), POPCO, Exxon Corporation,  Chevron
Corporation,  Southern  California  Gas Company,  Rincon  Island  L.L.P.,  Torch
Operating Company, and several other independent oil companies. Geo has enlarged
and upgraded its facilities to accommodate the new sources of wastes and intends
to convert  additional  unproductive  oil wells to disposal  wells.  The Company
plans to apply to the Environmental  Protection Agency for a permit to operate a
Class I well, which can dispose of all non-hazardous industrial wastes. The fees
charged are generally at rates much higher than for Class II wastes.

         These operations are conducted by a related party,  Capitan  Resources,
Inc., and the Company has a 75% revenue interest in such operations. The Company
is planning for the merger of Capitan  into the Company by  September  30, 1998.
The only  compensation  related  to the  transaction  would be the  issuance  of
approximately  70,000 shares of the Company's common stock to an unrelated third
party in exchange for the  cancellation of their overriding net profits interest
in Capitan and their $28,000 note due from Capitan.  No other compensation is to
be paid to the  shareholders of Capitan.  If this  transaction is consummated as
planned, the assets and liabilities of Capitan will be recorded on the Company's
books at their historical cost.

         The Company's  valuation of the  discounted  present value of Capitan's
revenue interests in the Company's gas wells,  based upon the estimates included
in the Company's  independent  petroleum engineer's report, and in the Company's
waste disposal well is in excess of $1,000,000.

         Under its agreement with Saba, Geo will retain the disposal wells,  but
will contribute the oil field facilities to the venture.

         See "Environmental Services" below.



<PAGE>

EAST LOS ANGELES / BANDINI FIELDS

         At January 1, 1998,  these two  separate  but  adjacent  accumulations,
located in an industrial  area of the City of Los Angeles,  had estimated  total
net proven  reserves of 2,619,153 bbls of light oil and 5,737,911 mcf of natural
gas.

         Geo plans to sell its East L.A.  and Bandini  fields and its  remaining
properties  (excluding  the Vaca) to increase its cash position and focus all of
its resources on its Vaca SAGD and waste disposal projects.

         The  properties are located  approximately  one-half mile apart and are
operated  together by the same employees.  In the aggregate,  approximately  570
surface  acres are covered by Geo's leases and mineral  rights.  Geo's rights in
both fields are held by  production.  The Company owns the mineral rights in the
East Los  Angeles  Field and in a  portion  of the  Bandini  Field,  subject  to
overriding  royalties  of 16% of  gross  revenues.  The  Bandini  interests  are
comprised of town-lot leases and of  Company-owned  mineral rights;  the Bandini
interests are subject to royalties  varying from 16% to 29.5% of gross revenues.
Production comes from multiple sand zones in the Pliocene  Repetto  formation at
depths of 2,800 to 8,000 feet at Bandini and in the Miocene Puente  formation at
depths of between 7,200 to 11,200 feet at East Los Angeles.

ROSECRANS FIELD

         Geo plans to sell its Rosecrans Oil Field and its remaining  properties
(excluding  the  Vaca)  to  increase  its cash  position  and  focus  all of its
resources on its Vaca SAGD and waste disposal projects.

         Geo  purchased  30 wells in the  Rosecrans  Oil  Field  located  in Los
Angeles County,  California,  in December,  1994, with the plan of improving the
seven active wells and repairing or reworking an additional 19 wells in order to
return them to  production.  Wells in this field were drilled during a period of
between  ten and  fifty  years  ago.  The  royalty  amounts  to  16.67% of gross
revenues.  If  the  wells  were  to be  produced  under  present  conditions  to
depletion,  future cumulative  production would amount to 423,000 barrels of oil
(351,000 net). There are seven principal producing zones of Miocene and Pliocene
age in the Field,  ranging  from depths of 6,500 to 8,400  feet.  The wells have
been drilled  through these zones,  but have not produced from all of them. This
provides the  opportunity  to commence  production  from  bypassed  zones in the
future.  Presently,  the gas  produced  from  this  yields no  revenues  for the
Company.  The wells are expected to produce an  estimated  896,000 Mcf of gas. A
gas processing  facility has been completed by another company,  and Geo's wells
are now connected by pipeline to this facility.  Geo has negotiated an agreement
to sell its gas at market prices.

ENVIRONMENTAL SERVICES

         The  Company  owns  two  commercial  Class  II  (as  designated  by the
Environmental  Protection Agency) disposal facilities at which fluids and solids
produced in oil field  operations  conducted by Geo and by other  operators  are
injected into the subsurface for disposal.  Such facilities are located at Geo's
Oxnard property. Historically, these operations did not contribute significantly


<PAGE>

either  to gross  revenues  or  earnings,  but Geo has  over the last two  years
increased its efforts to attract  non-affiliates  to dispose of oil field wastes
in Geo's  facilities  for a per-barrel  fee.  These  efforts have  resulted in a
significant increase in revenues at the facilities.

         The  most  significant  increase  in  revenues  has  resulted  from the
September 1996 granting of a new permit to Geo by the California Division of Oil
and Gas. This permit provides for the disposal of "tank bottoms" in Geo's wells,
in addition to produced waste water. Tank bottoms consist of the mud,  paraffin,
and sand,  which  accumulate at the bottom of oil  production  tanks and must be
periodically  removed and disposed of. The past primary method for handling such
wastes is an  expensive  surface  disposal  process.  Geo can offer  substantial
savings to oil operators by disposing of the tank bottoms in its disposal well.

         Water and tank bottoms  produced by other oil  operators  are hauled to
Geo's  disposal  sites,  treated,  stored,  screened,  and  injected  into wells
operated in a joint venture with Capitan  Resources,  Inc., an affiliate,  which
provides the capital for disposal facilities and retains 25% of the revenues. In
1996,  Capitan  entered into a  transaction  with  affiliates  of Drake  Capital
Securities, Inc. by which the latter acquired a portion of Capitan's interest in
the disposal facilities. See "Certain Relationships and Related Transactions."

         The price received by Geo for Class II fluids  averages about $0.60 per
barrel for water and $6.50 for tank bottoms. The Company currently has contracts
with,  among others,  AERA Energy L.L.C. (a consortium  owned by Shell & Mobil),
POPCO, Exxon Corporation, Chevron Corporation,  Southern California Gas Company,
Rincon Island L.L.P., Torch Operating Company, and several other independent oil
companies. Because there are few high-capacity waste disposal wells permitted by
the  California  Division of Oil & Gas,  and an  expanding  need by operators to
dispose of their waste water and tank bottoms, Geo's operations of this type are
capable of substantial growth.

ESTIMATED OIL AND GAS RESERVES

         At January 1, 1998,  the Company's net proved oil and gas reserves,  as
estimated by its  independent  petroleum  engineers,  Sherwin D. Yoelin and Greg
Martin,  amounted to 29,231,688 barrels of oil and 5,737,911 Mcf of natural gas,
of  which  2,560,255  barrels  and  4,884,569  Mcf  were  classified  as  proved
developed.  Future cash flows  attributable  to such proved  developed  reserves
(before  income taxes) are estimated to be $25,614,830 at December 31, 1997, and
the discounted value thereof, at 10%, is estimated to be $15,318,857.

         Proved  undeveloped  reserves were a net 26,761,072  barrels of oil and
863,354 Mcf of gas.  Future net  revenues  of  $229,234,292  would be  achieved,
having a present  net  worth,  discounted  at 10% per  annum,  of  $104,518,051,
according to the report of an independent petroleum engineer.

         A major  portion of the  Company's  oil  reserves is comprised of heavy
crude.  This  portion is highly  price  sensitive,  costs


<PAGE>

more to produce than lighter  crudes,  and receives a lower price in the market.
Accordingly,  a price  at or  above  1997  levels  is  needed  in order to cover
operating  costs  and  yield a  profit  utilizing  conventional  completion  and
production techniques.

         There are numerous  uncertainties  inherent in  estimating  oil and gas
reserves and their  values,  including  many  factors  beyond the control of the
producer.  The reserve data set forth above  represent only  estimates.  Reserve
engineering is a subjective process of estimating  underground  accumulations of
oil and gas that  cannot be  measured in an exact  amount.  The  accuracy of any
reserve  estimate  is a  function  of  the  quality  of  available  data  and of
engineering and geological  interpretation and judgment. As a result,  estimates
of different engineers may vary. In addition,  estimates of reserves are subject
to revision by the results of drilling, testing and production subsequent to the
date of such estimate.  Accordingly,  reserve estimates are often different from
the quantities of oil and gas that are ultimately recovered.  The meaningfulness
of such estimates is highly  dependent upon the accuracy of the assumptions upon
which they were based.

         In  general,  the  volume  of  production  from oil and gas  properties
declines as reserves  are  depleted.  Except to the extent the Company  acquires
properties  containing  proved reserves or conducts  successful  exploration and
development activities, or both, the proved reserves of the Company will decline
as reserves  are  produced.  The  Company's  future oil and gas  production  is,
therefore, highly dependent upon its level of success in acquiring or developing
additional reserves.

         For additional  information  concerning the discounted  future net cash
flows to be derived from these reserves see Note 11 to the Financial  Statements
included elsewhere herein.

         The  Company's  estimates  of  reserves  have  not been  filed  with or
included in reports to any federal agency other than the Securities and Exchange
Commission.

TITLE TO PROPERTIES

         While Geo has been in possession of its major properties,  Bandini-East
Los Angeles and Oxnard,  for at least seven years and has not received notice of
an adverse  claim,  Geo has not  obtained  title  insurance  or a title  opinion
covering  such  properties,  but has relied upon title  abstracts  of the public
records  and the  apparently  unchallenged  possession  of its  predecessors  in
interest.  Consequently,  while Geo  believes  that title to its  properties  is
satisfactory,  it would be unable to  demonstrate  such fact  without  obtaining
title  insurance  or  opinions  which  Geo  believes  is not  cost-effective  or
otherwise warranted under the circumstances. Generally, once production has been
established on an oil and gas lease, production must be maintained in quantities
sufficient to pay the costs of  operations,  or the lease will  terminate of its
own accord. Geo believes that all of its material leases have been kept in force
by production.


<PAGE>

         Title to the Company's  properties is, in addition,  subject to royalty
and overriding  royalty interests and to contractual  arrangements  customary in
the oil and gas industry, to liens for work and materials, current taxes not yet
due  and  to  other  minor  encumbrances.  Geo  has  not  encumbered  any of its
properties to secure bank indebtedness.

MARKETS

         GENERAL

         The market for oil and natural gas  produced by the Company  depends on
factors  beyond its control,  including  the extent of domestic  production  and
imports of oil and  natural  gas,  the  proximity  and  capacity  of natural gas
pipelines and other transportation  facilities,  demand for oil and natural gas,
the  marketing  of  competitive  fuels  and the  effects  of state  and  federal
regulation of oil and natural gas production and sales. The oil and gas industry
as a whole also competes with other  industries in supplying the energy and fuel
requirements of industrial, commercial and individual consumers.

         The Company, during 1997, experienced a substantial decrease
in the price paid for its oil.  The company anticipates that there may be a
strengthening  of the  prices  for  both  its oil and gas  production,  but that
periods of unstable pricing may occur. The Company will be subject to variations
in cash flow depending upon changes in prices paid for oil and gas.

