SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-KSB


                     ANNUAL REPORT UNDER SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934
                   For the fiscal year ended December 31, 1998


                         Commission file number 0-19766

                          HOME-STAKE OIL & GAS COMPANY
                 (Name of small business issuer in its charter)

             Oklahoma                                    73-0288030
   (State or other jurisdiction of                    (I.R.S. Employer
    incorporation or organization)                   Identification No.)

    15 East 5th Street, Suite 2800
          Tulsa, Oklahoma                                    74103
(Address of principal executive offices)                   (Zip Code)

                    Issuer's telephone number: (918) 583-0178

           Securities registered under Section 12(b) of the Act: None

              Securities registered under Section 12(g) of the Act:

                     Common Stock, par value $0.01 per share

        Check whether the issuer (1) has filed all reports  required to be filed
by  Section  13 or 15(d) of the  Exchange  Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports),  and
(2) has been subject to such filing requirements for the past 90 days. 
Yes |X| No | |

        Check if  disclosure  of  delinquent  filers in  response to Item 405 of
Regulation  S-B is not  contained  in  this  form,  and no  disclosure  will  be
contained,  to the best of the  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. |_|

        State issuer's revenues for its most recent fiscal year:     $9,989,608

        As of March 29, 1999,  4,273,827 shares of the Registrant's Common Stock
were outstanding. As of March 29, 1999, the aggregate market value of the voting
stock held by non-affiliates of the Registrant was $10,727,136 based on the last
reported  trading price reported on the Nasdaq  SmallCap  Market.  (Officers and
directors  of the  Registrant,  and holders of more than 10% of the  outstanding
common stock, are considered affiliates for purposes of this calculation.)

                       DOCUMENTS INCORPORATED BY REFERENCE

        Portions of the  Registrant's  Proxy Statement for the Annual Meeting of
Stockholders  to be held May 24, 1999, are  incorporated  by reference into Part
III of this Form 10-KSB.

        Transitional Small Business Disclosure Format (Check one) Yes | | No |X|


                                       -1-

<PAGE>



                          HOME-STAKE OIL & GAS COMPANY

                                   FORM 10-KSB
                          YEAR ENDED DECEMBER 31, 1998

                                TABLE OF CONTENTS

                                      Page
                                     PART I

Item 1.  Description of Business...........................................   1

Item 2.  Description of Property...........................................   5

Item 3.  Legal Proceedings.................................................  10

Item 4.  Submission of Matters to a Vote of Security Holders...............  11


                                     PART II

Item 5.  Market for Common Equity and Related Stockholder Matters..........  11

Item 6.  Management's Discussion and Analysis..............................  12

Item 7.  Financial Statements..............................................  15

Item 8.  Changes in and Disagreements with Accountants
         on Accounting and Financial Disclosure............................  15

                                    PART III

Item 9.  Directors, Executive Officers and Compliance with Section 16(a)
         of the Exchange Act...............................................  16

Item 10. Executive Compensation............................................  16

Item 11. Security Ownership of Certain Beneficial Owners and Management....  16

Item 12. Certain Relationships and Related Transactions....................  16

Item 13. Exhibits and Reports on Form 8-K..................................  16

Signatures ................................................................  18

Index to Financial Statements.............................................. F-1

                                       -i-

<PAGE>



                                     PART I


Item 1., Description of Business,  Item 2., Description of Property, and Item 6,
Management's  Discussion and Analysis,  include certain statements which are not
historical  fact, but are "forward  looking  statements".  These forward looking
statements are based on current expectations, estimates, assumptions and beliefs
of  management;  and  words  such  as  "expects",   "believes",   "anticipates",
"intends", "plans" and similar expressions are intended to identify such forward
looking statements.  Home-Stake Oil & Gas Company (the "Company" or "HSOG") does
not undertake to update, revise or correct forward looking information.  Readers
are cautioned that such forward looking statements should be read in conjunction
with the Company's  disclosures under the heading "Forward Looking  Statements",
included on page 15 hereof.

ITEM 1. DESCRIPTION OF BUSINESS

General

The Company is actively engaged in the acquisition, exploration, development and
production of oil and gas properties.  Its principal  geographic operating areas
lie within the states of Oklahoma, Montana, New Mexico and Texas.

The Company was  incorporated  in the State of Oklahoma in 1917.  The  Company's
principal business activity from the date of its incorporation through the early
1950's  was the  acquisition  and  leasing  of oil and  gas  mineral  interests.
Accordingly, the Company's revenues were primarily from royalty interests in oil
and gas production from the mineral interests in properties leased to others. In
the 1950's the Company began  participating as a working interest partner in the
acquisition  and  drilling  of oil and gas  properties,  primarily  drilled  and
operated by industry  partners.  The Company also originated and participated in
the drilling of a few of its own prospects and  discovered  several  significant
oil fields in south  central  Kansas during the 1950's.  Beginning in 1985,  the
Company  developed  an  exploration  staff to  generate,  sell and drill its own
prospects. The Company now also serves as operator for 58 producing wells.

In the mid-1970's the Company revised its business  strategy to pursue a program
to increase its revenues  generated  from the ownership of working  interests in
oil and gas properties relative to its revenues generated from royalty interests
(resulting from the ownership and leasing of oil and gas mineral interests). The
Company  increased its relative  investment in drilling  ventures  developed and
sold by  other  industry  partners  and in the oil  and gas  properties  that it
acquired.  In 1977, the Company received  approximately 70% of its revenues from
royalty interests, whereas, in 1998, approximately 27% of its revenues were from
royalty interests.

At December 31, 1998,  the Company had estimated  proved  reserves of 21,412,481
Mcf  of  natural  gas  and  2,994,928  barrels  of  oil.  Natural  gas  reserves
constituted  approximately  54% of  the  Company's  reserves  based  on an  "oil
equivalent"  basis  (converting  each six Mcf of natural gas to a barrel of oil,
representing the estimated relative energy content of oil and natural gas).

Merger

Effective  December 31, 1997, The Home-Stake  Royalty  Corporation  ("HSRC") was
merged with and into the Company (the "Merger"). The Merger was accounted for as
a purchase, with HSOG deemed to be the purchased entity for accounting purposes.
Under the purchase method of accounting,  the cost of the assets and liabilities
acquired is  allocated  based on their fair value,  with the  operations  of the
acquired  entity  included with those of the  acquiring  entity from the date of
acquisition.  Accordingly,  the historical tables and other information included
in this report for activities  during 1997 and 1996 reflect such information for
HSRC and do not include historical amounts for HSOG. However,  information as of
December 31, 1998 and 1997 and for the year ended  December  31, 1998,  includes
the combined amounts for HSRC and HSOG (i.e. the merged entity).

                                       -1-

<PAGE>



Partnership

The Company serves as general partner of H-S Royalty,  Ltd., an Oklahoma limited
partnership (the  "Partnership")  formed in 1982. The Partnership was formed for
the purpose of distributing to stockholders a 3/16th royalty interest in certain
jointly owned mineral  interests in properties,  which were  nonproducing at the
time of formation of the Partnership,  located in ten states.  Management of the
Company  distributed  the royalty  interests to allow  stockholders to realize a
portion  of the  direct  economic  benefits  that  result  from  the  commercial
production  and  sale of oil and gas,  as well as the  maximization  of  certain
income  tax  benefits  attributable  to oil and  gas  producing  activities.  In
connection with the  administration  of the Partnership,  the Company receives a
monthly administrative management fee of $500.

Competition

Competition  in the oil and gas  industry  is  intense.  In  seeking  to  obtain
desirable  producing  properties,  new leases  and  exploration  prospects,  the
Company faces competition from both major and independent oil and gas companies,
as well as from numerous  individuals and income and drilling programs.  Many of
these competitors have financial and other resources  substantially in excess of
those available to the Company.

Increases  in  worldwide  energy   production   capability  have  brought  about
substantial  surpluses in energy  supplies in recent years.  This, in turn,  has
resulted in substantial  competition for markets historically served by domestic
natural gas sources both with alternate sources of energy, such as residual fuel
oil,  and among  domestic  gas  suppliers.  Changes  in  government  regulations
relating to the  production,  transportation  and  marketing of natural gas have
also resulted in significant changes in the historical marketing patterns of the
industry.  Generally,  these  changes have resulted in the  abandonment  by many
pipelines  of  long-term   contracts  for  the  purchase  of  natural  gas,  the
development  by gas producers of their own marketing  programs to take advantage
of new regulations  requiring pipelines to transport gas for regulated fees, and
the reliance on short-term sales contracts priced at spot market prices.

