SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-Q
                                   (Mark One)

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

                For the quarterly period ended September 30, 1998

                                       or

          [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                             SECURITIES ACT OF 1934

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

                           Commission File No._______

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

                            PENDARIES PETROLEUM LTD.
             (Exact name of registrant as specified in its charter)

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

                        PROVINCE OF NEW BRUNSWICK, CANADA
             (Exact Name of Registrant as specified in its charter)

        Internal Revenue Service - Employer Identification No. 52-2051576

                8 Greenway Plaza, Suite 910, Houston, Texas 77046
                                 (713) 355-2900

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

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

       The  total  number of shares of the  registrant's  Common  Shares, no par
            value, outstanding on September 30, 1998, was 6,605,264.


                                        1

<PAGE>


                            PENDARIES PETROLEUM LTD.


PART I - FINANCIAL INFORMATION                                              PAGE


 Consolidated Balance Sheet as of September 30, 1998
 (Unaudited) With Comparative Figures for the Preceding Year...............    3


 Statements  of  Consolidated  Operations  and Retained  Deficit for the
 three and nine months ended September 30, 1998
 (Unaudited) With Comparative Figures for the Preceding Year...............    4


 Consolidated Statement Cash Flows of Changes in Financial Position
 for the nine months ended September 30, 1998 (Unaudited) With
 Comparative Figures for the Preceding Year................................    5


 Notes to Consolidated Financial Statements (Unaudited)....................    6


PART II - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
         CONDITION AND RESULTS OF OPERATIONS...............................    9















PART II.                     FINANCIAL INFORMATION


                                        2

<PAGE>




<TABLE>
                            PENDARIES PETROLEUM LTD.
                           CONSOLIDATED BALANCE SHEET
                               SEPTEMBER 30, 1998
                   (Prepared from the accounts without audit)
           (All figures are in U.S. dollars, unless otherwise stated)

<CAPTION>
                                                                                                   September 30,       December 31,

                                                                                                      1998                1997
                                                                                                      ----                ----
                                       ASSETS

<S>                                                                                            <C>                     <C>         
CURRENT ASSETS:

   Cash and cash equivalents .......................................................           $  8,691,086            $ 15,133,285
   Accounts receivable .............................................................                144,704                 213,243
   Prepaid expenses and other assets ...............................................                162,443                  18,457
                                                                                                    -------                  ------

                     Total current assets ..........................................              8,998,233              15,364,985
                                                                                                  ---------              ----------


PROPERTY AND EQUIPMENT:

   Oil and gas properties, recorded under the full-cost method-
     Proved ........................................................................              6,682,708               6,556,094
     Unproved ......................................................................             13,975,613               9,729,119
   Furniture, fixtures and other equipment .........................................                211,609                 227,657
   Accumulated depreciation, depletion and amortization ............................               (639,225)               (378,279)
                                                                                                   --------                -------- 

                     Net property and equipment ....................................             20,230,705              16,134,591
                                                                                                 ----------              ----------

                     Total assets ..................................................           $ 29,228,938            $ 31,499,576
                                                                                               ============            ============

                        LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES:
   Accounts payable ................................................................           $     17,403            $     88,060
   Accrued liabilities .............................................................                 43,376                 187,891
                                                                                                     ------                 -------

                     Total current liabilities .....................................                 60,779                 275,951
                                                                                                     ------                 -------

SHAREHOLDERS' EQUITY:
   Common shares (Note 3)
   Authorized
         Unlimited number of common shares
   Issued
         8,781,970 and 8,726,470 common shares, respectively .......................             32,501,842              32,328,761
   Cumulative translation adjustment ...............................................                   -                      4,180
   Retained deficit ................................................................             (3,333,683)             (1,109,316)
                                                                                                 ----------              ---------- 

                     Total shareholders' equity ....................................             29,168,159              31,223,625
                                                                                                 ----------              ----------

                     Total liabilities and shareholders' equity ....................           $ 29,228,938            $ 31,499,576
                                                                                               ============            ============

</TABLE>

               The accompanying notes are an integral part of this
                           consolidated balance sheet.


                                        3

<PAGE>




<TABLE>
                            PENDARIES PETROLEUM LTD.

           CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED DEFICIT


                   (Prepared from the accounts without audit)
           (All figures are in U.S. dollars, unless otherwise stated)


<CAPTION>
                                                                            Three Months Ended                Nine Months Ended
                                                                               September 30,                    September 30,

                                                                           1998            1997              1998             1997
                                                                           ----            ----              ----             ----
<S>                                                                  <C>              <C>              <C>              <C>        

REVENUE:

   Oil and gas income ..........................................     $   165,014      $   176,418      $   380,732      $   411,070
                                                                     -----------      -----------      -----------      -----------

EXPENSES:
   Oil and gas operating expenses ..............................          33,528           42,859          125,182          104,659
   General and administrative expenses .........................         596,371          492,381        1,799,431        1,406,179
              Depreciation, depletion and amortization .........          86,625           78,409          266,623          247,369
   Exchange loss ...............................................         132,514              685          103,575           34,493
    Write-off of registration costs (Note 2) ...................         299,397             -             299,397             -
   Stock option settlement (Note 3) ............................            -                -             450,000             -

                                                                       1,148,435          614,334        3,044,208        1,792,700
OTHER INCOME:
    Interest Income ............................................         118,290          200,411          439,109          712,184
                                                                         -------          -------          -------          -------

LOSS BEFORE INCOME TAXES .......................................        (865,131)        (237,505)      (2,224,367)        (669,446)

RECOVERY OF INCOME TAXES .......................................            -              83,127            -               234,306
                                                                       ---------        ---------       ----------        ----------
                                                                                                                        


   NET LOSS ....................................................     $  (865,131)     $  (154,378)      (2,224,367)        (435,140)

   RETAINED DEFICIT, beginning of period........................                                        (1,109,316)        (224,975)
                                                                                                        ----------         -------- 
   

   RETAINED DEFICIT, end of period .............................                                       $(3,333,683)     $  (660,115)
                                                                                                       ===========      =========== 

   NET LOSS PER SHARE:
       Basic ...................................................     $      (.10)     $      (.02)     $      (.25)     $      (.05)
                                                                     ===========      ===========      ===========      =========== 
       Fully Diluted ...........................................     $      (.10)     $      (.02)     $      (.25)     $      (.05)
                                                                     ===========      ===========      ===========      =========== 
</TABLE>





               The accompanying notes are an integral part of this
                             consolidated statement.


                                        4

<PAGE>




<TABLE>
                            PENDARIES PETROLEUM LTD.
            CONSOLIDATED STATEMENTS OF CHANGES IN FINANCIAL POSITION
                   (Prepared from the accounts without audit)
           (All figures are in U.S. dollars, unless otherwise stated)

<CAPTION>
                                                                                                      For the             For the
                                                                                                     Nine-Month          Nine-Month
                                                                                                    Period Ended        Period Ended
                                                                                                     September           September
                                                                                                        30,                 30,
                                                                                                       1998                1997
                                                                                                       ----                ----
<S>                                                                                              <C>                   <C>          
CASH FLOWS FROM OPERATING ACTIVITIES:

   Net loss ............................................................................         $ (2,224,367)         $   (435,140)
   Items not affecting cash-
     Depreciation, depletion and amortization ..........................................              266,623               247,369
     Decrease in future income taxes ...................................................                 -                 (234,306)
        Loss on sale of fixed assets ...................................................               34,514                  -   
    Change in non-cash working capital items-
        Accounts receivable ............................................................               68,539              (149,309)
        Accounts payable ...............................................................              (70,657)             (201,433)
        Accrued liabilities ............................................................             (144,515)             (166,747)
        Prepaid expenses and other .....................................................             (128,553)                5,915
                                                                                                     --------                 -----

                            Net cash used in operating activities ......................           (2,198,416)             (933,651)
                                                                                                   ----------              -------- 

CASH FLOWS FROM INVESTING ACTIVITIES:
   Additions to proved oil and gas properties ..........................................                 -               (1,683,085)
   Additions to unproved oil and gas properties ........................................           (4,246,494)           (3,985,429)
   Additions to other property and equipment ...........................................              (41,563)              (42,042)
   Proceeds from disposal of fixed assets ..............................................                6,454                  -  
                                                                                                   ----------            ----------