         COMPETITION

         The oil and gas  industry is highly  competitive.  Competitors  include
major oil companies,  other  independent  oil and gas companies,  and individual
producers and  operators,  many of which have  financial  resources,  staffs and
facilities  substantially  greater than those of the Company.  The Company faces
intense competition for the acquisition of producing oil and gas properties that
are being divested by major and independent oil and gas companies.

ACREAGE

         The following  table reports the  Company's  developed and  undeveloped
leasehold and mineral acreage at December 31, 1997. All of the Company's acreage
is in California.

     Developed     Developed     Undeveloped     Undeveloped
       Gross          Net           Gross            Net
     -------------------------------------------------------
       1,950           1,790          4,930          4,610

     As is customary in the oil and gas industry,  the Company is generally able
to retain  its  ownership  interest  in  undeveloped  acreage by  production  of
existing  wells,  by drilling  activity which  establishes  commercial  reserves
sufficient  to maintain the lease,  or by payment of delay  rentals.  All of the
acreage  listed above as  "undeveloped"  is acreage which is held by production,
but upon which no wells have presently been drilled.


<PAGE>

RECENT DRILLING ACTIVITIES

         During the three year period ended  December 31, 1997,  the Company did
not drill or participate  in the drilling of  development or exploratory  wells.
During the quarter ended March 31, 1998,  the Company did not  participate in or
drill any wells.

OFFICES

         The Company leases office space in Rolling Hills  Estates,  California,
aggregating  some  2,000  square  feet.  The  Company  has  a  four  year  lease
commitment.

EMPLOYEES

         Geo has  twelve  full  time  employees,  five of whom  are  general  or
administrative;  the remaining seven being field employees. Two of the employees
are  related to Gerald T.  Raydon,  the  chairman  chief  executive  officer and
principal  shareholder of the Company.  In 1998, the Company intends to decrease
the  number  of  its  employees  by  the   retirement   and/or   termination  of
administrative  and field personnel upon the sale of Geo's non-Vaca  properties.
The  Company is not a party to any  collective  bargaining  or other  collective
labor agreement.


ITEM 3. LEGAL PROCEEDINGS

         The Company is involved in certain legal matters in the ordinary course
of business.  In one  particular  case,  an  interlocutory  judgment was awarded
against the Company by the court  hearing  litigation  in which the Company is a
defendant.  The judgment, if it becomes final, requires the Company to incur the
expense of clean up and  abandonment of two idle wells and to pay fees and costs
of  $32,000.  No damages  will be awarded  unless  the  Company  fails to comply
following a final judgment.  On July 1, 1998, the Company filed an appeal of the
Court's Order.  Additionally,  if the Company fails to do so the courts may also
award  damages for these costs  including  attorneys  fees.  These costs are not
possible to determine at this time,  but the plaintiff has requested  damages of
up to $300,000. The Company is considering whether to appeal the decision of the
court.


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

     No matters were submitted for a vote of Security  Holders during the fourth
quarter of 1997.


<PAGE>


                                     PART II


ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

MARKET INFORMATION

         Since August 1996,  the shares of common stock of the Company have been
traded  on  the  Electronic  Bulletin  Board  of  the  National  Association  of
Securities  Dealers,  Inc. Prior to August 1996,  there was no public market for
the common stock.  The following table sets forth the high and low bid prices of
the  common  stock  for  the  periods  indicated  as  reported  by the  National
Association of Securities Dealers, Inc.

         The prices set forth below reflect inter-dealer prices,  without retail
mark-up, mark-down or commission, and may not represent actual transactions.

         Year Ended 1997                           HIGH BID         LOW BID
         ------------------------------------------------------------------
         First Quarter                               8.13              6
         Second Quarter                              6.73              6.31
         Third Quarter                               3                 2.13
         Fourth Quarter                              3.31              2

On June 1, 1998, the reported closing price per share was $0.25.

HOLDERS OF COMMON EQUITY

         At December 31, 1997,  there were  approximately  400 holders of record
known to the Company of the common equity of the Company. At May 21, 1998, there
were  approximately  400  holders  of record of the common  equity  known to the
Company.

DIVIDENDS

         The Company has never paid  dividends  on its common  equity and has no
plans to do so in the foreseeable  future.  There are no agreements to which the
Company is a party or by which its property is bound which restricts the payment
of dividends.


ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF PLAN OF
OPERATION

         The following  discussion  and analysis for the year ended December 31,
1997 should be read in conjunction with the Consolidated  Financial Statement of
the  Company and the Notes  thereto and the  Selected  Financial  Data  included
elsewhere in this statement.

         As shown in the  financial  statements,  as of December 31,  1997,  the
Company's   accumulated  deficit  totaled  $2,572,331  and  current  liabilities
exceeded current assets by $980,052.


<PAGE>

         Management is continuing its efforts to obtain additional funds so that
the Company  can meet its  obligations,  eliminate  its  deficit,  and return to
profitability.  These  potential  alternatives  include,  among other things,  a
private placement of debt or equity,  the sale of certain  non-strategic oil and
gas properties,  a joint venture, a merger,  and/or extending or refinancing the
bank loan using oil and gas properties as collateral.

RESULTS OF OPERATIONS

         1997 compared with 1996.  During the year ended  December 31, 1997, Geo
had a net loss of $768,406 and cash used in operations of $542,538,  compared to
a net loss of $430,559 and cash used in operations of $325,632 for 1996.

         Oil and gas  revenues  decreased  to  $662,874  for  1997  compared  to
$823,695 for 1996.  This was  attributable  mostly to a sharp drop in oil prices
and decreased production as a result of the idling or intermittent production of
a  significant  number of wells,  due to  inadequate  funds for the  repair  and
maintenance of the wells.

         Industrial  waste  disposal  revenues  increased  to $437,675  for 1997
compared to $93,308 for 1996.  This increase is due primarily to the addition of
new contracts  with,  among others,  AERA Energy L.L.C.  (a consortium  owned by
Shell  &  Mobil),  POPCO,  Exxon  Corporation,  Chevron  Corporation,   Southern
California  Gas Company,  Rincon Island L.L.P.,  Torch  Operating  Company,  and
several other  independent  oil companies.  These  operations are conducted by a
related  party,  Capitan  Resources,  Inc.,  and the Company has a 75% operating
interest in such  operations.  Geo has also enlarged and upgraded its facilities
to accommodate  the new sources of wastes,  resulting in increased  revenues and
efficiencies.

         Other revenue  increased to $162,170 in 1997 from $82,735 in 1996,  due
primarily  to $60,000 in fees earned in 1997 from a private  company for the use
of a wellbore in the drilling of an exploratory well.

         Lease operating expenses for 1997 amounted to $696,648,  as compared to
$675,292 for 1996,  reflecting  the larger number of wells on production and the
increased level of maintenance expenditures.

         General and administrative expenses for 1997 were $580,866, as compared
to  $277,107  for  1996.  Substantial  administrative  costs  were  incurred  in
connection  with:  preparing,  offering,  negotiating  and  consummating  equity
offerings and joint ventures;  in registering the Company's shares;  and certain
legal,  investment  banking,  and  accounting  expenses in connection  with such
offerings.  Additionally, Gerald T. Raydon began drawing his first salary in ten
years, at $120,000 per year. Mr. Raydon has since reduced his 1998 salary by 50%
in an effort to reduce costs and conserve cash.

         Interest  expense for 1997 was  $144,791,  as compared to $360,581  for
1996.  This decrease was due to the  reduction of loan  principal  amounts.  The
Company's  provision for depletion  and  depreciation  increased to $102,797 for
1997, as compared to $88,596 for 1996.

         The Company has recorded a valuation  allowance of $500,000  during the
year ended  December  31,  1997 to reduce  the  carrying  value of the  accounts
receivable due from Capitan Resources, Inc.


<PAGE>

         The Company is planning  for the merger of Capitan  into the Company by
September 30, 1998. The only  compensation  related to the transaction  would be
the issuance of approximately  70,000 shares of the Company's common stock to an
unrelated third party in exchange for the  cancellation of their  overriding net
profits  interest in Capitan and their $28,000 note due from  Capitan.  No other
compensation is to be paid to the  shareholders of Capitan.  If this transaction
is  consummated  as  planned,  the assets  and  liabilities  of Capitan  will be
recorded on the Company's books at their  historical cost, due to common control
of the two companies by the principal officer/shareholder.

         The Company's  valuation of the  discounted  present value of Capitan's
revenue interests in the Company's gas wells,  based upon the estimates included
in the Company's  independent  petroleum engineer's report, and in the Company's
waste disposal well is in excess of $1,000,000.

CAPITAL RESOURCES AND LIQUIDITY

         FINANCIAL POSITION

         At  December  31,  1997,  the  Company's  total  assets   decreased  by
approximately  $553,618  over  December  31,  1996,  primarily  as a result of a
decrease in current  assets.  At December  31,  1997,  the Company had a working
capital  deficit  of  $980,052  as  compared  to a working  capital  surplus  of
$1,375,152 at December 31, 1996. In 1997 and prior years, the net cash flow from
the  properties  of the  Company  has  been  sufficient  to fund  its  costs  of
operations  but  insufficient  to fund  both such  costs and its debt  servicing
requirements.

         On January 30, 1998, the Company signed an extension agreement with the
bank that  extended  the due date of the note to June 30,  1998,  or December 1,
1998 if the Company  receives certain  investment  capital by June 30, 1998. The
extension  agreement  requires the Company to make  monthly  payments of $10,000
starting  February 1, 1998 through May 1, 1998 and a lump sum principal  paydown
of 30% of the net investment  proceeds  received by the Company from any capital
financing.  Unless the entire  obligation  becomes  due and  payable on June 30,
1998, the remaining  principal balance is to be repaid in six equal installments
starting  July 1, 1998.  As  compensation  for the  extension of this note,  the
Company issued 25,000 shares of the Company's  common stock to the owners of the
collateral.  On January  30,  1998,  the date of the  extension  agreement,  the
Company's  stock had a market price of $1 per share valuing the 25,000 shares at
a cost of $25,000. The Company is currently delinquent on the principal payments
and accrued interest on this loan.

         The Company's primary sources of liquidity and capital resources in the
near term will consist of the working capital on hand and the funds derived from
its oil and gas production and water disposal operations. The Company intends to
sell all of its  properties,  excluding the Oxnard Field (which  consists of the
Vaca Tar Sands and waste disposal operations), and invest the proceeds from such
sales in development of the Vaca and disposal operations, and in debt reduction.
These  activities are for the purpose of increasing  production and revenues and
decreasing  costs.  Capital resources will be augmented by any such funds as may
be  derived  from the sale of equity in the  Company  and  transfer  of  partial
interests in its properties in exchange for development  capital.  The Company's
net  revenues  from oil,  gas, and disposal  sales in excess of  production  and
operating   expenses   during  1997  and  1996  were   $403,901  and   $241,711,
respectively.


<PAGE>

         Cash used in  operations  for the year ended  December  31,  1997,  was
$542,538,  compared  to cash used in  operations  of  $325,632  for  1996.  This
increase in cash used in operations was primarily a result of decreased revenues
resulting from the circumstances set forth above in this Discussion.

         During  1997,  Geo  sought  long-term  equity  financing.  The  Company
attempted to sell shares of its common stock and warrants in private  offerings,
which would enable the Company to eliminate its working  capital  deficiency and
reduce its debt and interest  obligations.  Such plan is continuing in 1998. The
farm-out agreement with Saba Petroleum will cause the drilling of a large number
of wells  on  Geo's  properties  if the  initial  wells  are  successful.  These
activities  are expected to increase the revenues of the Company.  However,  the
Company can give no assurance that its goals will be achieved.