In light of these  developments,  many  producers,  including the Company,  have
accepted oil prices that may differ from area  "posted  prices" in order to sell
their production.  Also, gas prices,  which were once effectively  determined by
government regulations, are now largely established by competition.  Competitors
in this market  include other  producers,  gas  pipelines  and their  affiliated
marketing companies,  independent  marketers,  and providers of alternate energy
supplies, such as residual fuel oil.

Marketing

The Company's gas production from properties in which it owns working  interests
is sold  primarily  on the spot market with a variety of  purchasers,  including
intrastate  and  interstate  pipeline  companies,  their  marketing  affiliates,
independent marketing companies and other companies who have the ability to move
gas under firm transportation  agreements. Gas produced from properties in which
the  Company  owns  royalty  interests  is  marketed  and sold by  owners of the
leasehold interests in such properties.

Substantially  all of the Company's crude oil and condensate  production is sold
at posted prices under short-term contracts, as is customary in the industry.

Seasonality

The results of operations of the Company are subject to seasonal fluctuations in
the price for natural gas.  Natural gas prices have been generally higher in the
fourth  and first  quarters.  Due to these  seasonal  fluctuations,  results  of
operations  for  individual  quarterly  periods may not be indicative of results
which may be realized on an annual basis.



                                       -2-

<PAGE>



Regulation

     General

The oil and gas industry is  extensively  regulated by federal,  state and local
authorities.  Legislation  affecting the oil and gas industry is under  constant
review for  amendment or expansion.  Numerous  departments  and  agencies,  both
federal and state, have issued rules and regulations  binding on the oil and gas
industry and its individual members,  some of which carry substantial  penalties
for the failure to comply.  The  regulatory  burden on the oil and gas  industry
increases   its  cost  of  doing   business  and,   consequently,   affects  its
profitability.  Inasmuch as such laws and regulations are frequently  amended or
reinterpreted,  the  Company is unable to predict  the future  cost or impact of
complying with such regulations.

     Exploration and Production

Exploration  and  production  operations  of the  Company are subject to various
types of regulation  at the federal,  state and local  levels.  Such  regulation
includes  requiring  permits  for the  drilling  of wells,  maintaining  bonding
requirements in order to drill or operate wells,  and regulating the location of
wells,  the method of drilling and casing wells, the surface use and restoration
of  properties  upon which wells are drilled and the plugging and  abandoning of
wells.  The  Company's  operations  are also  subject  to  various  conservation
matters.  These include the regulation of the size of drilling and spacing units
or  proration  units  and the  density  of wells  which may be  drilled  and the
unitization or pooling of oil and gas  properties.  In this regard,  some states
allow the forced  pooling or  integration  of tracts to  facilitate  exploration
while  other  states  rely on  voluntary  pooling  of lands  and  leases.  State
conservation  laws establish maximum rates of production from oil and gas wells,
generally prohibit the venting or flaring of gas and impose certain requirements
regarding the  ratability of  production.  In addition,  Oklahoma and Texas have
adopted limits on gas production  that attempt to match  production  with market
demand.  The effect of these  regulations is to limit the amounts of oil and gas
the Company can produce  from their  wells,  and to limit the number of wells or
the locations at which the Company can drill.

     Sales and Transportation

Federal legislation and regulatory controls have historically affected the price
of the gas  produced by the Company and the manner in which such  production  is
marketed.  However, due to the deregulation provisions of the Natural Gas Policy
Act of 1978,  the Natural Gas  Wellhead  Decontrol  Act of 1989 and  regulations
promulgated  by  the  Federal  Regulatory  Commission  ("FERC"),  the  price  of
virtually all gas produced by producers not affiliated with interstate pipelines
has been  deregulated.  As a result,  most of the Company's gas production is no
longer  subject  to price  regulation.  Gas which has been  removed  from  price
regulation is subject only to that price  contractually  agreed upon between the
producer and purchaser.  Market  determined  prices for deregulated  natural gas
fluctuate in response to market pressures.

The FERC  regulates  interstate  natural  gas  transportation  rates and service
conditions,  which affects the marketing of gas produced by the Company, as well
as the revenues  received from sales of such  production.  Since the mid- 1980s,
the FERC has issued a series of orders  culminating in Order Nos. 636, 636-A and
636-B  ("Order  636"),  that  have  significantly   altered  the  marketing  and
transportation  of gas.  Order  636  mandates  a  fundamental  restructuring  of
interstate pipeline sales and transportation  service,  including the unbundling
by  interstate  pipelines  of  the  sales,  transportation,  storage  and  other
components of the city-gate sales services such pipelines previously  performed.
One of the FERC's  purposes  in issuing  the orders is to  increase  competition
within all phases of the gas industry.  Generally,  Order 636 has  eliminated or
substantially reduced the interstate pipelines'  traditional role as wholesalers
of natural gas and has  substantially  increased  competition  and volatility in
natural gas markets.  While some regulatory  uncertainty  remains due to pending
appeals of  individual  pipeline's  implementation  of Order 636,  Order 636 may
ultimately  enhance the ability of  producers  such as the Company to market and
transport  their gas directly to  end-users  and local  distribution  companies,
although  it may also  subject  producers  to greater  competition  and the more
restrictive  pipeline imbalance  tolerances and greater associated penalties for
violation of such tolerances.

                                       -3-

<PAGE>



As a result of Order 636,  many  interstate  gas pipelines  have spun-off  their
gathering  systems,  which  systems  for the most part are not  subject  to FERC
jurisdiction.  This action could affect the cost of  gathering  gas.  States are
reviewing whether to regulate such gathering  systems.  The Company is unable to
predict what impact, if any, such divesting and regulation may have.

Sales of oil and natural gas  liquids by the Company are not  regulated  and are
made at market  prices.  The price the Company  receives  from the sale of these
products  is  affected  by the cost of  transporting  the  products  to  market.
Effective as of January 1, 1995, the FERC implemented  regulations  establishing
an  indexing  system for  transportation  rates for most oil  pipelines,  which,
generally,  would index such rates to inflation,  subject to certain  conditions
and limitations.  These  regulations could increase the cost of transporting oil
and  natural  gas  liquids by  pipeline,  although  the most  recent  adjustment
generally  decreased  rates.  The Company is not able to predict with  certainty
what effect, if any, these regulations will have on its operations, however, the
regulations  may,  over time,  tend to increase  transportation  costs or reduce
wellhead prices for oil and natural gas liquids.

     Operational Hazards and Insurance

The  operations  of the  Company  are  subject  to  all  risks  inherent  in the
exploration for, and development and production of, oil and gas,  including such
natural hazards as blowouts,  cratering and fires,  which could result in damage
or injury  to, or  destruction  of,  drilling  rigs and  equipment,  formations,
producing facilities or other property, or could result in personal injury, loss
of life or  pollution  of the  environment.  Any  such  event  could  result  in
substantial  cost to the  Company  which  could have an adverse  effect upon the
financial condition of the Company to the extent it is not fully insured against
such risk. The Company carries  insurance against certain of these risks but, in
accordance with standard industry practice,  is not fully insured for all risks,
either  because such insurance is unavailable or because it elects not to obtain
insurance coverage because of cost.  Although such operational risks and hazards
may to some extent be minimized,  no combination  of  experience,  knowledge and
scientific evaluation can eliminate the risk of investment or assure a profit to
any company engaged in oil and gas operations.