Net cash used in investing activities ..................................................           (4,281,603)           (5,710,556)
                                                                                                   ----------            ---------- 

CASH FLOWS FROM FINANCING ACTIVITIES:
   Net proceeds from issuance of common shares .........................................                 -                3,212,900
   Net proceeds from exercise of common stock options ..................................               42,000                  -   
   Cumulative translation effects ......................................................               (4,180)                 -
                                                                                                   ----------             ---------

                            Net cash provided by financing activities ..................               37,820             3,212,900
                                                                                                   ----------             ---------

DECREASE  IN CASH AND CASH EQUIVALENTS .................................................           (6,442,199)           (3,431,307)

CASH AND CASH EQUIVALENTS, beginning of period .........................................           15,133,285            17,973,455
                                                                                                 ------------          ------------

CASH AND CASH EQUIVALENTS, end of period ...............................................         $  8,691,086          $ 14,542,148
                                                                                                 ============          ============
</TABLE>


               The accompanying notes are an integral part of this
                             consolidated statement.



                                        5

<PAGE>




                            PENDARIES PETROLEUM LTD.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                               SEPTEMBER 30, 1998
                   (Prepared from the accounts without audit)
           (All figures are in U.S. dollars, unless otherwise stated)

1.  NATURE OF OPERATIONS:

Pendaries Petroleum Ltd."Pendaries" or the "Company" is a holding company whose
primary assets are interests in  exploration,  development and production of oil
and gas properties in the People's Republic of China.

2. BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION:

The Company  completed an initial public offering and became a public company in
Canada on December 12, 1996.

The consolidated interim financial statements included herein have been prepared
by Pendaries without audit and reflect all adjustments which are, in the opinion
of  management,  necessary  to present a fair  statement  of the  results of the
interim period.  These  statements are presented on a basis  consistent with the
annual  audited   consolidated   financial   statements.   Certain  information,
accounting policies and footnote  disclosures  normally included in consolidated
financial  statements  prepared in accordance with generally accepted accounting
principles have been omitted, although the Company believes that the disclosures
are  adequate  to  make  the  information   presented  not   misleading.   These
consolidated interim financial statements should be read in conjunction with the
consolidated  financial  statements  and the summary of  significant  accounting
policies and notes  thereto  included in the Company's  latest annual  financial
statements.

The  consolidated  financial  statements  include  the  accounts  of  Pendaries,
Pendaries Productions,  Inc.,  Sino-American Energy Corporation  (Sino-American)
and  Sino-American  Overseas Energy  Corporation.  All significant  intercompany
transactions and balances have been eliminated.

The Company's  registration  statement filed on Form 20-F was declared effective
by the U.S.  Securities and Exchange Commission in June 1998. This permitted the
Company to list its common shares for trading on the American Stock Exchange. 
In the third quarter of 1998, the Company wrote-off approximately  $300,000 in 
deferred  registration costs related to the Company's postponed initial cross-
border public offering in the United States.

The consolidated financial statements for the year ended December 31, 1997, were
audited by Arthur  Andersen & Co.,  which  issued an  Auditors'  Report  without
reservation dated January 16, 1998.

3.  COMMON SHARES:

Issuance of Stock Options

In January 1998,  certain directors and officers of Pendaries were granted stock
options for a total of 79,500 common shares. The exercise price is $10.75 CDN
per common share and the options expire on January 8, 2003.
                                        

                                       6

<PAGE>




Stock Option Legal Proceeding

In connection with litigation with the former  President of  Sino-American  over
the number of stock options to which the former president was entitled, in April
1998,  the parties  entered  into a Settlement  Agreement  pursuant to which the
former  President  received  $450,000  and agreed to execute a new Stock  Option
Agreement  reflecting  a grant of 100,000  stock  options  (the  number of stock
options the Company claimed had originally been granted) and, with the exception
of certain  restrictions  not imposed on other option holders,  containing terms
substantially  similar to those contained in the Stock Option  Agreements of all
other option holders who had been granted options prior to 1996.