         SOURCES OF CAPITAL RESOURCES

         On January 30, 1998, the Company signed an extension agreement with the
bank that  extended  the due date of the note to June 30,  1998,  or December 1,
1998 if the Company  receives certain  investment  capital by June 30, 1998. The
extension  agreement  requires the Company to make  monthly  payments of $10,000
starting  February 1, 1998 through May 1, 1998 and a lump sum principal  paydown
of 30% of the net investment  proceeds  received by the Company from any capital
financing.  Unless the entire  obligation  becomes  due and  payable on June 30,
1998, the remaining  principal balance is to be repaid in six equal installments
starting  July 1, 1998.  As  compensation  for the  extension of this note,  the
Company issued 25,000 shares of the Company's  common stock to the owners of the
collateral.  On January  30,  1998,  the date of the  extension  agreement,  the
Company's  stock had a market price of $1 per share valuing the 25,000 shares at
a cost of $25,000. The Company is currently delinquent on the principal payments
and  accrued  interest  on this loan.  This  facility  is secured by  collateral
pledged by minority shareholders of the Company and is not secured by any of the
assets of the Company.  However,  the collateral itself is secured by a recorded
deed of trust on 33% of the Company's  interest in its Vaca Tar Sands  property.
The sum of $750,000  from the proceeds of the equity  offering in December  1996
was used to pay down the loan to $710,000.

         The Company's cash used in investing activities, primarily additions to
its oil and gas  properties,  was $1,519,159 in 1997 and $270,565 in 1996.  This
was  financed  in 1997 by common  stock sold in private  placements  in December
1996,  by cash  from  operations,  and by the  proceeds  from  the  issuance  of
additional notes payable.

         Net cash provided by financing  activities amounted to $251,264 in 1997
and  $2,724,458  in 1996.  This cash was  primarily  the net  proceeds  from the
issuance of notes payable in 1997.

         TRENDS

         The Company  expects  that it will be able to increase  its revenues by
investing a portion of the net proceeds from the sale of its non-Vaca properties
in the development of Vaca using SAGD technology, and in the expansion of Vaca's
industrial waste disposal operations.  Due to the expected simplification of its
asset management,  the Company  anticipates that its general and  administrative
expenses


<PAGE>

will  measurably  decrease  through the retirement of personnel and reduction of
its administrative offices.  However, the Company can give no assurance that its
goals will be achieved.

         Geo  anticipates  that  there  will be a gradual  strengthening  in the
prices for both its oil and gas production,  but that cyclical swings in pricing
will  likely  occur.  The  Company  will be subject to  variations  in cash flow
depending  upon  changes in prices paid for oil and gas.  Severe drops in prices
would strain the Company's ability to conduct remedial work using its revenues.

         CAPITAL BUDGET

         During  1998,  the Company  will utilize the net proceeds of its equity
offerings and asset sales, after payment of a portion of its debt and
accounts payable,  primarily for the development of the Vaca Tar Sands and waste
disposal  operations.  However, the Company can give no assurance that its goals
will be achieved. The budget for 1998 is $650,000.

         YEAR 2000

         The Company's  accounting  software and other  applications used in its
operations were purchased from outside vendors. It is management's understanding
that these applications are Year 2000 compliant. As a result,  management of the
Company does not believe that the Year 2000 will have an impact on its financial
statements or on its operations.

INFLATION

     In recent years inflation has not had a significant  impact on the Company,
its operations or financial condition.



<PAGE>


ITEM 7. FINANCIAL STATEMENTS

     The following  financial  statements and supplementary data for the Company
are included as part of this form 10-KSB:



<PAGE>







Item 7. Financial Statements

     (a)   1. Index to Financial Statements

     The following Financial Statements are included herein:

                                                                            Page
                                                                          Number

Report of Ernst & Young LLP, Independent Auditors............................F-1

Balance Sheets at December 31, 1997 and 1996.................................F-2

Statements of Operations
   for the years ended December 31, 1997 and 1996............................F-4

Statements of Stockholders' Equity
   for the years ended December 31, 1997 and 1996............................F-5

Statements of Cash Flows
   for the years ended December 31, 1997 and 1996............................F-6

Notes to Financial Statements................................................F-8



<PAGE>


                         Report of Independent Auditors

Stockholders and Board of Directors
Geo Petroleum, Inc.

We have audited the  accompanying  balance sheets of Geo  Petroleum,  Inc. as of
December  31,  1997  and  1996,  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 audits 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 Geo Petroleum, Inc. at December
31, 1997 and 1996,  and the results of its operations and its cash flows for the
years then ended in conformity with generally accepted accounting principles.

The  accompanying  financial  statements  have been  prepared  assuming that the
Company  will  continue  as a  going  concern.  As  discussed  in  Note 1 to the
financial statements,  the Company had incurred recurring losses from operations
through  December 31, 1997, and had an accumulated  deficit and negative working
capital at December 31, 1997. In addition,  all of the Company's  debt is due in
1998. These conditions raise  substantial doubt about its ability to continue as
a going concern.  Management's plans concerning these matters are also described
in Note 1. The financial  statements do not include any  adjustments  that might
result from the outcome of this uncertainty.



Los Angeles, California
May 15, 1998



                                       F-1
<PAGE>


<TABLE>
                                           Geo Petroleum, Inc.

                                              Balance Sheets

<CAPTION>
                                                                          December 31
                                                                      1997             1996
                                                                  ------------------------------               
<S>                                                               <C>               <C>
Assets
Current assets:
   Cash and cash equivalents (includes restricted cash of
     $160,000 in  1997 and $100,000 in 1996)                      $   418,393       $ 2,228,826
   Accounts receivable:
     Accrued oil and gas revenues (net of allowance for
       doubtful accounts of $6,942 in 1997 and none in 1996)           53,204           151,586
     Joint interest and other (net of allowance for doubtful
       accounts of $48,835 in 1997 and none in 1996)                   69,809           228,131
   Prepaid expenses and other, net                                    127,718            52,876
                                                                  -----------------------------
Total current assets                                                  669,124         2,661,419


Due from Capitan Resources, Inc. (net of valuation
  allowance of $500,000 in 1997 and none in 1996)                     213,545           191,230


Property and equipment:
   Oil and gas properties                                           6,342,986         4,927,176
   Office furniture and equipment                                     155,338            51,989
                                                                  -----------------------------
                                                                    6,498,324         4,979,165
   Accumulated depletion and depreciation                          (1,201,602)       (1,098,805)
                                                                  -----------------------------
                                                                    5,296,722         3,880,360

                                                                  -----------------------------
Total assets                                                      $ 6,179,391       $ 6,733,009
                                                                  =============================
</TABLE>


                                      F-2
<PAGE>

<TABLE>
<CAPTION>
                                                                     December 31
                                                                1997              1996
                                                           -----------------------------
<S>                                                        <C>               <C>
Liabilities and stockholders' equity
Current liabilities:
   Accounts payable:
     Accrued royalties                                     $   361,326       $   431,388
     Trade and other                                           258,193           396,110
   Dividends payable                                              --              14,104
   Accrued expenses                                            139,504           119,643
   Current portion of bank notes payable                       622,500           180,000
   Current portion of capitalized lease obligation               4,583              --
   Notes payable to officers                                   240,000              --
   Other notes payable                                          23,070           145,022
                                                           -----------------------------
Total current liabilities                                    1,649,176         1,286,267

Long-term portion of bank note payable                            --             530,000
Capitalized lease obligation                                    13,747              --
10% convertible debentures                                      39,400              --

Redeemable  convertible  preferred stock,  $1,000 par
  value;  authorized 100,000 shares;  issued and
  outstanding  101.29 shares at December 31, 1996
  (none at December 31, 1997)                                     --             101,289

Stockholders' equity:
  Common  stock,  no  par  value;  authorized  50,000,000
    shares;  issued  and outstanding  7,900,432 and
    7,603,324  shares at December 31, 1997 and 1996,
    respectively                                             7,049,399         6,615,634
   Accumulated deficit                                      (2,572,331)       (1,800,181)
                                                           -----------------------------
Total stockholders' equity                                   4,477,068         4,815,453
                                                           -----------------------------
Total liabilities and stockholders' equity                 $ 6,179,391       $ 6,733,009
                                                           =============================
<FN>
See accompanying notes.
</FN>
</TABLE>


                                      F-3
<PAGE>

<TABLE>
                                           Geo Petroleum, Inc.

                                         Statements of Operations

<CAPTION>
                                                                         Year ended December 31
                                                                         1997              1996
                                                               ------------------------------------
<S>                                                            <C>                  <C>
Revenues:
   Oil and gas sales                                           $        662,874     $    823,695
   Waste disposal services (from related party)                         437,675           93,308
   Other revenue                                                        162,170           82,735
   Interest income                                                       37,040            6,208
                                                               ------------------------------------
                                                                      1,299,759        1,005,946

Expenses:
   Lease operating expenses                                             696,648          675,292
   Depletion and depreciation                                           102,797           88,596
   Amortization of deferred loan costs                                   43,063           34,929
   General and administrative                                           580,866          277,107
   Valuation allowance on receivable from related party                 500,000                -
   Interest expense                                                     144,791          360,581
                                                               ------------------------------------
                                                                      2,068,165        1,436,505
                                                               ------------------------------------
Loss before income taxes                                               (768,406)        (430,559)
Provision for income taxes                                                   --               --
                                                               ------------------------------------
Net loss                                                               (768,406)        (430,559)
Preferred stock dividends                                                (3,744)        (130,831)
                                                               ------------------------------------
Net loss applicable to common stock                            $       (772,150)    $   (561,390)
                                                               ====================================

Basic and diluted net loss per share of common stock           $         (0.10)     $      (0.11)
                                                               ====================================
<FN>
See accompanying notes.
</FN>
</TABLE>


                                      F-4
<PAGE>
<TABLE>
                                           Geo Petroleum, Inc.

                                    Statements of Stockholders' Equity

<CAPTION>
                                            Number of
                                             Common
                                             Shares            Common         Accumulated
                                          Outstanding           Stock           Deficit           Total
                                        --------------------------------------------------------------------
<S>                                           <C>          <C>             <C>              <C>  
Balance at December 31, 1995                  4,477,913    $  2,157,702    $  (1,238,791)   $     918,911
   Net loss                                          --              --         (430,559)        (430,559)
   Issuances of common stock:
     Sold in private placements, net
       of related costs                       2,320,506       3,779,790               --        3,779,790
     Conversion of redeemable
       convertible preferred stock
       and related dividends payable            156,749         391,872               --          391,872
     Exchange of certain notes
       payable and related accrued
       interest                                  74,570         186,428               --          186,428
     Payment for services                        76,040          79,842               --           79,842
     Acquisition of Drake Investment
       Corp.                                    497,546          20,000               --           20,000
   Preferred stock dividends                         --              --         (130,831)        (130,831)
                                        --------------------------------------------------------------------
Balance at December 31, 1996                  7,603,324       6,615,634       (1,800,181)       4,815,453
   Net loss                                          --              --         (768,406)        (768,406)
   Issuances of common stock:
     Sold in private placements, net
       of related costs                         124,000          86,709               --           86,709
     Conversion of redeemable
       convertible preferred stock               36,473          91,183               --           91,183
     Exchange of certain notes
       payable and related accrued
       interest                                  43,558         102,428               --          102,428
     Payment for services                        67,400         151,645               --          151,645
     Adjustment for number of shares
       to be issued for prior year's
       reverse stock split                       25,077              --               --               --
     Warrants exercised                             600           1,800               --            1,800
   Preferred stock dividends                         --              --           (3,744)          (3,744)
                                        --------------------------------------------------------------------
Balance at December 31, 1997                  7,900,432    $  7,049,399    $  (2,572,331)   $   4,477,068
                                        ====================================================================
<FN>
See accompanying notes.
</FN>
</TABLE>


                                                F-5
<PAGE>



<TABLE>
                                           Geo Petroleum, Inc.