Environmental Matters

Operations  of the  Company  are subject to  numerous  and  constantly  changing
federal,  state  and local  laws and  regulations  governing  the  discharge  of
materials  into  the   environment  or  otherwise   relating  to   environmental
protection.  These laws and  regulations  may require the acquisition of certain
permits,  restrict or prohibit  certain types,  quantities and  concentration of
substances that can be released into the environment in connection with drilling
and  production,  restrict or prohibit  drilling  activities  that could  impact
wetlands,  endangered or threatened species or other protected natural resources
and impose  substantial  liabilities for pollution  resulting from the Company's
operations.  Such laws and  regulations may  substantially  increase the cost of
exploring for,  developing or producing oil and gas and may prevent or delay the
commencement or continuation of a given project. In the opinion of the Company's
management,  the Company is in substantial  compliance  with current  applicable
environmental  laws and regulations  and it is not anticipated  that the Company
will be required in the near future to expend  amounts  that are material in the
aggregate  to its  overall  operations  by  reason  of  environmental  laws  and
regulations.   Nevertheless,   changes  in  existing   environmental   laws  and
regulations or in the interpretations thereof could have a significant impact on
the  operating  costs of the  Company,  as well as the oil and gas  industry  in
general.  For instance,  legislation  has been proposed in Congress from time to
time that would reclassify  certain oil and gas production  wastes as "hazardous
wastes",  which  reclassification  would make exploration and production  wastes
subject  to much more  stringent  and costly  handling,  disposal  and  clean-up
requirements.  State initiatives to further regulate the disposal of oil and gas
wastes and naturally occurring radioactive materials are also pending in certain
states and these various initiatives could have a similar impact on the Company.

The  Comprehensive  Environmental  Response,  Compensation,  and  Liability  Act
("CERCLA"), also known as "Superfund" law, imposes liability,  without regard to
fault or the legality of the  original  conduct,  on certain  classes of persons
that  are  considered  to  have  contributed  to  the  release  of a  "hazardous
substance" into the environment.  These persons include the owner or operator of
the disposal  site where the release  occurred and  companies  that  disposed or

                                       -4-

<PAGE>



arranged for the disposal of the hazardous substances found at the site. Persons
who are or were  responsible for releases of hazardous  substances  under CERCLA
may be subject to joint and several  liability  for the costs of cleaning up the
hazardous  substances  that  have been  released  into the  environment  and for
damages to natural resources,  and it is not uncommon for neighboring landowners
and other third parties to file claims for personal  injury and property  damage
allegedly caused by the hazardous substances released into the environment.  The
Company is only able to  directly  control  the  operations  of those wells with
respect to which it acts as  operator.  Notwithstanding  the  Company's  lack of
control over wells  operated by others,  the failure of an operator of a well in
which  the  Company   owns  a  working   interest  to  comply  with   applicable
environmental  regulations may, in certain  circumstances,  be attributed to the
Company. As of the date of this report, the Company has no material  commitments
for capital expenditures to comply with existing environmental requirements.

Employees

At December  31,  1998,  the Company  employed 12 persons  (currently  11) whose
functions are associated  with  management,  operations and mineral  management,
engineering,  geology,  land and gas  contract  administration,  accounting  and
financial  planning,  and  administration  and  data  processing.   The  Company
considers its relations with its employees to be excellent.

ITEM 2. DESCRIPTION OF PROPERTY

General

The Company owns interests in 1,525 producing properties, including both working
interests  and royalty  interests,  located in 15 states.  (For further  details
regarding these properties,  see "Producing Wells" included  elsewhere  herein.)
The Company is engaged in leasing of its  minerals  as well as the  exploration,
production  and  sale  of  natural  gas,  condensate  and  crude  oil  from  its
properties.

The  Company has an  extensive  ownership  of  nonproducing  perpetual  minerals
located in 16 states, including North Dakota, Oklahoma, Michigan, Texas, Montana
and Mississippi.  Such ownership  comprises 3,307 properties covering 93,067 net
acres. The Company may from time-to-time  participate in exploration  activities
on certain of these properties, but generally leases them to others, retaining a
royalty  interest  in  whatever  production  may be derived  therefrom,  thereby
eliminating the risk in the exploration of such properties. At the present time,
there are  approximately  39  properties  leased to others for such  exploration
comprising 1,102 net acres.

In  addition,  the  Company  owns  a  leasehold  interest  in  124  nonproducing
properties  comprising  11,599 net acres.  These  properties  have varying lease
terms, with most expiring in the next five years. These leasehold  interests are
located in nine states, including Montana, Texas and Oklahoma.

Acquisitions

During 1998, the Company purchased 18 non-operated producing gas properties from
Sid R.  Bass,  Inc.  et al (the  "Bass  Properties")  for a  purchase  price  of
$6,685,000,  adjusted  for  operations  subsequent  to  January  1,  1998.  This
acquisition  was  financed  under the  Company's  credit  facility  described in
Financial Condition and Liquidity on page 13 hereof.

Current Activities

The Company's  exploration and development  activities are generally  located in
the states of Oklahoma  (Anadarko  Basin),  Texas and New Mexico.  In 1998,  the
majority of the Company's  activities were conducted in the Anadarko and Permian
Basins  of  Oklahoma,  Texas  and New  Mexico.  Most  recent  drilling  has been
developmental  in  nature  (63% in 1998  and 80% in  1997)  on both  oil and gas
properties. In 1998, there were nine oil wells and 15 gas wells drilled; in 1997
there were 11 oil wells and 14 gas wells drilled.

                                       -5-

<PAGE>



During 1999,  the Company's  drilling  activities  will continue to be primarily
developmental  in nature.  The Company is presently  committed to participate in
the drilling (or completion) of ten (1.3 net) wells in 1999. The Company expects
to operate one (.45 net) of these wells.  In 1999, the Company has budgeted $1.2
million  for  drilling  activities,  of which  approximately  $500,000  has been
committed.  The  primary  area of focus  during  the next 12 to 18  months  will
continue to be  developmental  drilling in the Arkoma  Basin of Oklahoma and the
Permian Basin of New Mexico.

The Company  remains  active in the property  acquisition  market.  In 1998, the
Company  reviewed  several property sales packages and submitted bids on four of
these  packages,   containing  seven  groups  of  properties.  The  Company  was
successful in acquiring the Bass Properties.

Drilling Activity

During  the  periods  indicated,  the  Company  drilled or  participated  in the
drilling of the following exploratory and development wells:


                                         Years ended December 31,
                                         ------------------------
                                   1998             1997          1996
                                   ----             ----          ----
                                Gross   Net      Gross  Net    Gross   Net
                               -------------    ------------  ------------
Exploratory:
 Productive...................    4      .50       0     .00      1    .17
 Nonproductive................    5      .59       5     .82      2    .29
                                 --     ----      --    ----     --   ----
   Total......................    9     1.09       5     .82      3    .46
                                 ==     ====      ==    ====     ==   ====
Development:
 Productive...................   14     2.25      14     .50     13    .26
 Nonproductive................    1      .18       6     .75      3    .48
                                 --     ----      --    ----     --   ----
   Total......................   15     2.43      20    1.25     16    .74
                                 ==     ====      ==    ====     ==   ====
Total:
 Productive...................   18     2.75      14     .50     14    .43
 Nonproductive................    6      .77      11    1.57      5    .77
                                 --     ----      --    ----     --   ----
    Total.....................   24     3.52      25    2.07     19   1.20
                                 ==     ====      ==    ====     ==   ====

The  above  well  information  excludes  wells in which the  Company  has only a
royalty or mineral interest.

1997 and 1996 information are those of The Home-Stake Royalty  Corporation prior
to the merger, as explained on Page 1 of this Annual Report on Form 10-KSB.

At December 31, 1998, the Company was  participating in the drilling of one (.12
net) well.  It now appears this well will be  non-commercial  and be plugged (or
sold as a water supply  well).  In  addition,  the Company  participated  in one
additional  recompletion (.16 net) subsequent to year-end which was completed as
a producing gas well.


                                       -6-

<PAGE>



Operating Activities

The Company  operates 51 producing  wells and seven  service wells located in 11
separate  fields,  which  includes one  waterflood  consisting of nine producing
wells and three  service  wells.  In  addition,  the Company has a  non-operator
working interest ownership in approximately 280 other producing properties.

The  Company  operates  wells in two  fields  in  Dawson  County,  Montana.  The
operations  in the  Glendive  Field  consist  of 12  producing  wells  and  four
saltwater  disposal wells. The Gas City Field is unitized for secondary recovery
operations and consists of nine producing wells and three water injection wells.
Production is primarily  from the Red River  formation of Ordovician age in both
of these fields.