Exercise of  Stock Options

In the first nine months of 1998,  40,500  Sino-American  stock options were 
exercised for net proceeds of $42,000.

4.    MURPHY AGREEMENT:

On April 24, 1998,  Sino-American and the Company entered into an agreement with
Murphy to purchase  its 45%  interest in Block  04/36 (the  "Murphy  Agreement")
which  was  extended  to  December  21,  1998.  Under  the  pertinent  Operating
Agreement,  Kerr-McGee  had a 30-day  right  of  first  refusal  to  purchase  a
proportionate share of such 45% interest.  Kerr-McGee did not exercise its right
of first refusal,  and its right expired on May 28, 1998.  The Murphy  Agreement
provides that the Company will pay a total of $38 million for Murphy's interest,
$35  million  of the  consideration  to be paid in cash and $3 million in common
shares.  The  Company  is  currently  assessing  its  capital  requirements  and
financing options for this transaction as well as associated future  exploration
and  development  costs.  As part of the  agreement,  Pendaries  was required to
submit a deposit of $1,000,000. Should the transaction not close for any reason,
Pendaries'  obligations  in the  transaction  are  restricted to the loss of the
aforementioned deposit.

5.     RECONCILIATION TO UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES:

These  consolidated  financial  statements are expressed in U.S. dollars and are
prepared in accordance with generally accepted  accounting  principles in Canada
("Canadian  GAAP")  which  conform in all  material  respects  with those in the
United States ("U.S. GAAP") for the periods presented, except as outlined below.

Oil and Gas Properties

In Canada,  if the net  capitalized  costs of oil and gas  properties  in a cost
center exceed an amount equal to the sum of estimated  future net revenues on an
undiscounted  basis from proved oil and gas  reserves in the cost center and the
costs of properties not being  amortized,  both adjusted for income tax effects,
such excess is charged to expense. Also, the total capitalized costs of all cost
centers are subject to a further recoverability test which includes, among other
things, provisions for site development and restoration, operating costs, future
general,  administrative  and financial costs.  This is not consistent with U.S.
GAAP.  For U.S. GAAP,  Pendaries  limits,  on a  country-by-country  basis,  the
capitalized costs of proved oil and gas properties,  net of accumulated DD&A, to
the  estimated  future net cash flows from proved oil and gas  reserves,  net of
related tax effects,  discounted at 10 percent. If capitalized costs exceed this
limit,  the excess is charged to DD&A expense.  Included in the estimated future
net cash flows are  Canadian  provincial  tax  credits  expected  to be realized
beyond  the  date at which  the  legislation,  under  its  provisions,  could be
repealed.  To date,  the Canadian  provincial  government  has not  indicated an
intention to repeal this legislation.


                                        7

<PAGE>




If U.S. GAAP had been applied  instead of Canadian  GAAP, the Company would have
recognized an  impairment of its oil and gas  properties in Canada in the amount
of  $510,800  in the second  quarter of 1998.  This amount is  reflected in the
following summary as impairment of oil & gas properties.

The following is a summary of the  significant  adjustments to net loss for each
of the three and nine-month periods ended September 30, 1998 and 1997 and to the
retained  deficit as of September 30, 1998 and 1997,  which would be required if
U.S. GAAP had been applied instead of Canadian GAAP in the financial statements.
<TABLE>


<CAPTION>
                                                                        Three Months Ended                    Nine Months Ended
                                                                          September 30,                         September 30,

                                                                      1998             1997              1998               1997
                                                                      ----             ----              ----               ----

<S>                                                            <C>                <C>                <C>                <C>         

  Net loss according to the financial
   statements, Canadian GAAP ...........................       $  (865,131)       $  (154,378)       $(2,224,367)       $  (435,140)

   Decrease due to:
         Impairment of oil & gas properties ............             -                   -              (510,800)             - 
                                                               -----------        ------------       -----------        -----------

   Approximate net loss in accordance
   with U.S. GAAP ......................................          (865,131)          (154,378)        (2,735,167)          (435,140)

   Add:  Cumulative translation
   adjustment loss .....................................           (21,443)             -                  (4,180)             - 
                                                               -----------         -----------       -----------        -----------