                                         Statements of Cash Flows

<CAPTION>
                                                                                Year ended December 31
                                                                                 1997             1996
                                                                       ------------------------------------
<S>                                                                    <C>                  <C>
Operating activities
Net loss                                                               $       (768,406)    $   (430,559)
Adjustments to reconcile net loss to net cash used in
  operating activities:
     Depletion and depreciation                                                 102,797           88,596
     Amortization of deferred loan costs                                         43,063           34,929
     Payment in common stock for services                                       151,645           79,842
     Changes in operating assets and liabilities:
       Accounts receivable                                                      256,702         (174,069)
       Due from Capitan Resources, Inc., net                                    (22,315)         (35,544)
       Prepaid expenses and other                                              (117,905)            (463)
       Accounts payable                                                        (207,980)          99,814
       Accrued expenses                                                          19,861           11,822
                                                                       ------------------------------------
Net cash used in operating activities                                          (542,538)        (325,632)

Investing activities
Acquisition of Drake Investment Corp.                                                 -           20,000
Additions to property and equipment                                          (1,610,159)        (396,565)
Disposition of property                                                          91,000          106,000
                                                                       ------------------------------------
Net cash used in investing activities                                        (1,519,159)        (270,565)

Financing activities
Proceeds from notes payable                                                     385,078          171,246
Payments on notes payable                                                      (265,908)      (1,075,178)
Payments in common stock for interest                                            72,037           43,565
Common stock sold in private placements                                          86,709        3,779,790
Preferred stock sold                                                                  -           23,500
Dividends paid                                                                     (750)         (72,523)
Preferred stock redeemed                                                        (27,702)        (145,942)
Warrants exercised                                                                1,800                -
                                                                       ------------------------------------
Net cash provided by financing activities                                       251,264        2,724,458
                                                                       ------------------------------------
Net (decrease) increase in cash and cash equivalents                         (1,810,433)       2,128,261

Cash and cash equivalents at beginning of year                                2,228,826          100,565
                                                                       ------------------------------------
Cash and cash equivalents at end of year                               $        418,393     $  2,228,826
                                                                       ====================================
</TABLE>

                                      F-6
<PAGE>




                               Geo Petroleum, Inc.

                      Statements of Cash Flows (continued)


                                                       Year ended December 31
                                                        1997            1996
                                                     ---------------------------

Supplemental disclosure of cash flow information
Cash paid during the year for interest               $ 104,426       $ 308,261
                                                     ===========================
Cash paid during the year for income taxes           $     --        $     810
                                                     ===========================

Supplemental  disclosure of noncash  investing and financing  activities

During  1996,  the  Company  issued  66.25  shares of the  Company's  redeemable
convertible  preferred  stock in exchange for the  retirement  of certain  notes
payable aggregating $66,250.  Additionally,  the Company issued 74,570 shares of
the  Company's  common stock in exchange  for the  retirement  of certain  notes
payable and related accrued interest  aggregating  $186,428.  The Company issued
156,749  shares of the Company's  stock in exchange for the retirement of 347.67
shares of the  Company's  redeemable  convertible  preferred  stock and  related
dividends payable aggregating  $391,872.  Also, the Company issued 51,040 shares
of common stock to the holders of the collateral for the note payable to bank as
compensation  for extending the  availability  of the collateral for the note to
January 1, 1998.  Also,  the Company  issued  25,000  shares of common stock for
legal services that were performed in 1996.

During 1997, the Company  issued 43,558 shares of the Company's  common stock in
exchange  for the  retirement  of certain  notes  payable  and  related  accrued
interest aggregating $102,428. The Company issued 36,473 shares of the Company's
stock in exchange for the retirement of 91.18 shares of the Company's redeemable
convertible  preferred stock and related dividends payable aggregating  $91,183.
Also,  the Company  issued  67,400  shares of common stock to third  parties for
services that were performed in 1997.

See accompanying notes.




                                      F-7
<PAGE>




                               Geo Petroleum, Inc.

                          Notes to Financial Statements

                                December 31, 1997


1. Organization and Summary of Significant Accounting Policies

Organization

Geo Petroleum,  Inc. (the Company) is an oil and gas production  company founded
in 1986 and incorporated in the state of California.  The Company engages in the
development,  production  and  management of oil and gas  properties  located in
California.  A well on one of the  Company's  oil  properties  is used for waste
disposal  services.  These operations are conducted by a related party (see Note
5) and the Company has a 75% revenue interest in such operations.

Basis of Presentation

The  accompanying  financial  statements  have been prepared on a  going-concern
basis,  which  contemplates  the  realization of assets and the  satisfaction of
liabilities  in the  normal  course  of  business.  As  shown  in the  financial
statements,  as of December 31, 1997, the Company's  accumulated deficit totaled
$2,572,331 and current liabilities exceeded current assets by $980,052,  and the
Company is in arrears on  payments  due on its note  payable to the bank.  These
factors, among others,  indicate that the Company may be unable to continue as a
going concern for a reasonable period of time.

The Company's  continuation  as a going concern is dependent upon its ability to
generate sufficient cash flow to meet its current obligations on a timely basis,
to obtain additional financing,  and ultimately to obtain successful operations.
Management  is  continuing  its efforts to obtain  additional  funds so that the
Company  can  meet its  obligations  and  sustain  operations.  These  potential
alternatives include, among other things, a private placement of debt or equity,
extending  or  refinancing  the  bank  loan  using  oil  and gas  properties  as
collateral and/or the sale of oil and gas properties.  There can be no assurance
that  any of  these  potential  alternatives  will  materialize.  The  financial
statements do not include any adjustments  that might result from the outcome of
this uncertainty.

The Company has  significant  transactions  with  related  parties as more fully
described in Notes 4, 5 and 10.

Common Stock Split

On  April  30,  1996,  the  Company's  common  stock  was  split  at a  rate  of
2.5505-for-1  in  accordance  with  a  resolution  of  the  Company's  Board  of
Directors.  All  references  to the number of common stock  shares  contained in
these financial statements have been adjusted to reflect the stock split.


                                      F-8
<PAGE>


1. Organization and Summary of Significant Accounting Policies (continued)

Cash and Cash Equivalents

Cash equivalents include certificates of deposit with original maturity dates of
less than three months. The Company maintains a $100,000  certificate of deposit
for state of California authorization purposes to perform additional oil and gas
well recompletions.  These funds are subject to certain withdrawal  restrictions
until  completion of the work.  The Company also has $60,000 in restricted  cash
held in government bonds,  $50,000 with the city of Los Angeles and $10,000 with
Ventura  County,  for  the  purposes  of  paying  for any  future  environmental
liabilities that could arise.

Deferred Charge

The deferred charge consists of unamortized  loan costs.  Deferred loan costs of
$77,992 were incurred in 1996 and were  amortized over the term of the Company's
note payable to bank due June 30, 1998. Related amortization expense was $43,063
and $34,929 in 1997 and 1996, respectively.

Investment in Partnership

Included in oil and gas  properties is an  investment  in a general  partnership
that  was  created  in  1991  to  produce  oil at a well  located  on one of the
Company's oil and gas  properties.  The Company is the managing  partner in this
general  partnership,  and this  investment  is accounted for under the pro rata
consolidation method.

Property and Equipment

The  Company  follows  the  full-cost  method  of  accounting  for  oil  and gas
properties. Accordingly, all costs associated with the acquisition,  exploration
and development of oil and gas reserves are  capitalized as incurred.  The costs
of oil and gas properties are  accumulated in a cost center and are subject to a
cost  center  ceiling  which  such  costs do not  exceed.  The  Company  has not
capitalized any of its internal costs in oil and gas properties.

All capitalized costs of oil and gas properties,  including the estimated future
costs to develop proved  reserves,  are depleted over the estimated useful lives
of the  properties by application  of the  unit-of-production  method using only
proved oil and gas reserves,



<PAGE>

                               Geo Petroleum, Inc.

                          Notes to Financial Statements

                                December 31, 1997


1. Organization and Summary of Significant Accounting Policies (continued)

Property and Equipment (continued)

excluding future estimated costs and related proved  undeveloped oil reserves at
the Vaca  Tar  Sands  property,  which  relate  to a major  development  project
involving an enhanced  recovery  process as more fully discussed in Note 11. The
evaluations  of the oil and gas reserves were  prepared by Sherwin D. Yoelin,  a
petroleum engineer.  Depletion expense recorded for the years ended December 31,
1997 and 1996, was $88,157 and $83,417, respectively.

Substantially all additions to oil and gas properties in 1997 and 1996 relate to
recompletions of existing producing or previously  producing wells.  During 1997
and 1996, the Company received proceeds of $91,000 and $166,000 from the sale of
certain oil and gas interests which were credited to property and equipment.

The Company's oil and gas  producing  properties  are estimated by the Company's
independent petroleum engineer to have remaining producing lives in excess of 17
years. The Company's policy for accruing site restoration and environmental exit
costs related to its oil and gas production is that such costs are accounted for
in the Company's calculation of depletion expense.

Depreciation   of  office   equipment  and  furniture  is  computed   using  the
straight-line  method, with depreciation rates based upon their estimated useful
lives,  which  range  between  five and seven  years.  Depreciation  expense was
$14,340 and $5,179 for the years ended December 31, 1997 and 1996, respectively.

Revenue

Revenue from oil and gas sales is recognized upon delivery of the oil and gas to
the  Company's  customer.  Such revenue is recorded net of royalties and certain
other  costs  that the  Company  incurs  to bring  the oil and gas into  salable
condition.

The Company had one significant  customer for its oil and gas production in 1997
and 1996  that  accounted  for  approximately  88% and 82% of gross  oil and gas
sales,  respectively.  All of the Company's revenue from waste disposal services
arises from a related  party (see Note 5) which  operates  the  Company's  waste
disposal  well. The Company  recognizes its share of waste disposal  revenues as
the services are provided by Capitan.


                                                                              10
<PAGE>

                               Geo Petroleum, Inc.