Operations  in the Golden Trend Field in Grady and McClain  counties in Oklahoma
consist of 17 producing wells completed in four formations of Pennsylvanian  and
Ordovician age rock.

Northwestern  Oklahoma  operations  consist of five producing  wells in the Vici
Field in Ellis County. Production is from Pennsylvanian age rock.

The  Company's  operations in the Arkoma Basin of Eastern  Oklahoma  consists of
five  producing  gas wells located in the  Hartshorne  South and Kinta Fields in
Latimer County and the Ti North and Ashland Fields in Pittsburg County.

Another of the  Company's  producing  fields is the West  Cement  Field in Caddo
County,  Oklahoma.  At present,  there is one  producing  well  completed in the
Medrano formation of Pennsylvania age rock.

The  Company  also  operates  one well in the  Champmon  Strawn  Field in Gaines
County, Texas and one well in the Eunice Dome Field in Lea County, New Mexico.

Producing Wells

The  following  table sets forth certain  information  relating to the Company's
producing properties. Because the Company owns the mineral interests in numerous
producing  wells,  it does not have current  information on the numbers of wells
drilled  by  the  owners  of  the  leasehold  interests  for  these  properties.
Accordingly,   the  Company   keeps  track  of  its  royalty   interests   on  a
property-by-property  rather than a well-by-well  basis, and the following table
sets forth the number of properties  upon which there are one or more  producing
wells. Net wells refers to the total number of wells in which the Company has an
interest, multiplied by the Company's working interest percentage in the wells.


                            Producing Wells as of December 31, 1998
      -------------------------------------------------------------------
                                                        Gross        Net
                                                        -----       -----
      Working interests -       Oil....................   112          28
                                Gas....................   220          23
      Royalty interests -       Oil....................   709         (1)
                                Gas....................   484         (1)


     (1)  The term "net wells" is not applicable to a royalty interest since the
          Company has no working interest in the applicable well.



                                       -7-

<PAGE>



Acreage

As previously noted, the Company owns an interest in 1,525 producing properties,
including royalty interests in 1,193 properties (comprising approximately 27,550
net  acres) and  working  interests  in 332  properties  (comprising  12,943 net
acres).  The following  table sets forth the Company's gross and net oil and gas
leasehold acreage as of December 31, 1998.


                          Acreage as of December 31, 1998
         --------------------------------------------------------------
                                                     Gross        Net
                                                     -----       -----
         Developed Acreage:
           Leasehold...........................       72,631     13,396
           Mineral.............................      297,356     29,097
         Undeveloped Acreage:
           Leasehold...........................       30,568     11,599
           Mineral.............................      635,760     93,067
                                                  ----------   --------
         Total Acreage                             1,036,315    147,159
                                                  ==========   ========

Proved Reserves

The following table reflects the proved reserves and proved developed  producing
reserves,  the future net revenues and the present  value of future net revenues
from such  reserves  of the Company at December  31,  1998 as  estimated  by the
Company.  The quantities of the Company's proved reserves of oil and natural gas
presented below,  representing developed and undeveloped reserves,  include only
those amounts which the Company reasonably expects to recover in the future from
known oil and gas reservoirs under existing  economic and operating  conditions.
Proved  developed  producing  reserves are limited to those quantities which are
recoverable  commercially from existing wells at current prices and costs, under
existing regulatory  practices and with existing  technology.  Accordingly,  any
changes in prices, operating and developmental costs, regulations, technology or
other  factors  could  significantly  increase  or  decrease  estimates  of  the
Company's proved developed producing reserves.  The Company's proved undeveloped
reserves include only those quantities which the Company  reasonably  expects to
recover  from the  drilling  of new  wells  based on  geological  evidence  from
directly  offsetting  wells.  The risks of recovering  these reserves are higher
from both  geological and mechanical  perspectives  than the risks of recovering
developed  reserves.  The  estimates  of the  Company's  proved  reserves do not
include  proved  undeveloped  reserves  attributable  to the  Company's  royalty
interests (this information is not available to the Company) or outside operated
working  interests  (quantities  are not  considered  material to the  Company's
proved  reserves).  Furthermore,  the reserve  estimates do not include reserves
whose  estimates of  recoverability  are less precise,  commonly  referred to as
"probable"  or  "possible"  reserves.  The Company  has no reserves  outside the
continental United States.

                                       -8-

<PAGE>




                Proved Oil and Gas Reserves at December 31, 1998
--------------------------------------------------------------------------------
                                                                 Present Value
                                Oil        Gas       Future Net    of Future
                              (Bbls)      (Mcf)       Revenues   Net Revenues(1)
                             ---------  ----------  ------------ ---------------

Proved reserves............. 2,994,928  21,412,481  $ 44,896,422   $ 28,999,235
Proved developed producing
   reserves................. 2,912,403  18,372,372  $ 40,251,936   $ 25,343,082

(1)  Present value of future net revenues before deducting the impact of federal
     and state income taxes (discounted at 10%).

The future net revenues are determined by using  estimated  quantities of proved
reserves and proved developed  producing  reserves and the periods in which they
are expected to be developed  and produced  based on December 31, 1998  economic
conditions. The estimated future production is priced based on the actual prices
in effect at December 31, 1998.  The resulting  estimated  future gross revenues
are reduced by estimated future costs to develop and produce the proved reserves
based on December 31, 1998 cost levels,  but not for debt  service,  general and
administrative  expense and income taxes. For additional  information concerning
the  discounted  future net revenues to be derived  from these  reserves and the
disclosure  of the  standardized  measure  information  in  accordance  with the
provisions  of  Statement  of  Financial   Accounting   Standards  No.  69,  see
"Supplementary  Information on Oil and Gas Producing Activities  (unaudited)" at
page F-13 herein.

The reserve data set forth in this report  represents  only  estimates.  Reserve
engineering is a subjective process of estimating  underground  accumulations of
crude oil and  natural  gas that  cannot be  measured  in an exact  manner.  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,  results of drilling,
testing  and  production  subsequent  to the  date of an  estimate  may  justify
revision of such estimate. Accordingly,  reserve estimates often differ from the
quantities  of crude oil and  natural  gas that are  ultimately  recovered.  The
meaningfulness  of such  estimates is highly  dependent upon the accuracy of the
assumptions  upon which  they were  based.  Estimates  of the  Company's  proved
reserves  have not been filed  with,  or  included  in  reports  to any  Federal
authority or agency, other than the Securities and Exchange Commission.



                                       -9-

<PAGE>



Oil and Gas Production, Sales Prices and Production Costs

The  following  table sets forth  information  with  respect to  production  and
average  product  prices  attributable  to the Company's  royalty  interests and
working  interests in producing  properties,  and, with respect to properties in
which The Company  owns a working  interest,  the  production  costs  (including
production  taxes  and  transportation  charges)  per  equivalent  barrel of oil
produced for the periods indicated.


                                                  Royalty Interests
                                                  -----------------
                                           1998          1997         1996
                                      ------------  ------------  ------------

Production:
   Oil (Bbls)...............               104,536        55,014        57,137
   Gas (Mcf)................               642,773       376,703       393,114

Average Sales Prices:
   Oil (per Bbl)............                $12.14        $18.97        $20.13
   Gas (per Mcf)............                  2.04          2.52          2.12


                                                  Working Interests
                                                  -----------------
                                          1998          1997           1996
                                      ------------  ------------  ------------

Production:
   Oil (Bbls)...............               273,340       155,983       182,388
   Gas (Mcf)................             1,846,862       831,761       864,916

Average Sales Prices:
   Oil (per Bbl)............                $12.10        $18.74        $20.16
   Gas (per Mcf)............                  1.94          2.33          1.97

Average direct operating 
   costs per barrel of oil 
   equivalent (1)...........                 $5.22         $6.51         $9.03

(1)  This item relates only to working  interests  since royalty  owners are not
     liable for operating costs.  Barrels of oil equivalent are determined using
     the  ratio of six Mcf of gas to one  barrel  of crude  oil,  condensate  or
     natural gas liquids. See Item 6., Management's Discussion and Analysis, for
     further discussion of these costs.