   Comprehensive income ................................       $  (886,574)       $  (154,378)        (2,739,347)          (435,140)

   RETAINED DEFICIT, beginning of period ...............                                              (1,109,316)          (224,975)
                                                                                                      ----------           -------- 

   RETAINED DEFICIT, end of period .....................                                             $(3,844,483)       $  (660,115)
                                                                                                     ===========        =========== 

   NET LOSS PER SHARE:
       Basic ...........................................       $      (.10)       $      (.02)       $      (.31)       $      (.05)
                                                               ===========        ===========        ===========        =========== 
       Fully Diluted ...................................       $      (.10)       $      (.02)       $      (.31)       $      (.05)
                                                               ===========        ===========        ===========        =========== 

Weighted average common shares
    outstanding ........................................         8,781,970          8,316,111          8,779,839          8,282,505

Net loss per share
</TABLE>

Basic net loss per share is  calculated  on the  basis of the  weighted  average
common shares  outstanding shown on the above table for the three and nine-month
periods  ended  September  30, 1998 and 1997.  The  Company's  stock options and
warrants  were not  included in the  computation  of fully  diluted net loss per
share because to do so would have been antidilutive for the periods presented.





                                        8

<PAGE>




PART II.           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                  CONDITION AND RESULTS OF OPERATIONS

The following  discussion and analysis  should be read in  conjunction  with the
unaudited  consolidated  financial  statements  included  elsewhere and with the
Company's Annual Report for the year ended December 31, 1997.

In April  1998, the Company  entered  into a purchase  agreement  with a working
interest owner in Block 04/36, Murphy Pacific Rim, Ltd.  ("Murphy"),  to acquire
Murphy's 45% interest. The purchase agreement provides that the Company will pay
$38 million for Murphy's interest,  $35 million in cash and $3 million in common
stock of the  Company.  The  Company  was  required  to submit a  deposit  of $1
million.  Should the Company elect not to close the  transaction by December 21,
1998 for any reason, the Company's obligations in the transaction are limited to
forfeiture of the deposit. The Company is assessing its capital requirements and
options to finance the acquisition of Murphy's  interest plus future  associated
costs of exploration and development.


ACCOUNTING POLICIES

The unaudited  consolidated  financial  statements  and notes  thereto  included
herein have been prepared in accordance  with  accounting  principles  generally
accepted in Canada.

As of September  30, 1998,  the  Company's  revenues  were derived from interest
income  and  oil  and  gas  production  related  to its  activities  in  Canada.
Accumulated losses are presented on the balance sheet as "Retained Deficit." The
unaudited  statements  of  operations  presents  revenues  and  expenses for the
quarter and year to date in  comparison  with the same  periods for the previous
year.  The  statement  of changes in  financial  position  shows the inflows and
outflows for the period comparatively with those of the previous year.

The Company  follows the full-cost  method of accounting for oil and natural gas
properties.  Under  this  method,  all costs  incurred  in  connection  with the
exploration  and development of oil and gas reserves are capitalized in separate
cost centers on a  country-by-country  basis.  Such  capitalized  costs  include
contract  and  concession   acquisition;   geological,   geophysical  and  other
exploration  work;  drilling,  completing  and  equipping  oil  and  gas  wells,
constructing  production facilities and pipelines,  and other related costs. The
Company also  capitalizes  interest  costs  related to  unevaluated  oil and gas
properties.

Capitalized  costs  associated  with the  acquisition and evaluation of unproved
properties are excluded from amortization  until it is determined whether proved
reserves  can be  assigned  to  such  properties,  or  until  the  value  of the
properties  is  impaired.  Unproved  properties  are  assessed  periodically  to
determine whether any impairment has occurred.

If the net  capitalized  costs of oil and gas properties in a cost center exceed
an amount equal to the sum or estimated  future net revenues from proved oil and
gas reserves in the cost center and the costs

                                        9

<PAGE>




of properties not being  amortized,  both adjusted for income tax effects,  such
excess is charged to expense. The total capitalized costs of all cost centers is
subject to a further  recoverability  test which  includes,  among other things,
provisions  for  site   development   and   restoration,   and  future  general,
administrative and financial costs.