                          Notes to Financial Statements

                                December 31, 1997


1. Organization and Summary of Significant Accounting Policies (continued)

Earnings (Loss) Per Common Share

The following table sets forth the computation of basic and diluted earnings per
share adjusted for the stock split described above:

                                                        1997         1996
                                                   ---------------------------

Numerator:
   Net loss                                        $ (768,406)   $ (430,559)
   Preferred stock dividends                           (3,744)     (130,831)
                                                   ---------------------------
   Numerator for basic and diluted loss
     per common share                                (772,150)     (561,390)

Denominator:
   Denominator for basic and diluted loss
     per common share-weighted-average
     shares                                         7,732,989     4,976,764
                                                   ---------------------------
Basic and diluted loss per common shares           $    (0.10)   $    (0.11)
                                                   ===========================

The following  additional  potential common shares were outstanding  during 1997
and 1996,  but were not  included in the  computation  of diluted loss per share
because such assumptions are antidilutive:

      At  December  31,  1996,  $101,289  of  convertible  preferred  stock  was
      outstanding,  convertible  into shares of the  Company's  common  stock at
      $2.50 per share, or 40,516 shares. In addition,  at the time the preferred
      stock is converted, the shareholder also receives common stock warrants to
      purchase  shares  totaling  one-half of the number of common  stock shares
      converted,   or  20,258  shares.  At  December  31,  1997,  there  was  no
      convertible preferred stock outstanding.


                                                                              11
<PAGE>

                               Geo Petroleum, Inc.

                          Notes to Financial Statements

                                December 31, 1997


1. Organization and Summary of Significant Accounting Policies (continued)

Earnings (Loss) Per Common Share (continued)

      At December 31, 1996,  $145,022 of notes payable to investors  convertible
      into  shares of the  Company's  common  stock at $2.50 per share or 58,009
      shares were outstanding. In addition, at the time the notes are converted,
      the  shareholder  also receives  common stock warrants to purchase  shares
      totaling one-half of the number of common stock shares converted or 29,005
      shares.  At December 31, 1997, all of these notes had either been redeemed
      or converted.

      At December 31, 1997, $39,400 of convertible  subordinated debentures were
      outstanding.  These  debentures are convertible  into the Company's common
      stock  at a 10%  discount  of the  closing  price  at the  date  of  these
      debentures and mature in July 2000.

      Options to purchase  500,000 shares of the Company's common stock at $2.07
      per share and 125,000  shares of the Company's  common stock at $4.125 per
      share were outstanding during 1997.

      At December 31, 1997 and 1996, the Company had an aggregate of 997,361 and
      957,946  warrants  outstanding,  respectively,  to purchase  shares of its
      common stock at $3.00 per share which expire at various  dates during 1999
      through 2001.

Subsequent to December 31, 1997, the Company has issued a total of 66,763 common
stock  shares  as  compensation  to its  employees,  officers,  consultants  and
vendors.

Use of Estimates in the Preparation of Financial Statements

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

                                                                              12
<PAGE>

                               Geo Petroleum, Inc.

                          Notes to Financial Statements

                                December 31, 1997


2. Acquisition of Drake Investment Corp.

On April 9, 1996, the Company  acquired all of the  outstanding  common stock of
Drake Investment  Corp.  (Drake) in exchange for 497,546 shares of the Company's
common stock.  The primary  purpose of the acquisition was to expand the base of
the Company's stockholders.  Drake's net assets were comprised primarily of cash
and cash  equivalents.  This  transaction  was  accounted  for as a purchase  in
accordance with Accounting Principles Bulletin No. 16, "Business  Combinations,"
and the  transaction  was  recorded  at the fair value,  $20,000,  of the assets
received for the Company's common stock.

3. Farm-Out of Vaca Tar Sands Property

On December 23, 1996, the Company entered into an agreement with Saba Petroleum,
Inc. (Saba) to farm-out  two-thirds  (2/3) of the Company's rights and interests
in the Vaca Tar Sands  property  in  exchange  for Saba to  expend a minimum  of
$10,000,000 in operating and developing the property over a two-year period from
the date of the  agreement.  Saba had the right to receive all revenues from the
properties until its costs are recouped.  Subsequent thereto, the Company was to
participate  as to its  one-third  (1/3)  interest  in the  property  and  shall
co-operate the property with Saba.

If Saba did not expend the agreed sum of $10,000,000 within the two-year term or
ceased  operations  at the  property  for a  period  of 90 days  after  assuming
operations,  Saba was to re-assign  all interests in the property to the Company
except for any property interests acquired by Saba and spacing units, as defined
in the agreement, around each well Saba wishes to retain.

On November 1, 1997,  the  contract  agreement  with Saba was  renegotiated  and
modified  so that the  Company's  interest  would  increase  from  one-third  to
two-thirds  as  Saba  did  not  make  the  required   operating  and  developing
expenditures.  The  modification  requires  Saba  to  pay  for  one-half  of the
operating and developing costs until they expend $5,000,000. At that point, Saba
will have earned a one-third  interest  and the Company will retain a two-thirds
interest  in the  property  and these two  parties  will  share in the costs and
revenues based on their respective interests.



                                                                              13
<PAGE>


                               Geo Petroleum, Inc.

                          Notes to Financial Statements

                                December 31, 1997

4. Notes Payable

Notes payable consist of the following:

                                                          December 31
                                                      1997             1996
                                                   -----------------------------

Note payable to bank                               $ 622,500         $ 710,000
Notes payable to investors                            10,000           145,022
Notes payable to officers                            240,000                --
10% convertible debentures                            39,400                --
Automobile loan                                       13,070                --
                                                   -----------------------------
                                                     924,970           855,022
Less current portion                                 885,570           325,022
                                                   -----------------------------
Total long-term debt                               $  39,400          $ 530,000
                                                   =============================

Note Payable to Bank

In 1990,  the  Company  issued  273,669  shares  of common  stock,  an option to
purchase  180,660  additional  shares of  common  stock at $2.35 per share and a
recorded  deed of trust on 20% of the  Company's  interest in its Vaca Tar Sands
property  to  certain  parties  in  exchange  for those  parties  providing  the
collateral, 35,000 shares of Union Pacific Corp. common stock, for the Company's
note payable to a bank.  The  consideration  issued was valued at $300,000,  its
estimated  fair market value,  and was  amortized as additional  loan costs over
five years. The 35,000 shares of Union Pacific Corp.  common stock are held in a

trust and had an approximate  value of $2,191,875 and $2,104,375 at December 31,
1997 and 1996,  respectively.  In the event of default on the bank note payable,
the parties  providing the collateral may take steps to recover from the Company
the value of any collateral taken by the bank. The collateral agreements and the
stock purchase option expired on September 11, 1995.  During 1997, in connection
with the  extension of the maturity  date of the bank note payable to January 1,
1998, the collateral  agreement was extended to January 1, 1998. As compensation
for this  extension,  the Company  issued 51,040 shares of the Company's  common
stock to the owners of the collateral.  The parties agreed that the stock issued
had a value of $53,592 or $1.05 per share.  During 1997,  the  recorded  deed of
trust on the  Company's  interest  in its Vaca Tar  Sands  property  to  certain
parties in exchange for those parties  providing the  collateral  was changed to
33% of the Company's interest.


                                                                              14
<PAGE>

                               Geo Petroleum, Inc.

                          Notes to Financial Statements

                                December 31, 1997


4. Notes Payable (continued)

Note Payable to Bank (continued)

The note payable to bank bears interest at prime plus 2.0%. At December 31, 1997
and 1996, the prime rate was 8.50% and 8.25%,  respectively.  Interest  payments
are due  monthly.  During 1997 and 1996,  the bank  extended the maturity of the
note several times. On October 11, 1996,  retroactive to June 15, 1996, the bank
amended  certain  terms and extended the maturity date of the note from June 15,
1996 to January 1, 1998,  including a $750,000 principal payment due January 15,
1997, and subsequent  principal  payments in the amount of $20,000 per month due
on the 15th of each month  beginning  April 15, 1997. In October 1997,  the bank
amended the monthly payments from $20,000 per month to $7,500 per month.

On January 30, 1998,  the Company  signed an extension  agreement  with the bank
that  extended the due date of the note to either June 30, 1998,  or December 1,
1998, if the Company receives certain  investment  capital by June 30, 1998. The
extension  agreement  requires the Company to make  monthly  payments of $10,000
starting February 1, 1998 through May 1, 1998, and a lump-sum  principal paydown
of 30% of the net investment  proceeds  received by the Company from any capital
financing.  Unless the entire  obligation  becomes  due and  payable on June 30,
1998, the remaining  principal balance is to be repaid in six equal installments
starting  July 1, 1998.  As  compensation  for the  extension of this note,  the
Company issued 25,000 shares of the Company's  common stock to the owners of the
collateral.  On January  30,  1998,  the date of the  extension  agreement,  the
Company's  stock had a market price of $1 per share valuing the 25,000 shares at
a cost of $25,000. The Company is currently delinquent on the principal payments
and accrued interest on this loan.

During 1998,  the bank also  released  27,500  shares of the Union Pacific Corp.
common stock used as collateral  reducing the  collateral  to 7,500  shares.  In
addition to the 7,500 shares of Union  Pacific Corp.  common stock,  the loan is
also secured by 7,642 shares of Union  Pacific  Resource  common stock which was
spun-off from Union Pacific Corp. and $328,260 in cumulative dividends earned on
these two stocks.

See Note 10 for additional unaudited  information related to the note payable to
bank.



                                                                              15
<PAGE>

                               Geo Petroleum, Inc.

                          Notes to Financial Statements

                                December 31, 1997


4. Notes Payable (continued)

Notes Payable to Investors

The  Company at  various  times has issued  notes  payable to various  investors
bearing an interest rate of 10% and a guaranteed oil and gas production  payment
equal to 20% of the  outstanding  principal  amount  per annum.  The  holders of
certain of the notes had extended the  maturities  of the notes to various dates
in 1997, and all of the notes were secured by interests in the Company's oil and
gas properties. During 1997 and 1996, $71,300 and $171,246, respectively, of new
notes payable to investors were issued, $179,181 and $325,178,  respectively, of
notes payable were repaid, $102,428 and $142,863, respectively, of notes payable
and accrued interest were exchanged for shares of the Company's common stock.

Officer Loans

During 1997, the Company borrowed  $240,000 from two of its officers.  A loan of
$50,000  from one of the  officers  bears  interest  at a rate of 8.25% with the
principal  and accrued  interest due on demand.  The Company  received the other
loan of  $190,000  from the other  officer  which  bears  interest  at a rate of
10.25%,  accrued interest due monthly  commencing January 1, 1998, and principal
and any unpaid interest due on or before July 1, 1998.

See Note 10 for additional unaudited information related to officer loans.

Convertible Debentures

During 1997, the Company issued 10% convertible subordinated debentures totaling
$39,400 to various  investors which are due in July 2000.  These  debentures are
convertible  into shares of the  Company's  common  stock  convertible  at a 10%
discount of the closing price at the date of these debentures.
Interest payments are due monthly.

5. Related Party Transactions

Capitan Resources, Inc.

The Company has certain  agreements with Capitan  Resources,  Inc.  (Capitan) to
sell gas  produced  from wells owned by the Company and to offer water  disposal
services on sites owned by the Company. The principal officer/shareholder of the
Company is also the



                                                                              16
<PAGE>


                               Geo Petroleum, Inc.

                          Notes to Financial Statements

                                December 31, 1997

5. Related Party Transactions (continued)

Capitan Resources, Inc. (continued)

principal  officer/shareholder of Capitan. Under the agreements,  the Company is
to receive 70% of Capitan's  gross  revenues from gas sales and 75% of Capitan's
gross revenues from waste  disposal  services.  The waste disposal  services are
operated by Capitan and the costs of gas  production  and of operating the waste
disposal services are borne by Capitan.