1997 and 1996 information are those of The Home-Stake Royalty  Corporation prior
to the merger, as explained on Page 1 of this Annual Report on Form 10-KSB.

ITEM 3. LEGAL PROCEEDINGS

The  Company is involved in various  minor legal  actions  arising in the normal
course of business. In the opinion of management, the Company's liabilities,  if
any, in these matters will not have a material effect on the Company's financial
position, results of operations or cash flows.




                                      -10-

<PAGE>



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

There were no matters submitted to the Company's  stockholders during the fourth
quarter of the fiscal year ended December 31, 1998.

                                     PART II

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

As of December  31, 1998,  the Company had  approximately  400 known  holders of
record of its common stock.  Prior to February 12, 1998,  the  Company's  common
stock was  listed in the  "pink  sheets"  published  by the  National  Quotation
Bureau.  Trades were limited and,  accordingly,  there was no established public
trading market for the stock as defined in Item 201(a)(1) of SEC Regulation S-B.
On  February  12,  1998  the  Company's   common  stock  began  trading  on  the
Over-the-Counter Bulletin Board and on May 11, 1998, began trading on the Nasdaq
SmallCap  Market under the symbol "HSOG".  The table below reflects the high and
low sales prices per share for the Company's  common stock as reported on either
the Over-the-Counter Bulletin Board or the Nasdaq SmallCap Market for the period
indicated.


                                                  1998
                                                  ----
              Quarter                      Low            High
              -------                    -------        -------  
First...............................     $ 4.250        $ 6.250
Second..............................     $ 6.250        $ 8.000
Third...............................     $ 5.375        $ 6.750
Fourth..............................     $ 4.625        $ 5.750

The following  table sets forth the per share amount of cash dividends  declared
and paid by the  Company  ("HSRC in  1997") on their  common  stock  during  the
periods indicated (1997 restated to reflect the Merger and common stock split).


                                                 Cash Dividends
                                                Declared and Paid
                                                  Per Share of
                                                  Common Stock

      Years ended December 31,                 1998           1997
      ------------------------                ------         ------
First Quarter........................          $ .02         $  .02
Second Quarter.......................            .02            .02
Third Quarter........................            .02            .02
Fourth Quarter.......................            .02            .00

The Company has historically  paid quarterly cash dividends to its stockholders.
The Company's Board of Directors has adopted a dividend policy that provides for
the payment of quarterly  dividends,  dependent on numerous  factors,  including
future earnings,  anticipated capital requirements,  the financial condition and
prospects of the Company, and such other factors as the Board may deem relevant.
In addition,  future  dividends may be  restricted  pursuant to the terms of the

                                      -11-

<PAGE>



loan  agreement  between the Company and  NationsBank,  N.A.  See  "Management's
Discussion and Analysis" below for a description of these restrictions.

ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS

The  following  discussion  should  be read in  conjunction  with the  Company's
financial statements and notes thereto included elsewhere herein.

Results of Operations

As further  described on page 1 of this Annual  Report on Form 10-KSB and Note 1
to the  financial  statements  (see page F-6),  the 1997  results of  operations
presented  herein are the  historical  amounts  for HSRC only and do not include
historical  amounts  for  HSOG.  Results  of  operations  for 1998  reflect  the
activities of the merged entities.

Net operations for 1998 decreased from income of $2,162,482 in 1997 to a loss of
$4,732,213 in 1998. The factors contributing to this increase are as follows:

Oil sales  increased  $608,820  (15%),  primarily  due to the  increase in sales
volumes. The Company's oil production increased 166,863 barrels,  primarily as a
result of the Merger with HSRC, partially offset by the sale in late 1997 of the
Company's  interest in the  Countyline  Unit. The average sales price per barrel
decreased significantly from $18.80 in 1997 to $12.11 in 1998.

Gas sales  increased  69%  ($2,002,393)  primarily  due to the increase in sales
volumes.  Gas production  increased  1,281,153 mcf, primarily as a result of the
Merger with HSRC and the additional  production  provided by the Bass Properties
purchased  March 31, 1998. The average sales price of the Company's  natural gas
decreased from $2.36 per mcf in 1997 to $1.96 per mcf in 1998.

Income from equity affiliates  decreased by $534,690.  As described in the Notes
to the Financial  Statements  on Page F-6 herein,  HSRC was merged with and into
HSOG on December  31, 1997.  Consequently,  there was no  comparable  amount for
1998.

Gains on sales of assets  decreased 97%  ($315,525) in 1998. The Company had two
major  property  sales in 1997;  the Alden Field  properties  and the Countyline
Unit, which had gains of $99,600 and $194,900, respectively.

Production  expenses  increased 57%. Lease operating expenses increased $998,798
(67%) due primarily to the Merger with HSRC, partially offset by the decrease in
expenses   associated  with  the  Countyline  Unit  and  the  Company's  Montana
properties.  Production  taxes increased  $182,049 as a result of the higher oil
and  gas  sales  described  above.  On a pro  forma  basis  production  expenses
decreased 20%.

Exploration  expenses  increased  $572,023.  This  increase  is a result  of the
incomparable  reporting  between 1997 and 1998 due to the Merger. On a pro forma
basis,  these expenses  decreased 40%.  Although the Company  participated  in a
greater number of dry holes in 1998, the Company had a lower working interest in
the wells  drilled and a lower  average cost per well.  Condemned  and abandoned
property  expenses  were higher in 1998,  due  primarily to the  abandonment  of
certain nonproducing  leasehold costs on acreage the Company was unable to drill
due to lower product prices.

General and  administrative  expense  increased  $1,093,737  (96%) in 1998. This
increase was entirely  related to the 1998  accounts  including the costs of the
Company  and HSRC,  whereas the 1997  expense is only that of HSRC.  General and
administrative expenses on a comparable pro forma basis decreased 3%.

Depreciation,  depletion and amortization  expense increased  $3,876,228 related
primarily to the Merger.  1997 expense  represents  amounts  calculated on asset
values prior to the Merger.  In connection with the Merger,  the carrying values

                                      -12-

<PAGE>



of the producing properties acquired from HSOG were adjusted to reflect the fair
values of the properties  based on estimated  discounted  future net cash flows.
This purchase  price  adjustment  increased the carrying  value of the producing
properties  in the  amount  of  $10.1  million  and  was  included  in the  1998
calculation  of  depreciation,  depletion  and  amortization.  In addition,  the
Company's   producing   asset  costs  increased  $6.6  million  related  to  the
acquisition of the Bass Properties.

The  carrying  value of the  Company's  properties  are  assessed  for  possible
impairment  whenever  facts and  circumstances  indicate such amounts may not be
recoverable,  based on estimated future net cash flows.  During 1998, prices for
crude oil and natural gas decreased  significantly.  Although  future prices are
difficult  to predict,  the Company does not expect  these  depressed  prices to
increase  significantly  in the near future.  Accordingly,  the estimated future
cash flows from  producing  properties  decreased  significantly  in 1998.  As a
result,  in 1998 the Company  recorded an impairment  adjustment in the carrying
value of its  producing  oil and gas  properties  in the  amount of  $4,775,867.
Future  impairment  adjustments may be necessary,  depending on future estimated
prices for crude oil and natural gas, as well as future well performance.

Interest expense increased  $336,202 as a result of the Company's  borrowings in
1998 to finance the acquisition of the Bass Properties on March 31, 1998.

The Company's  effective tax rate varies  significantly  from year to year,  due
principally to the significant  effects of statutory  depletion which is largely
independent of pre-tax income. In addition,  in 1997 a portion of net income was
attributable to income from the Company's equity investee, for which there is no
corresponding  income  tax  provision  required.   For  additional   information
attributable to each of these factors, see Note 4 to the Consolidated  Financial
Statements on page F-10.

Financial Condition and Liquidity

The Company's operating activities have traditionally been self-financed through
internally  generated cash flows.  The principal uses of cash flows have been to
fund the Company's  exploration and production activities and for the payment of
dividends to stockholders.  The use of borrowed funds has generally been limited
to the  acquisition  of producing oil and gas properties  where future  revenues
from such purchases are expected to fund the debt.

In 1998,  the  Company  spent  $2.4  million  for  exploration  and  development
activities  and $6.6  million on  acquisitions.  The Company has  budgeted  $1.2
million  for  exploration   and   development   activities  in  1999,  of  which
approximately $500,000 has been committed.