Substantially  all of the  Company's  exploration,  development  and  production
activities are conducted  jointly with others,  and  accordingly,  the Company's
financial statements reflect only its proportionate interest in such activities.

The Company owns an interest in  producing  oil and gas  properties  in Alberta,
Canada.  Depletion is provided based on the Company's  proportionate interest of
production in respect of proved reserves.

The Company  currently has no producing  oil and gas  properties in the People's
Republic  of  China.  Therefore,  related  capitalized  costs  of  oil  and  gas
properties are not currently subject to depletion.


CHINESE TAXES

The  Company's  future net income,  as defined  under  Chinese law, from Chinese
sources,  will be subject to Chinese  corporate  income tax at a rate of 33%. In
accordance  with the terms of the tax treaty  between the U.S.  and China,  such
taxes are creditable to U.S. corporate income taxes.


RESULTS OF OPERATIONS

Three Months Ended September 30, 1998 and 1997:

The Company  incurred a net loss of $865,131 and $154,378 for the quarter  ended
September 30, 1998 and 1997, respectively, as a result of the following:

Oil and gas income from the  Company's  properties  located in  Alberta,  Canada
decreased  from  $176,418  in the third  quarter  ended  September  30,  1997 to
$165,014 for the same period in 1998. The $11,404  decrease was due to lower oil
and natural gas prices.

Interest income  decreased by $82,121 from $200,411 in the third quarter of 1997
to $118,290 in the third quarter of 1998.  The decrease was due to the reduction
of cash available for investment in 1998.

Oil and gas operating  expenses and depreciation,  depletion and amortization do
not differ materially for the third quarter of 1997 and the same period in 1998.

General and administrative expenses increased from $492,381 in the third quarter
of 1997 to $596,371 in the third quarter of 1998. The $103,990  increase was due
primarily to increased salaries

                                       10

<PAGE>




and an increase in staff and costs  associated  with the Company's  registration
with the U.S. Securities and Exchange Commission and its listing on the American
Stock Exchange.

The Company  incurred an exchange  loss of $132,514 in the third quarter of 1998
as  compared to $685 in the same  period in 1997.  The losses  were  recorded in
consolidation due to the strength of the U.S. dollar as compared to the Canadian
dollar.

In the third quarter of 1998, the Company wrote off costs of $299,397 associated
with its registration with the U.S.  Securities and Exchange  Commission.  These
costs were incurred  primarily in the first and second quarters of 1998 and were
deferred  on the  balance  sheet as  "Prepaid  Expenses  and  Other  Assets"  in
anticipation  of an offering of securities  in the U.S. and Canada.  The Company
has elected to indefinitely  postpone the offering and has,  therefore,  charged
these registration costs to expense.

The Company  recorded a recovery of income taxes of $83,127 in the third quarter
of 1997. The Company follows  Accounting  Recommendation  Section 3465,  "Income
Taxes" of the Handbook of the Canadian  Institute of Chartered  Accountants  and
determined  that the loss incurred in the third quarter of 1998 did not meet the
criteria promulgated in Section 3465 to record a future income tax asset.


Nine Months Ended September 30, 1998 and 1997:

The Company  incurred a net loss of $2,224,367  and $435,140 for the nine months
ended September 30, 1998 and 1997, respectively, as a result of the following:

Oil and gas income from the  Company's  properties  located in  Alberta,  Canada
decreased from $411,070 in the nine months ended  September 30, 1997 to $380,732
for the same  period  in 1998.  The  $30,338  decrease  was due to lower oil and
natural gas prices.

Interest income  decreased by $273,075 from $712,184 in the first nine months of
1997 to $439,109 in the first nine months of 1998.  The  decrease was due to the
reduction of cash available for investment in 1998.

Oil and gas operating expenses and depreciation, depletion and amortization were
essentially  comparable for the first nine months of 1997 and the same period in
1998.

General and administrative  expenses increased from $1,406,179 in the first nine
months of 1997 to  $1,799,431  in the first nine  months of 1998.  The  $393,252
increase was due  primarily  to increased  salaries and an increase in staff and
costs associated with the Company's  registration  with the U.S.  Securities and
Exchange Commission and its listing on the American Stock Exchange.