Accounts  receivable  due from Capitan for the years ended December 31, 1997 and
1996, is as follows:

                                                       Year ended December 31
                                                        1997          1996
                                                 ------------------------------

Balance at beginning of year                       $   191,230    $   155,686
Company's portion of Capitan's gross revenues          476,300        167,194
Other advances to Capitan                               96,015             --
Less payments received from Capitan                    (50,000)      (131,650)
                                                 ------------------------------
                                                       713,545        191,230
Less allowance for doubtful accounts                  (500,000)            --
                                                 ------------------------------
Balance at end of year                             $   213,545    $   191,230
                                                 ==============================

As of December 31, 1997,  Capitan does not have sufficient  liquidity to pay the
entire amounts due the Company in the foreseeable future. Although the Company's
management  believes that the fair market value of Capitan's  net assets,  which
consists  primarily of Capitan's revenue interests in the Company's  properties,
exceeds  amounts  owed to the  Company,  the  Company  has  recorded a valuation
allowance of $500,000  during the year ended  December  31, 1997,  to reduce the
carrying  value  of the  accounts  receivable  due  from  Capitan.  See  Note 10
(unaudited) for a description of planned  transaction with Capitan subsequent to
December 31, 1997.

Other

The  Company's  principal  officer/shareholder  previously  held  a  net  profit
interest  of 25% in the  East  Los  Angeles  and  Vaca  Tar  Sands  oil  and gas
properties.  In 1994,  the Company  acquired the 25% net profit  interest in the
East Los  Angeles  property  and 20% of the net profit  interest in the Vaca Tar
Sands  property  from the principal  officer/shareholder.  In exchange for these
interests, the Company issued 1,148,054 shares of common stock

                                                                              17
<PAGE>

                               Geo Petroleum, Inc.

                          Notes to Financial Statements

                                December 31, 1997

5. Related Party Transactions (continued)

Other (continued)

valued at $103,421,  which was the  approximate  cost of the  properties  to the
principal  officer/shareholder.  At the date of the  acquisition  in  1994,  the
principal  officer/shareholder  owed  the  Company  $31,516,  which  amount  was
forgiven as part of the purchase consideration.

In 1987, the Company acquired  certain  interests in oil and gas properties from
its  principal  officer/shareholder  in  exchange  for  2,125,587  shares of the
Company's common stock valued at $781,400, which was the approximate cost of the
properties to the principal officer/shareholder.

During  1996,  notes  payable  by the  Company to a  relative  of the  principal
officer/shareholder  totaling  $46,250 were  converted  into 46.25 shares of the
Company's redeemable  convertible  preferred stock aggregating $46,250 (see Note
6).

During  1997 and  1996,  notes  payable  by the  Company  to a  relative  of the
principal officer/shareholder totaling $12,014 and $121,850,  respectively, were
converted into 4,806 and 48,740 shares,  respectively,  of the Company's  common
stock aggregating $12,014 and $121,850, respectively (see Note 7). Additionally,
24,505 and 23,740 warrants, respectively, were issued to purchase a share of the
Company's  common stock at $3.00 per share which expire at various  dates during
1999 through 2001.

At December 31, 1997, the Company had notes payable and  convertible  debentures
to relatives of the principal officer/shareholder totaling $24,000.

6. Redeemable Convertible Preferred Stock

During 1994, the Company authorized 100,000 shares of preferred stock with a par
value of $1,000 per share.  The series of preferred  stock  issued,  carrying an
annual dividend of 30%, was callable by the Company at par at any time on notice
to the holder.  If the Company has not called the preferred stock for redemption
by January 1, 1997,  the holder may require the Company to redeem the  preferred
stock. As originally  issued,  the preferred  stock was convertible  into common
stock,  at the  option of the  holder,  at a price  equal to 80% of the price at
which the common stock may be sold in an initial


                                                                              18
<PAGE>

                               Geo Petroleum, Inc.

                          Notes to Financial Statements

                                December 31, 1997


6. Redeemable Convertible Preferred Stock (continued)

public  offering  of the  common  stock of the  Company.  During  the year ended
December 31,  1996,  the Company and the holders of the  preferred  stock agreed
that each share of the preferred stock could be converted into 400 shares of the
Company's  common  stock and 200  warrants to purchase a share of the  Company's
common stock at $3.00 per share which expire at various dates during 1999.

In January 1996, the Company  issued 23.5 shares of its  redeemable  convertible
preferred stock to two investors for cash totaling $23,500.

During 1996,  three holders of notes payable  totaling  $66,250  converted  such
notes into 66.25 shares of the Company's redeemable convertible preferred stock.

During 1997 and 1996,  91.18 and 347.69 shares,  respectively,  of the Company's
redeemable   convertible   preferred   stock  totaling   $91,183  and  $347,668,
respectively,  were converted into 36,473 and 139,067 shares,  respectively,  of
the  Company's  common stock and 14,717 and 69,534  warrants,  respectively,  to
purchase a share of the  Company's  common stock at $3.00 per share which expire
at various dates during 1999 through 2001.

During 1997 and 1996, accrued dividends on the Company's redeemable  convertible
preferred stock totaling $17,596 and $44,204, respectively,  were converted into
7,038 and 17,682 shares,  respectively,  of the Company's common stock and 3,519
and 8,841  warrants to purchase a share of the  Company's  common stock at $3.00
per share which expire at various dates during 1999 through 2001.

7. Common Stock

During 1996, the Company's Articles of Incorporation were amended to provide for
an authorized capital of fifty million shares of common stock.

In December 1996, the Company sold 522,000 shares of the Company's  common stock
attached with 522,000 warrants to purchase a share of the Company's common stock
at $3.00 per share,  which expire at various  dates  during 1999 and 2000,  at a
price  of  $2.50  per  share  for  cash  totaling  $1,305,000,   before  related
commissions, costs and expenses of $187,301.


                                                                              19
<PAGE>

                               Geo Petroleum, Inc.

                          Notes to Financial Statements

                                December 31, 1997

7. Common Stock (continued)

On December 31, 1996, the Company sold 1,764,000  shares of the Company's common
stock to  private  parties  at a price  of $1.50  per  share  for cash  totaling
$2,646,000  (see Note 3),  before  related  costs and expenses of $155,659.  The
Company sold 300,000 warrants at a price of $15,000, in connection with services
provided to the Company related to the sale of the stock.  Each warrant provides
for the purchase of a share of the Company's common stock at $3.00 per share and
expires on December 31, 1999.

At December 31, 1997 and 1996,  an  aggregate  of 997,361 and 957,946  warrants,
respectively,  to purchase a share of the  Company's  common  stock at $3.00 per
share which expire at various dates during 1999 through 2001 were outstanding.

8. Income Taxes

Deferred  income taxes result from temporary  differences in the  recognition of
revenues and expenses for financial  accounting and tax reporting purposes.  Net
deferred income taxes were composed of the following:

                                                             December 31
                                                          1997         1996
                                                      --------------------------

Deferred income tax asset - operating loss
   carryforwards                                      $ 2,000,000  $ 1,700,000
Deferred income tax liability - differences between
   book and tax basis of property                      (1,100,000)  (1,120,000)
Valuation allowance                                      (900,000)    (580,000)
                                                      --------------------------
Net deferred income taxes                             $        --  $        --
                                                      ==========================

As of December 31, 1997 and 1996,  the Company had estimated net operating  loss
carryforwards  available  in future  periods to reduce  income taxes that may be
payable at those dates.  For federal  income tax purposes,  net  operating  loss
carryforwards  amounted to approximately  $5,100,000 and $4,290,000 for 1997 and
1996,  respectively,  and expire during the years 2001 through  2009.  For state
income tax purposes,  net operating loss carryforwards amounted to approximately
$3,400,000 and $2,680,000 for 1997 and 1996, respectively, and expire during the
years 2004 through 2010. Due to the "change in



                                                                              20
<PAGE>

                               Geo Petroleum, Inc.

                          Notes to Financial Statements

                                December 31, 1997

8. Income Taxes (continued)

ownership"  provisions  of the  Tax  Reform  Act  of  1986,  utilization  of the
Company's  net  operating  loss  carryforwards  may be subject to a  substantial
limitation if a greater than 50% ownership change, as defined, occurs subsequent
to the  incurrence  of the losses.  The Company is delinquent in filing its 1995
and 1996 income tax returns.

9. Commitments and Contingencies

Future Minimum Rental Payments

Total rental expense incurred under all lease agreements was $78,368 and $43,598
for the years ended  December 31, 1997 and 1996,  respectively.  At December 31,
1997, the Company had the following future lease commitments:

    1998                                                       $   33,600
    1999                                                           33,600
    2000                                                           33,600
    2001                                                           33,600
    2002                                                            8,400
                                                              ------------
    Total                                                      $  142,800
                                                              ============

The Company is currently  delinquent  in paying their  1994/1995,  1995/1996 and
1996/1997 property taxes.

Litigation

The Company is  involved  in certain  legal  matters in the  ordinary  course of
business. In one particular case, an interlocutory  judgment was awarded against
the Company by the court hearing litigation in which the Company is a defendant.
The  judgment  requires  the  Company  to  incur  the  expense  of  clean up and
abandonment of two idle wells.  Additionally,  if the Company fails to do so the
courts may also award damages for these costs including  attorneys'  fees. These
costs  are not  possible  to  determine  at this  time,  but the  plaintiff  has
requested  damages of up to  $300,000.  The  Company is  considering  whether to
appeal the decision of the court.

See  Note 10 for  additional  unaudited  information  related  to the  Company's
litigation.


                                                                              21
<PAGE>

                               Geo Petroleum, Inc.

                          Notes to Financial Statements

                                December 31, 1997


10. Events Subsequent to December 31, 1997 (Unaudited)

Default in Notes Payable to Bank

As of August 3, 1998,  the Company  was in default of its note  payable to bank.
The bank  has not  exercised  its  rights  and  remedies  under  the  terms  and
conditions  of the  note.  Negotiations  between  the  Company  and the bank are
currently  ongoing.  Management  of the Company is  attempting to revise the due
date on the note to August 31, 1999; however,  there are no assurances that this
date will be achieved.

Extension of Officer Loan

The $190,000 loan from an officer due on or before July 1, 1998 was subsequently
extended to November 1, 1998.  No other  changes to the terms or  conditions  of
this officer loan have been made.

Litigation

During July 1998, the court hearing  litigation  issued a final judgment against
the  Company  requiring  it to clean up and  abandon  two idle  wells and to pay
$32,000 in damages to the plaintiff.  The Company plans to proceed with the well
clean up and  abandonment;  however,  it has filed an appeal with respect to the
damages awarded the plaintiff.

Shut-in of Certain Oil and Gas Production

During June 1998,  the Company  decided to shut-in its oil and gas production at
all of its  property  locations  except  for the Vaca Tar  Sands  property.  The
Company  plans to focus its resources on the  development  of the Vaca Tar Sands
property and other waste disposal projects.

Planned Merger with Capitan Resources, Inc.

The Company is planning  for the merger of Capitan (see Note 5) into the Company
by  September  30,  1998.  Capitan  is an entity  under  common  control  of the
principal  officer/shareholder  of the Company. The only compensation related to
the  transaction  would be the issuance of  approximately  70,000  shares of the
Company's  common  stock  to an  unrelated  third  party  in  exchange  for  the
cancellation  of their  overriding  net  profits  interest  in Capitan and their
$28,000 note due from Capitan. No other compensation is to



                                                                              22
<PAGE>

                               Geo Petroleum, Inc.