The working  capital  deficit at December  31, 1998 was  $900,000.  Despite this
deficit,  the Company's working capital and internally generated cash flows from
operations  are expected to be sufficient to finance the Company's note payments
and budgeted 1999  exploration  and  development  activities.  In addition,  the
Company's line of credit described below is expected to be extended into 2000.

During 1998, the Company  entered into a new credit  facility with its bank that
provided  long-term  financing for the acquisition of the Bass Properties and an
operating line-of-credit.  The Company borrowed $6.6 million under the long-term
loan that  requires  monthly  principal  payments of $110,000,  plus interest at
prime less 1/2%.  This  credit  facility  also  provides  for a  revolving  term
line-of-credit until May 1, 1999, in the amount of $5 million, requiring monthly
payments of interest at prime less 1%. This credit  facility,  which is expected
to be extended  another year,  includes certain  covenants which require,  among
other things, that the Company maintain (i) a ratio of cash flow (defined in the
loan agreement to be income before income taxes plus depreciation, depletion and
amortization including impairment adjustments) to current maturities on the term
loan  of  more  than  1.75  to  1.0,  (ii)  a  ratio  of  total  liabilities  to
stockholders'  equity of not more than 1.0 to 1.0, and (iii) a minimum net worth
of not less than $20 million.  In addition,  the Company's annual cash dividends
are limited to the lesser of $550,000 or net income.  The Company has received a
waiver from the Bank  permitting  the payment of  dividends in 1998 and allowing
its minimum net worth to fall below the minimum requirement through the maturity
of the loan.  In  connection  with  this  line of  credit,  the  Company  pays a

                                      -13-

<PAGE>



commitment fee of one-half of one percent (1/2%) per annum on the unused portion
of the line.

In 1998,  the  Company's  average  direct  operating  costs  per  barrel  of oil
equivalent  decreased 20% to $5.22. This decrease is primarily the result of the
sale of the Countyline  Unit  effective July 31, 1997. In addition,  repairs and
maintenance costs on the Company's Montana  properties were lower in 1998 due to
the milder winter weather in the Spring and fewer mechanical break downs.

Average direct  operating  costs per barrel of oil equivalent are dependent upon
several factors, including principally the nature of a company's operations. For
example,  gas  properties  are  generally  more  economical  to operate than oil
properties.  Likewise,  oil  wells in a form of  primary  recovery  (flowing  or
pumping)  are more  economical  to operate than oil wells in a form of secondary
recovery,  such  as  waterfloods.   The  Company  has  large  interests  in  two
waterfloods  and  one  water-drive   operation.   These  properties  contributed
approximately  37% of the  total  working  interest  barrels  of oil  equivalent
production  in 1998 but were  responsible  for  approximately  63% of the direct
operating  costs.  Excluding these waterflood  properties,  the Company's direct
operating costs per barrel of oil equivalent in 1998 was $3.40.

The Company  projects  future  earnings and  believes it will fully  realize its
deferred  tax  assets  and,  accordingly,  no  valuation  allowances  have  been
provided.  In management's  opinion, the deferred tax assets will be realized as
reductions in future income taxes payable or by utilizing available tax planning
strategies.  Uncertainties  that may affect the  ultimate  realization  of these
assets  include  future  product  prices,  costs and tax rates.  Therefore,  the
Company will periodically review these factors and determine whether a valuation
allowance has become necessary.

Year 2000 Readiness

The Company began  addressing the impact of Year 2000 (Y2K) on its operations in
mid 1997. This problem exists for certain  computer  systems due to the use of a
two digit  year in most  computer  software.  If left  unchanged,  beginning  on
January 1, 2000,  those  computers  would  interpret the year as 1900 instead of
2000.  Although the primary  affects of this problem will be related to computer
systems,  the problem has the potential of affecting other office equipment such
as copiers, facsimile machines, telephone system, postage metering equipment and
any other  equipment  or devices  which might  contain  date-dependent  embedded
computer processor chips.

The Company has already  completed the  modification  of all in-house  generated
computer  software to make it Y2K  compliant.  This  includes  all phases of the
Company's financial and property  accounting  systems.  Each individual computer
processor has been  evaluated and  determined  to be Y2K  compliant.  All office
equipment  including  copiers,  facsimile  machines,  phone  system and  postage
metering equipment has also been found to be Y2K compliant.

Certain   pieces  of  field   equipment   used  by  the  Company  might  contain
date-dependent  embedded computer processors.  This equipment is currently being
evaluated for Y2K  compliancy.  To the best of the Company's  knowledge,  all of
this equipment allows for manual operation of the electronic system in case of a
power or  internal  system  failure  thus  permitting  the Company to bypass any
problem which might occur.

The Company is in the process of requesting  compliancy  information  from major
third-party  suppliers,  field equipment  manufacturers and other companies from
whom it  receives  revenues.  All third  party  vendor  responses  to-date  have
indicated that they anticipate total compliance of all critical systems prior to
the end of the  year.  As for  those  vendors  who have not yet  responded,  the
Company has requested  that they respond prior to the end of the second  quarter
of 1999.

All Y2K compliance  modifications and confirmations have been or will be done by
existing Company personnel in the ordinary performance of their duties,  without
incurring  the  expense of outside  consultants  or  additional  employees.  The
Company  is  unable to  estimate  its  internal  costs  associated  with its Y2K
readiness efforts.


                                      -14-

<PAGE>



The  Company's  contingency  plans  include the complete  backup of all computer
systems and data at December 31, 1999 and the  possibility of manual  over-rides
of any affected field operations. Services of any major outside third-party that
indicates expected non-compliance at year-end will be moved to compliant service
providers wherever possible.

The Company believes the most likely  worst-case  scenario would involve limited
failures by third party vendors and is making every effort to ensure  compliance
with third party vendors. The Company does not expect any significant disruption
in its operations or business activities.  However, the Company's operations are
part of an industry that is heavily  dependent on an  interconnected  network of
companies  and  transportation  facilities  that are beyond  the  control of the
Company  and which could be  adversely  affected  by Y2K  problems.  In a recent
survey by the oil and gas working group of the President's  Council on Year 2000
Conversion,  94% of the 1,000 responding  companies  reported that they would be
Y2K ready by September 30, 1999.  Given the nature of the  Company's  activities
and reliance on outside  third-parties,  the Company cannot  guarantee that some
Y2K problems  will not arise.  If Y2K  problems do arise,  there is no assurance
that such  problems  might not have a material  adverse  impact on the Company's
financial condition or results of operations.

The above information is designated as "Year 2000 Readiness Disclosure" pursuant
to the Year 2000  Information  and  Readiness  Disclosure  Act,  Public  Law No.
105-271,  1998.  The Year 2000  Readiness  Disclosure  Act does not insulate the
Company  from  liability  under the  Federal  securities  laws with  respect  to
disclosures relating to Y2K information.

Inflation

In recent years  inflation  has not had a  significant  impact on the  Company's
operations or financial  condition.  The general economic pressures limiting oil
and gas prices in recent years have generally been  accompanied by corresponding
downward pressure on costs to develop and operate oil and gas properties as well
as the costs of drilling and  completing  wells.  The impact of inflation on the
Company in the future  will  depend on the  relative  increases,  if any, in the
selling price of oil and gas and in the  Company's  operating,  development  and
drilling costs.

Forward Looking Statements

Certain  statements  included in this report which are not historical  facts are
"forward looking  statements",  including statements with respect to oil and gas
reserves,  the  number  and  location  of wells to be  drilled,  future  capital
expenditures  (including  the amount and nature  thereof),  anticipated  date of
repayment of bank debt,  extension of existing line of credit, Y2K readiness and
other  such  matters.  These  forward  looking  statements  are based on current
expectations,  estimates,  assumptions and beliefs of management; and words such
as  "expects",  "believes",   "anticipates",   "intends",  "plans"  and  similar
expressions  are intended to identify  such forward  looking  statements.  These
forward looking statements involve risks and uncertainties,  including,  but not
limited to:  dependence upon the prices for oil and natural gas which prices are
subject to significant  fluctuations in response to relatively  minor changes in
supply and demand for such products, market uncertainty, political conditions in
oil producing regions,  domestic and foreign government  regulations,  the price
and  availability  of  alternative   fuels  and  a  variety  of  other  factors;
competition in the  acquisition  of oil and gas properties and the  development,
production  and marketing of oil and natural gas;  operating  hazards  typically
associated with the exploration,  development,  production and transportation of
oil and natural gas; federal,  state and local laws relating to the exploration,
development,  production  and  marketing  of  oil  and  natural  gas,  including
environmental  and safety matters;  changes in laws and  regulations;  and other
factors,  most of which are beyond  the  control  of the  Company.  Accordingly,
actual results and  developments  may differ  materially from those expressed in
the forward looking statements.