The Company  incurred  an exchange  loss of $103,575 in the first nine months of
1998 as compared to $34,493 in the same period in 1997. The losses occurred were
recorded in consolidation due to the strength of the U.S. dollar as compared  to
the Canadian dollar.

                                       11

<PAGE>




As explained above, the Company wrote off costs of $299,397  associated with its
registration with the U.S. Securities and Exchange Commission.

During the nine months ended September 30, 1998, the Company settled  litigation
with the former President of its wholly owned subsidiary,  Sino-American  Energy
Corporation, over the  number of stock  options  to which the  former  president
was entitled, and in April 1998, the parties entered into a Settlement Agreement
pursuant to which the former president received $450,000 and agreed to execute a
new Stock  Option  Agreement  reflecting a grant of 100,000  stock  options (the
number of stock options the Company  claimed had  originally  been granted) and,
with the exception of certain  restrictions not imposed on other option holders,
containing  terms  substantially  similar to those contained in the Stock Option
Agreements  of all other option  holders who had been granted  options  prior to
1996. The $450,000 settlement amount was charged to expense.

The Company  recorded a recovery  of income  taxes of $234,306 in the first nine
months of 1997.  The Company  follows  Accounting  Recommendation  Section 3465,
"Income  Taxes"  of  the  Handbook  of  the  Canadian   Institute  of  Chartered
Accountants  and  determined  that the loss incurred in the first nine months of
1998 did not meet the  criteria  promulgated  in Section 3465 to record a future
income tax asset.


LIQUIDITY AND CAPITAL RESOURCES

The Company incurred capital  expenditures of $1,234,169 in 1995,  $4,947,941 in
1996 and $7,739,641 in 1997. For the nine-month period ended September 30, 1998,
the Company incurred $4,288,057 in capital expenditures, with $559,478 incurred 
in the period of June 30,1998 through September 30,1998.Except for approximately
$1,850,000 which  was used in 1996 to purchase  the  Alberta  properties,  these
funds were used  primarily to fund the Company's obligations under the petroleum
contracts associated with  the  Company's interests in China  for its  share  of
drilling,  geological  and geophysical  costs  in  its  five   concession  areas
in  China  and  to  fund  the  $1,000,000   deposit  for  the  proposed   Murphy
interest   acquisition and approximately $250,000 in evaluation costs associated
with this transaction.

In 1995, the Company raised capital of $1,886,500  through the private  offering
of stock. In 1996, the Company raised  additional  capital privately and had net
proceeds from its initial  public  offering on the Toronto Stock  Exchange for a
total of  $22,832,658.  The  Company  closed  the  overallotment  portion of the
initial public  offering in January 1997 resulting in additional net proceeds of
$2,823,247.  Also, during 1997, the Company raised $3,385,356 as a result of the
exercise  of  stock  options  and  warrants  by  the  holders   thereof.   Thus,
cumulatively through 1997, the Company raised $30,927,761,  and at the beginning
of 1998, had cash or cash equivalents of $15,133,285.

In the first  three  quarters  of 1998 the Company  raised  $42,000  through the
exercise of stock  options.  On September  30, 1998 the Company had cash or cash
equivalents  of  $8,691,086.  The  Company  had  total  shareholders'  equity of
approximately  $29,000,000  on September 30, 1998  compared  with  approximately
$31,000,000 at December 31, 1997.  There is no credit  facility with a financial
institution or any other outstanding debt.

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<PAGE>




YEAR 2000 DISCLOSURE

The Year 2000 ("Y2K") issue relates to the possible problems associated with the
inability of computer hardware and software to properly recognize the Year 2000.
Hardware and software systems which only use a two-digit  convention for keeping
track of dates would  improperly read "00" as representing the Year 1900 instead
of the Year  2000.  Although  the extent of the  problem  is not yet known,  the
ramifications of Y2K failures are expected to have a global impact.

The Company has completed its Internal  Assessment  Phase consisting of a review
of internal  hardware,  internal  software  and  non-technology  systems.  After
reviewing  current  hardware systems  applications and documenting  software Y2K
compliance,  the Company  believes  its  computer  systems  and  non-information
systems are Y2K  compliant  and  therefore the Company  will  not be affected by
Y2K problems. Consequently, the Company  does not  anticipate  the need to incur
any material remediation costs.