                          Notes to Financial Statements

                                December 31, 1997


10. Events Subsequent to December 31, 1997 (Unaudited) (continued)

Planned Merger in the Capitan Resources, Inc. (continued)

be paid to the  shareholders of Capitan.  If this  transaction is consummated as
planned, the assets and liabilities of Capitan will be recorded on the Company's
books at their historical cost.

The Company's  valuation of the  discounted  present value of Capitan's  revenue
interests in the Company's gas wells,  based upon the estimates  included in the
Company's  independent  petroleum  engineer's report, and in the Company's waste
disposal well is in excess of $1,000,000.

11. Quarterly Financial Information (Unaudited)
<TABLE>
As of December  31,  1997,  the Company has  recorded a valuation  allowance  of
$500,000  to reduce  the  carrying  value of the  accounts  receivable  due from
Capitan  (see Note 5). The  recording  of this  valuation  allowance  results in
certain quarterly  information  previously reported by the Company during fiscal
1997 under Form 10-QSB to be different. Such amounts are as follows:
<CAPTION>
                                                                Three Months ended March 31, 1997
                                                       -----------------------------------------------------
                                                         As Originally                         Restated
                                                           Reported         Adjustment          Amount
                                                       ------------------ ---------------- -----------------
<S>                                                    <C>                <C>              <C>
       Revenues                                        $       365,859    $            --  $       365,859
       Gross profit (loss)                                      90,452                 --           90,452
       Valuation allowance on receivable from
          related party                                             --            (99,000)         (99,000)
       Net income (loss)                                        24,302            (99,000)         (74,698)
       Net income (loss) applicable to common stock             24,302            (99,000)         (74,698)
                                                   
       Net income (loss) per share of common stock     $          0.00    $         (0.01)  $        (0.01)
                                                  


                                                                                                        23
</TABLE>

<PAGE>

                               Geo Petroleum, Inc.

                          Notes to Financial Statements

                                December 31, 1997
<TABLE>
11. Quarterly Financial Information (Unaudited) (continued)
<CAPTION>
                                                                Three Months ended June 30, 1997
                                                     -------------------------------------------------------
                                                       As Originally                           Restated
                                                          Reported          Adjustment          Amount
                                                     ------------------- ----------------- -----------------
<S>                                                    <C>                 <C>               <C>
       Revenues                                        $     342,213       $          --     $     342,213
       Gross profit (loss)                                   (55,337)                 --           (55,337)
       Valuation allowance on receivable from
          related party                                           --            (102,000)         (102,000)
       Net income (loss)                                     (56,389)           (102,000)         (158,389)
       Net income (loss) applicable to common stock          (56,389)           (102,000)         (158,389)
                                                   
       Net income (loss) per share of common stock     $       (0.01)      $       (0.01)    $       (0.02)
                                                  


                                                             Three Months ended September  30, 1997
                                                     -------------------------------------------------------
                                                       As Originally                           Restated
                                                          Reported          Adjustment          Amount
                                                     ------------------- ----------------- -----------------

       Revenues                                        $     571,533       $          --     $     571,533
       Gross profit (loss)                                    43,412                  --            43,412
       Valuation allowance on receivable from
          related party                                           --            (195,000)         (195,000)
       Net income (loss)                                     324,820            (195,000)          129,820
       Net income (loss) applicable to common stock          324,820            (195,000)          129,820
                                                   
       Net income (loss) per share of common stock     $        0.04       $       (0.02)    $        0.02
                                                  
</TABLE>

12. Year 2000 Issue (Unaudited)

The Company's  accounting software and other applications used in its operations
were purchased from outside vendors. It is management's understanding that these
applications  are Year 2000  compliant.  As a result,  management of the Company
does not  believe  that the Year  2000  will  have an  impact  on its  financial
statements or on its operations.


                                                                              24
<PAGE>

                               Geo Petroleum, Inc.

                          Notes to Financial Statements

                                December 31, 1997

13. Oil and Gas Operations (Unaudited)

At December 31, 1997, the Company had interests in oil and gas  properties  that
are  principally  located in Southern  California.  The Company  does not own or
lease any oil and gas properties outside the United States.

Costs Incurred in Oil and Gas Producing Activities

Costs incurred in oil and gas producing activities were as follows:

                                                  Year ended December 31
                                                   1997             1996
                                            ------------------------------------
                                                      (In Thousands)
                                                        (Unaudited)
Property acquisition costs:
   Proved properties                        $             --  $             --
Exploration costs                                         --                --
Development costs                                  1,041,393           412,974
                                            ------------------------------------
Total costs                                 $      1,041,393  $        412,974
                                            ====================================

Estimated Quantities of Proved Oil and Gas Reserves

Reserve  information  presented  herein is based upon  reports  prepared  by the
Company's  independent  petroleum  reservoir  engineer.  Reserve  estimates  are
inherently  imprecise and estimates of new  discoveries  are more imprecise than
those of producing  oil and gas  properties.  Accordingly,  these  estimates are
expected to change as future information becomes available.

Proved oil and gas reserves are the estimated  quantities of crude oil,  natural
gas and natural gas liquids which  geological and engineering  data  demonstrate
with  reasonable  certainty  to  be  recoverable  in  future  years  from  known
reservoirs under existing economic and operating conditions.

Proved developed oil and gas reserves are those expected to be recovered through
existing wells with existing equipment and operating methods.


                                                                              25
<PAGE>

                               Geo Petroleum, Inc.

                          Notes to Financial Statements

                                December 31, 1997

13. Oil and Gas Operations (Unaudited) (continued)
<TABLE>
Net  quantities of crude oil and natural gas for the Company as of the beginning
and the end of the  years  ended  December  31,  1997 and  1996,  as well as the
changes in proved reserves during such years, are set forth in the tables below:

Oil and Gas Reserve Data
<CAPTION>
                                                            Year ended December 31
                                                         1997                     1996
                                               --------------------------------------------------
                                                    Oil         Gas          Oil         Gas
                                                   Bbls         MCF         Bbls         MCF
                                               --------------------------------------------------
                                                                (In Thousands)
                                                                  (Unaudited)
<S>                                                 <C>          <C>        <C>          <C>
Proved developed and undeveloped
 reserves (excluding Vaca Tar
 Sands), net:
     Beginning of year                               3,804       5,827       3,200       5,531
     Revisions of previous estimates                  (786)        (58)        649         358
     Purchase of reserves in place                      --          --          --          --
     Production                                        (41)        (31)        (45)        (62)
                                               --------------------------------------------------
     End of year                                     2,977       5,738       3,804       5,827
                                               ==================================================

Proved developed non-producing 
  Vaca Tar Sands reserves, net:
    End of year                                        611          --         993          --
                                               ==================================================

Proved undeveloped Vaca Tar Sands
   reserves, net:
     End of year                                    26,091          --      29,566          --
                                               ==================================================
</TABLE>

The  decrease  in  reserves  during the year ended  December  31,  1997,  is due
primarily  to a  decrease  in  production  and the  decline in oil  prices.  The
increase in reserves  during the year ended  December 31, 1996, is due primarily
to the addition of proved undeveloped  reserves in the East Los  Angeles/Bandini
Fields.

With respect to the Vaca Tar Sands  property,  which contains  nearly all of the
Company's proven undeveloped reserves,  the Company in 1995 had obtained permits
for the drilling of 120 wells. Because of the approximately  $28,400,000 capital
expenditure required to


                                                                              26
<PAGE>

                               Geo Petroleum, Inc.

                          Notes to Financial Statements

                                December 31, 1997


13. Oil and Gas Operations (Unaudited) (continued)

Oil and Gas Reserve Data (continued)

develop the  property  fully,  management  decided to obtain a partner who could
provide the funds required to at least commence  development.  In December 1996,
the  Company  entered  into a farm-out  agreement  with Saba to provide at least
$10,000,000  for the operation and  development of the property,  for which Saba
would  earn a  two-thirds  interest  in the  property.  The  development  method
envisioned  by the  Company  provided  for  the  drilling  of  horizontal  wells
extending as much as 2,600 feet  horizontally.  Each well was to be twinned by a
parallel borehole above it into which steam will be injected  continuously.  The
heated, thinned oil was to flow from the lower borehole.

In 1997,  the farm-out  agreement  was modified  with Saba so that the Company's
interest increased from one-third to two-thirds.  The modification requires Saba
to pay for  one-half of the  operating  and  developing  costs until they expend
$5,000,000.  At that point,  Saba will have earned a one-third  interest and the
Company will retain a two-thirds  interest in the property and these two parties
will share in the costs and revenues based on their respective interests.

The cost allocated to the Vaca Tar Sands  undeveloped  reserves is insignificant
at December  31, 1997,  and the  estimated  volume of reserves  allocated to the
property has been  excluded  from the  calculation  of the  Company's  depletion
expense  through  December  31,  1997.  The costs  related to the Vaca Tar Sands
reserves,  including future development costs, will be included in the Company's
calculations of depletion expense when production of those reserves commences.

Standardized  Measure of  Discounted  Future Net Cash Flows  Relating  to Proved
Reserves

The following  tables set forth the computation of the  standardized  measure of
discounted  future net cash flows relating to the Company's  proved  reserves at
December  31,  1997 and 1996,  respectively.  The  standardized  measure  is the
estimated  future  cash  inflows  from proved  reserves  less  estimated  future
production and development costs and estimated future income taxes.  Future cash
inflows represent expected revenues from the production of proved reserves based
on prices and any fixed determinable  future escalation  provided by contractual
arrangements  in existence at fiscal  year-end.  Escalation  based on inflation,
federal  regulatory  changes and supply and demand is not considered.  Estimated
future production and development costs related to future production of


                                                                              27
<PAGE>

                               Geo Petroleum, Inc.

                          Notes to Financial Statements

                                December 31, 1997

13. Oil and Gas Operations (Unaudited) (continued)

Standardized  Measure of  Discounted  Future Net Cash Flows  Relating  to Proved
Reserves (continued)

reserves are based on historical costs. Such costs include,  but are not limited
to  drilling  development  wells  and  installation  of  production  facilities.
Inflation and other  anticipatory costs are not considered until the actual cost
change takes effect. Estimated future income tax expenses are computed using the
appropriate year-end statutory tax rates.  Consideration is given to the effects
of permanent differences,  tax credits and allowances. A discount rate of 10% is
applied to the annual future net cash flows after income taxes.

The methodology and assumptions used in calculating the standardized measure are
those required by FASB Statement No. 69. It is not intended to be representative
of the fair market  value of proved  reserves.  The  valuations  of revenues and
costs do not  necessarily  reflect the amounts to be received or expended by the
Company.  In  addition  to the  valuations  used,  numerous  other  factors  are
considered in evaluating known and prospective oil and gas reserves.
<TABLE>
The standardized  measure of discounted future net cash flows relating to proved
developed oil and gas reserves,  which excludes the Company's proved undeveloped
Vaca Tar Sands reserves, follows:
<CAPTION>
                                                                      December 31
                                                                    1997        1996
                                                              --------------------------
                                                                   (In Thousands)
                                                                     (Unaudited)
<S>                                                           <C>          <C>
Future cash inflows                                           $    66,491  $   109,744
Future production and development costs                           (33,729)     (42,621)
Future income tax expenses                                         (9,230)     (22,736)
                                                              --------------------------
Future net cash flows                                              23,532       44,387
10% annual discount for estimated timing of
   cash flows                                                      (8,328)     (20,970)
                                                              --------------------------
Standardized measure of discounted future
   net cash flows                                             $    15,204  $    23,417
                                                              ==========================
</TABLE>


                                                                              28
<PAGE>

                               Geo Petroleum, Inc.