ITEM 7. FINANCIAL STATEMENTS

The  annual  financial  statements  required  by this  Item  begin  at page  F-1
following page 18 hereof.


                                      -15-

<PAGE>



ITEM 8.  CHANGES  IN  AND  DISAGREEMENTS  WITH  ACCOUNTANTS  ON  ACCOUNTING  AND
         FINANCIAL DISCLOSURE

There has been no change in accountants and no  disagreements  on any matters of
accounting principles or practices, financial statement disclosures, or auditing
scope or procedures.

                                    PART III

ITEM 9. DIRECTORS,  EXECUTIVE  OFFICERS AND COMPLIANCE WITH SECTION 16(a) OF THE
        EXCHANGE ACT

The information required by this Item is incorporated by reference from sections
of the  Company's  definitive  Proxy  Statement  for its 1999 Annual  Meeting of
Stockholders  (the  "Proxy   Statement")   entitled   "Election  of  Directors",
"Executive  Officers of the  Company" and "Section  16(a)  Beneficial  Ownership
Reporting Compliance".

ITEM 10. EXECUTIVE COMPENSATION

The  information  required by this Item is  incorporated  by reference  from the
section of the Proxy Statement entitled "Executive Compensation".

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The  information  required by this Item is  incorporated  by reference  from the
section of the Proxy Statement  entitled  "Principal  Stockholders  and Security
Ownership of Management".

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The  information  required by this Item is  incorporated  by reference  from the
section of the Proxy  Statement  entitled  "Certain  Relationships  and  Related
Transactions".

ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K

     (a) Exhibits:

The  following  documents  are included as exhibits to this Form  10-KSB.  Those
exhibits  below  incorporated  by reference  herein are indicated as such by the
information  supplied  in  the  parenthetical  thereafter.  If no  parenthetical
appears after an exhibit, such exhibit is filed herewith.

Exhibit
Number        Description

  2.1     Purchase and Sale  Agreement  between Sid R. Bass,  Inc. et al and the
          Company,  effective  as of January 1, 1998  (filed as Exhibit 2 to the
          Company's Current Report on Form 8-K, dated March 31, 1998).

  3.1     Amended  and  Restated  Certificate  of  Incorporation  of the Company
          (filed as Exhibit 3.1 to the Company's Quarterly Report on Form 10-QSB
          for the quarter ended June 30, 1998).

  3.2     Bylaws  of the  Company,  as  amended  (filed  as  Exhibit  3.2 to the
          Company's Annual Report on Form 10-KSB for the year ended December 31,
          1997).




                                      -16-

<PAGE>



Exhibit
Number        Description


  4.1     Rights  Agreement and Indenture  dated as of May 2, 1994,  between the
          Company  and  The  Fourth   National  Bank  of  Tulsa  (now  known  as
          NationsBank, N.A.) (filed as Exhibit 4.1 to the Company's Registration
          Statement on Form 10, Registration No. 0-19766)


*10.1     Amended  and  Restated  Home-Stake  Oil &  Gas  Company  Key  Employee
          Incentive  Bonus Plan (filed as Exhibit 10.1 to the  Company's  Annual
          Report on Form 10-KSB for the year ended December 31, 1997).


*10.2     Amended and Restated  Employment  Agreement  by and between  Robert C.
          Simpson and the Company dated  February 5, 1998 (filed as Exhibit 10.2
          to the  Company's  Annual  Report on Form  10-KSB  for the year  ended
          December 31, 1997).

*10.3     Amended and Restated  Home-Stake  Oil & Gas Company  Change in Control
          Severance  Pay Plan  (filed as Exhibit  10.3 to the  Company's  Annual
          Report on Form 10-KSB for the year ended December 31, 1997).

*10.4     Home-Stake  Oil & Gas  Company  1997  Incentive  Stock Plan  (filed as
          Exhibit  10.4 to the  Company's  Annual  Report on Form 10-KSB for the
          year ended December 31, 1997).

*10.5     Form of  Indemnity  Agreement  between the Company and each  Director,
          dated May 14, 1996 (filed as Exhibit 10.1 to the  Company's  Quarterly
          Report on Form 10-QSB for the quarter ended June 30, 1996).

 10.6     Amended and Restated Loan  Agreement  dated March 31, 1998 between the
          Company and  NationsBank,  N.A.  (filed as Exhibit 10 to the Company's
          Current Report on Form 8-K, dated March 31, 1998).

   27     Financial Data Schedule.


         * Management contract or compensatory plan or arrangement.

     (b) Reports on Form 8-K:

     No reports on Form 8-K were filed  during the fourth  quarter of the fiscal
year ended December 31, 1998.

                                      -17-

<PAGE>


                                   SIGNATURES

In accordance  with Section 13 or 15(d) of the Exchange Act, the  Registrant has
caused this Form 10-KSB to be signed on its behalf by the undersigned, thereunto
duly authorized.

                                    

                                             HOME-STAKE OIL & GAS COMPANY
                                        
Date:    March 29, 1999                  By:  /s/ Robert C. Simpson             
                                             ---------------------------------
                                              Robert C. Simpson
                                              Chairman of the Board, 
                                              Chief Executive Officer
                                              and President
                                       
Pursuant to the  requirements  of the Exchange  Act, this report has been signed
below by the following persons on behalf of the Registrant and in the capacities
and on the dates indicated:

       Signature                        Title                         Date
       ---------                        -----                         ----

 /s/ Robert C. Simpson         Director, Chairman of the Board    March 29, 1999
------------------------------ Chief Executive Officer and                     
Robert C. Simpson              President
                               (Principal Executive Officer)  
                               

 /s/ Chris K. Corcoran         Director, Executive Vice           March 29, 1999
------------------------------ President, and Chief               
Chris K. Corcoran              Financial Officer   
                               (Principal Financial and  
                               Accounting Officer)      
                               

 /s/ L.W. Allegood             Director                           March 29, 1999
------------------------------
L.W. Allegood

 /s/ Larry F. Grindstaff       Director                           March 29, 1999
------------------------------
Larry F. Grindstaff

 /s/ Ronald O. Gutman          Director                           March 29, 1999
------------------------------
Ronald O. Gutman

 /s/ Joseph J. McCain, Jr.     Director                           March 29, 1999
------------------------------
Joseph J. McCain, Jr.

 /s/ I. Wistar Morris, III     Director                           March 29, 1999
------------------------------
I. Wistar Morris, III


                                      -18-

<PAGE>



                          HOME-STAKE OIL & GAS COMPANY

                          INDEX TO FINANCIAL STATEMENTS



Covered by Report of Independent Auditors

Report of Independent Auditors......................................        F-2
Balance Sheets as of December 31, 1998 and 1997.....................        F-3
Statements of Operations and Retained Earnings for the years
  ended December 31, 1998 and 1997..................................        F-4
Statements of Cash Flows for the years ended 
  December 31, 1998 and 1997........................................        F-5
Notes to Financial Statements.......................................        F-6


Not Covered by Report of Independent Auditors

Note 8 - Quarterly Results of Operations (unaudited)................       F-12
Supplementary Information on Oil and Gas Producing Activities for
  the years ended December 31, 1998 and 1997 (unaudited)............       F-13


                                       F-1

<PAGE>



                         REPORT OF INDEPENDENT AUDITORS



To the Board of Directors and Stockholders
Home-Stake Oil & Gas Company

We have audited the  accompanying  financial  statements of Home-Stake Oil & Gas
Company listed in the accompanying index to financial statements (Item 7). These
financial  statements are the  responsibility of the Company's  management.  Our
responsibility  is to express an opinion on these financial  statements based on
our audits.