The  Company  has  begun  its  Third-Party   Integration  Phase  which  includes
contacting third parties with whom the Company maintains  relationships material
to the Company, such as banks, suppliers,  and working interest owners. A survey
will be  forwarded  to these  third  parties to  determine  their  status of Y2K
compliance.  It is expected that the survey  results will be compiled by the end
of the first  quarter of 1999.  Upon  completing  the  assessment of third party
systems,  the Company  will  develop,  if  necessary,  a plan to respond to such
findings to be  implemented  by July 31, 1999.  Such  response  plan may include
modifications of current systems, development of contingency plans or other such
necessary actions.

Having completed the internal  Assessment Phase and having begun the Third-Party
Integration  Phase,  the  Company  believes  that,  at  worst,   material  risks
concerning  Y2K issues  include  loss of local or regional  electrical  power or
telecommunications   services,   delays  or   cancellations   of   shipping   or
transportation,  systems errors associated with exploration  activities or other
aspects of operations,  bank errors and computer errors by third parties.  There
can  be  no  assurance that  governmental  agencies or  other third parties will
not suffer a Year 2000 business  disruption  that could have a material  adverse
effect on the Company's business, financial condition and operating results.

Due to  the  nature  of  its  operations,  the  Company  does  not  believe  any
contingency  plan  dealing with Y2K failures  will have to be  implemented.  The
Company  does not rely on any  vendors or service  providers  which would pose a
significant  risk for disruptions of the Company's  operations in the event such
third parties are adversely  affected by Y2K problems.  The Company has and will
continue to utilize internal and external resources to address the Y2K issue.




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<PAGE>




DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS

The  statements  contained  in this  Quarterly  Report on Form  10-Q  (Quarterly
Report")  that  are  not  historical  facts,  including,  but  not  limited  to,
statements  found in this  Management's  Discussion  and  Analysis of  Financial
Condition and Results of Operations,  are  forward-looking  statements,  as that
term is defined in Section 21E of the  Securities  and Exchange Act of 1934,  as
amended, that involve a number of risks and uncertainties.  Such forward-looking
statements  may be or may concern,  among other  things,  capital  expenditures,
drilling activity, acquisition plans and proposals and dispositions, development
activities, cost savings, production efforts and volumes,  hydrocarbon reserves,
hydrocarbon  prices,  liquidity,   regulatory  matters  and  competition.   Such
forward-looking  statements  generally are  accompanied by words such as "plan,"
"estimate," "expert," "predict,"  "anticipate," "projected," "should," "assume,"
"believe,"  or other  words that  convey  the  uncertainty  of future  events or
outcomes.  Such  forward-looking  information is based upon management's current
plans,  expectations,  estimates and  assumptions  and is subject to a number of
risks  and  uncertainties  that  could   significantly   affect  current  plans,
anticipated  actions,  the timing of such  actions and the  Company's  financial
condition and results of operations. As a consequence, actual results may differ
materially from expectations, estimates or  assumptions  expressed in or implied
by any forward looking statements made by or behalf of  the  Company.  Among the
factors that could cause actual  results to differ materially  are: fluctuations
of the prices received  or demand  for the  Company's oil and  natural  gas, the
uncertainty of  drilling results  and  reserve   estimates,  operating  hazards,
acquisition  risks,  requirements  for  capital,  general  economic  conditions,
competition  and government  regulations, as well as the risks and uncertainties
discussed in this Quarterly Report, including, without limitation,  the portions
referenced  above, and  the  uncertainties  set  forth from  time to time in the
Company's other public reports, filings and public statements.


SIGNATURES

         Pursuant to the  requirements  of the Securities  Exchange Act of 1934,
the  registrant  has duly  caused  this report to be signed on its behalf by the
undersigned, thereunto duly authorized.

                                                      PENDARIES PETROLEUM LTD.



Date: November 13, 1998                                By /s/Bobby J.Fogle
                                                         -----------------
                                                            Bobby J. Fogle
                                                       Vice President, Finance




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