                          Notes to Financial Statements

                                December 31, 1997


13. Oil and Gas Operations (Unaudited) (continued)

Standardized  Measure of  Discounted  Future Net Cash Flows  Relating  to Proved
Reserves (continued)

For the calculations in the preceding table,  estimated future cash inflows from
estimated  future  production of proved  developed  reserves were computed using
average year-end oil and gas prices.  The average oil price,  primarily based on
posted prices,  was $18.97 per barrel and $20.35 per barrel at December 31, 1997
and 1996,  respectively,  and the average gas price,  a combination  of spot gas
prices and  contract  prices,  was $2.50 per  thousand  cubic feet and $1.91 per
thousand cubic feet at December 31, 1997 and 1996, respectively. Oil prices have
further declined subsequent to December 31, 1997

Changes in Standardized Measure of Discounted Future Net Cash Flows
<TABLE>
The  changes  in  standardized  measure  for  discounted  future  net cash flows
relating to proved  developed  reserves,  which  excludes the  Company's  proved
undeveloped Vaca Tar Sands reserves, follows:
<CAPTION>
                                                                   Year ended December 31
                                                                     1997          1996
                                                              ----------------------------
                                                                    (In Thousands)
                                                                      (Unaudited)
<S>                                                           <C>           <C>
Sales of oil and gas produced, net of production 
    costs                                                     $         33  $       (132)
     
Net changes in prices and production costs                         (19,931)       16,948
Changes in estimated future development costs                         (867)       (4,186)
Development costs incurred during the period                         1,041           413
Revisions of previous quantity estimates                               258         6,738
Purchase of reserves in place                                            -             -
Accretion of discount                                                2,342         1,369
Net change in income taxes                                           8,384      
  (8,452)
Other, principally changes in timing of estimated
    production                                                         527        (2,973)
                                                              ----------------------------
Net (decrease) increase                                             (8,213)        9,725
Beginning of year                                                   23,417        13,692
                                                              ----------------------------
End of year                                                   $     15,204  $     23,417
                                                              ============================
</TABLE>


                                                                              29
<PAGE>

                               Geo Petroleum, Inc.

                          Notes to Financial Statements

                                December 31, 1997


                        PART III


ITEM 1 AND 2. INDEX TO EXHIBITS AND DESCRIPTION

Exhibit                                                               Sequential
Number    Description of Exhibit                                    Location No.

2.1       Agreement  of  Merger  and  Plan  of   Reorganization   between  Drake
          Investment Corp. and Geo Petroleum, Inc. dated November 1, 1995.*

2.2       Certificate   of  Approval  of  Agreement  of  Merger   between  Drake
          Investment Corp. and Geo Petroleum, Inc., dated April 9, 1996.*

2.3       Permit to issue stock in merger, dated March 26,1996.*

3.1       Articles of  Incorporation  of Geo Petroleum,  Inc., filed November 6,
          1986.*

3.1(a)    First Amendment to Articles of  Incorporation  of Geo Petroleum,  Inc.
          filed June 1, 1994.*

3.1(b)    Second Amendment to Articles of  Incorporation of Geo Petroleum,  Inc.
          filed November 7, 1995.*

3.1(c)    Third Amendment to Articles of  Incorporation  of Geo Petroleum,  Inc.
          filed December 5, 1995.*

3.2       By-laws of Geo Petroleum, Inc., dated November 30, 1986.*

4.1       Corporate Resolution  establishing Rights,  Preferences and Privileges
          of Preferred Stock, Series A, dated August 23, 1994.*

4.1(a)    Form of Preferred Stock Certificate.*

4.2       Form of Common Stock Certificate.*

4.3       Form of Promissory  Note, Deed of Trust, and Assignment of Oil Payment
          of Geo Petroleum, Inc.*

10.1      Form of Oil and Gas lease covering various lands in Bandini oil field
          unit (exemplar), dated January 2, 1975.*

10.2      Assignment of Overriding  Royalty Interest (East Los  Angeles/Bandini)
          dated  February 1, 1979,  from Irving 


                                                                              30
<PAGE>

                               Geo Petroleum, Inc.

                          Notes to Financial Statements

                                December 31, 1997


          Terry  and  Esther  Terry  to  Wayne  Hoylman  and  Helen  W.  Hoylman
          (exemplar).*

10.3(a)   Form of Oil and Gas lease covering various lands in Oxnard Field (Vaca
          Tar Sands Unit) (exemplar), dated January 1, 1987.*

10.3(b)   Pooling Agreement, Vaca Tar Sands Unit, Ventura County,
          California.*

10.4      Form of Oil and Gas lease covering  various lands in the Rosecrans Oil
          Field, Los Angeles County, CA. (exemplar), dated October 15, 1956.*

10.5      Gas Sales Contract  dated August 31, 1991,  between Geo Petroleum Inc.
          and Capitan Resources, Inc. (East Los Angeles/Bandini fields).*

10.6(a)   Gas Sales Contract  dated August 9, 1991 between  Pacific Tube Company
          and Geo Petroleum, Inc.*

10.6(b)   Assignment  of Gas Sales  Contract,  Geo  Petroleum,  Inc.  To Capitan
          Resources, Inc.*

10.7      Oil Sales Contract  dated August 1, 1995 between Geo  Petroleum,  Inc.
          and Kern Oil & Refining (East Los Angeles/Bandini fields).*

10.8(a)   Oil Sales Contract dated November 22, 1994 between Geo Petroleum, Inc.
          and Texaco Trading and Transportation Inc. (Oxnard).*

10.8(b)   Oil Sales Contract dated July 5, 1995 between Geo Petroleum,  Inc. and
          Unocal Corp. (Rosecrans field).*

10.9      Oil Sales Contract between Geo Petroleum, Inc. and Kern Oil & Refining
          Co., dated July 10th, 1995 (Orcutt field).*

10.10     Oil and Gas Lease between Gene Careaga,  et al and Central  California
          Oil Co., (Geo's  predecessor in interest) (Orcutt Field) dated October
          3, 1972.*

10.13     Water Disposal  Agreement between J.W. Hansen and Geo Petroleum,  Inc.
          dated May 14, 1992.*

10.14     Water  Disposal  Agreement  between Geo  Petroleum,  Inc.  and Capitan
          Resources, Inc. dated June 1, 1990.*

10.15     Services and Drilling Master Contract (water disposal)


                                                                              31
<PAGE>

                               Geo Petroleum, Inc.

                          Notes to Financial Statements

                                December 31, 1997

          between Unocal  Corporation and Geo Petroleum,  Inc. dated February 3,
          1993.*

10.16     Term Loan Agreement,  as amended and extended to June 15, 1996,  dated
          June 6, 1994,  between First Los Angeles Bank (now City National Bank)
          and Geo Petroleum, Inc.*

10.17     Letter Agreement between Geo Petroleum,  Inc. and William Rich III, as
          attorney in fact, (Harriman interests) dated September 6, 1990.*

10.18     Surface Use Agreement  dated March 31, 1978,  as amended,  between Los
          Angeles and Salt Lake Railroad  Company and Union Pacific Railroad Co.
          and Irving Terry. (East Los Angeles and Bandini fields).*

10.19     Standard  Industrial  Lease dated January 1, 1979 between Irving Terry
          et ux. and Western Avenue Properties (East Los Angeles tank farm).*

10.20     Deed from Terry Oil Company,  Inc.  dated  February 5, 1979 to Western
          Avenue  Properties,  covering  various  rights and  easements  for oil
          operations (East Los Angeles/Bandini pipeline easements).*

10.21     Assignment  and Bill of Sale,  Rosecrans  Area Leases,  by and between
          Kelt  California,  Inc.,  and Geo Petroleum,  Inc.,  dated December 1,
          1994.*

10.23     Quitclaim  Deed,  Assignment  of  Leases  and Bill of  Sale,  East Los
          Angeles  and  Bandini  Oil  Fields,  by  and  between  Western  Avenue
          Properties, a California general partnership, and Geo Petroleum, Inc.,
          dated January 19, 1990.*

16.1      Consent  of  Sherwin  D.  Yoelin  to  use  all  information  from  his
          evaluation reports in this document.*

*Filed as exhibits to Registrant's Form 10 Registration  Statement dated June 6,
1996 and incorporated herein by reference thereto.

16.2      Agreement  for  Assignment  of Leases  dated  December 31, 1996 by and
          between Geo Petroleum,  Inc. as Assignor and Saba  Petroleum,  Inc. as
          Assignee  with respect to Geo's oil  properties  in the Oxnard  Field,
          Ventura  County,  California.  Filed  with  Application  for an  Order
          Granting Confidential Treatment to an Exhibit Filed with the Report of
          Geo  Petroleum,  Inc. on Form 10-KSB.  SAID  APPLICATION  WITHDRAWN ON
          SEPTEMBER  25,  1997  BY  GEO   PETROLEUM,   INC.  SAID  AGREEMENT  IS
          INCORPORATED 


                                                                              32
<PAGE>

                               Geo Petroleum, Inc.

                          Notes to Financial Statements

                                December 31, 1997


          HEREIN BY REFERENCE TO FORM 10KSB/A FILED BY SABA PETROLEUM COMPANY ON
          JULY 23, 1997,  CENTRAL INDEX KEY:  #0000312340;  STANDARD  INDUSTRIAL
          CLASSIFICATION:  CRUDE  PETROLEUM & NATURAL  GAS  [1311];  IRS NUMBER:
          470617589;  FORM TYPE:  10KSB/A;  SEC ACT:  1934 ACT; SEC FILE NUMBER:
          001-13880;   FILM  NUMBER:  97644058.  SAID  AGREEMENT  IS  OBTAINABLE
          DIRECTLY  FROM THE U.S.  SECURITIES  AND  EXCHANGE  COMMISSION  ON THE
          WORLDWIDE WEB AT  HTTP://WWW.SEC.GOV/EDAUX/FORMLYNX.HTM,  OR FROM SABA
          PETROLEUM  COMPANY AT:
          SABA  PETROLEUM  COMPANY
          17512 VON KARMAN AVE
          IRVINE, CA 92714

16.3      April 9, 1997 Consent of Sherwin D. Yoelin to use all information from
          his evaluation reports in this document.


                                                                              33
<PAGE>



                               Geo Petroleum, Inc.

                          Notes to Financial Statements

                                December 31, 1997


SIGNATURES

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


                            Geo Petroleum Inc.

Dated: July 8, 1998

                            By: /s/ GERALD T. RAYDON
                            -----------------------------------
                                 GERALD T. RAYDON

                            Chairman of the Board and President


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 date indicated.

Signatures and dates of directors.

Signature                    Title                            Date

Gerald T. Raydon           Chairman/C.E.O.                    July 8, 1998

Larry R. Burroughs         President/C.O.O./Director          July 8, 1998

Alyda L. Raydon            Secretary/Treasurer/Director       July 8, 1998

William J. Corcoran        Director                           July 8, 1998

Signatures for all directors and chief executive officer and Principal Financial
and Accounting Officer.

The above Index to  Exhibits  and Exhibit  Identification  form is  incorporated
herein by reference.


                                                                              34