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

In our opinion,  the financial  statements  listed in the accompanying  index to
financial  statements  (Item 7) present fairly,  in all material  respects,  the
financial  position of  Home-Stake  Oil & Gas  Company at December  31, 1998 and
1997,  and the results of its  operations  and its cash flows for the years then
ended in conformity with generally accepted accounting principles.


                                                               ERNST & YOUNG LLP

Tulsa, Oklahoma
March 22, 1999


                                       F-2

<PAGE>



                          HOME-STAKE OIL & GAS COMPANY
                                 BALANCE SHEETS
                           December 31, 1998 and 1997


                                     ASSETS

                                                         1998           1997
                                                         ----           ----
Current assets:
  Cash and cash equivalents......................... $    212,031  $  1,507,782
  Accounts receivable...............................    1,476,995     1,730,114
  Prepaid expenses..................................      238,253       188,461
                                                     ------------  ------------ 
         Total current assets.......................    1,927,279     3,426,357

Property and equipment, at cost:
  Producing oil and gas leases (working interests)..   37,054,044    29,138,034
  Producing oil and gas royalties...................    9,006,126     9,075,949
  Nonproducing oil and gas properties...............    1,494,000     1,841,049
  Office equipment and other........................      526,176       569,172
                                                     ------------  ------------
                                                       48,080,346    40,624,204
  Less accumulated depreciation, 
     depletion and amortization.....................   24,727,189    15,613,520
                                                     ------------  ------------
         Net property and equipment.................   23,353,157    25,010,684

Other assets........................................      237,781       246,918
                                                     ------------  ------------
                                                     $ 25,518,217  $ 28,683,959
                                                     ============  ============

                      LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
  Accounts payable and accrued liabilities.......... $    897,720  $  1,517,932
  Income taxes payable..............................            -        92,822
  Current notes payable (Note 3)....................    1,945,000             -
                                                     ------------  ------------
         Total current liabilities..................    2,842,720     1,610,754
Long-term notes payable (Note 3)....................    4,290,000             -
Deferred income taxes (Note 4)......................    2,914,813     5,207,548

Stockholders' equity (Note 7):
  Preferred  stock,  $1 par value -  
     2,000,000  shares  authorized;  none issued
  Common stock, $ .01 par value - 
     12,000,000 shares authorized,
     4,517,363 shares issued........................       45,174        45,174
  Additional paid-in capital........................   15,460,621    15,460,621
  Retained earnings.................................    1,272,945     6,359,862
                                                     ------------  ------------
                                                       16,778,740    21,865,657
  Less treasury stock, at cost - 243,536 shares.....   (1,308,056)            -
                                                     ------------  ------------
         Total stockholders' equity.................   15,470,684    21,865,657
                                                     ------------  ------------
                                                     $ 25,518,217  $ 28,683,959
                                                     ============  ============

                             See accompanying notes.


                                       F-3

<PAGE>



                          HOME-STAKE OIL & GAS COMPANY
                 STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
                     Years ended December 31, 1998 and 1997




                                                         1998           1997
                                                         ----           ----
Revenues:                                                         
     Oil and gas sales.............................. $  9,565,933  $  6,931,498
     Income from equity affiliates..................            -       534,690
     Gain on sales of assets........................        9,947       325,472
     Other income...................................      413,728       278,858
                                                     -----------   ------------
                                                        9,989,608     8,070,518
Costs and expenses:
     Production.....................................    3,234,996     2,054,149
     Exploration....................................    1,362,540       790,517
     General and administrative.....................    2,237,185     1,143,448
     Depreciation, depletion and amortization.......    4,891,694     1,015,466
     Impairment of producing oil and gas properties.    4,775,867             -
     Interest.......................................      375,800        39,598
     Property and other taxes.......................      262,438       126,567
                                                     ------------  ------------
                                                       17,140,520     5,169,745
Income (loss) before provision for income taxes.....   (7,150,912)    2,900,773

Provision for (benefit from) income taxes (Note 4):
     Current........................................     (125,964)      448,214
     Deferred.......................................   (2,292,735)      290,077
                                                     ------------  ------------
                                                       (2,418,699)      738,291
                                                     ------------  ------------
Net income (loss)...................................   (4,732,213)    2,162,482

Retained earnings at beginning of year..............    6,359,862     4,385,862

Cash dividends ($ .08 per share - 1998,
                $ .06 per share - 1997).............     (354,704)     (188,482)
                                                     ------------  ------------

Retained earnings at end of year.................... $  1,272,945  $  6,359,862
                                                     ============  ============

Weighted average number of shares outstanding.......    4,460,891     3,396,857
                                                     ============  ============

Net income (loss) per common share - 
     basic and diluted..............................       $(1.06)        $ .64
                                                           ======         =====

                             See accompanying notes.

1997  amounts  are  those of The  Home-Stake  Royalty  Corporation  prior to the
merger,  as  explained  in Note 1 Merger  (Page F-6).  See Note 2 (Page F-9) for
comparable pro forma amounts for 1997.




                                       F-4

<PAGE>



                          HOME-STAKE OIL & GAS COMPANY
                            STATEMENTS OF CASH FLOWS
                     Years ended December 31, 1998 and 1997


                                                         1998          1997
                                                         ----          ----
Operating activities:
  Oil and gas sales, net of production taxes........ $  9,562,002  $  6,439,737
  Other.............................................      413,728       353,284
                                                     ------------  ------------
                                                        9,975,730     6,793,021

  Cash paid to suppliers and employees..............    5,504,398     3,964,129
  Interest paid.....................................      375,800        39,598
  Property and other taxes..........................      262,438       126,567
  Income taxes paid.................................      265,945       389,982
                                                     ------------  ------------
                                                        6,408,581     4,520,276
    Net cash provided by operating activities.......    3,567,149     2,272,745

Investing activities:
  Proceeds from sales of property and equipment.....      100,002     1,718,211
  Acquisition of property and equipment.............   (9,540,604)   (1,903,505)
  Dividends from equity affiliate...................            -        60,674
                                                     ------------  ------------
    Net cash used in investing activities...........   (9,440,602)     (124,620)

Financing activities:
  Proceeds from notes payable.......................    7,225,000             -
  Note payments.....................................     (990,000)   (1,366,035)
  Purchase of treasury stock........................   (1,308,056)            -
  Cash dividends paid...............................     (349,242)     (262,563)
                                                     ------------  ------------
    Net cash provided by (used in) 
          financing activities......................    4,577,702    (1,628,598)
                                                     ------------  ------------
Net increase (decrease) in cash.....................   (1,295,751)      519,527
Cash acquired in merger.............................            -       361,391
Cash and cash equivalents at beginning of year......    1,507,782       626,864
                                                     ------------  ------------
Cash and cash equivalents at end of year............ $    212,031  $  1,507,782
                                                     ============  ============

Reconciliation of net income (loss) to net cas
    provided by operating activities:
Net income (loss)................................... $ (4,732,213) $  2,162,482
Reconciling adjustments:
  Depreciation, depletion and 
     amortization and impairment....................    9,667,561     1,015,466
  Gain on sales of assets...........................       (9,947)     (325,472)
  Income from equity affiliates.....................            -      (534,690)
  Dry hole costs and condemned and 
     abandoned properties...........................    1,362,540       790,517
  Deferred income taxes.............................   (2,292,735)      290,077
  Changes in other assets and liabilities:
    Accounts receivable.............................      (96,273)     (875,831)
    Prepaid expenses and other assets...............      (40,655)       18,629
    Accounts payable................................     (198,288)     (317,723)
    Other liabilities...............................      (92,841)       49,290
                                                     ------------  ------------
Net cash provided by operating activities........... $  3,567,149  $  2,272,745
                                                     ============  ============

                             See accompanying notes.

1997  amounts  are  those of The  Home-Stake  Royalty  Corporation  prior to the
merger, as explained in Note 1 Merger (Page F-6).




                                       F-5

<PAGE>



                          HOME-STAKE OIL & GAS COMPANY
                          NOTES TO FINANCIAL STATEMENTS

Description of business

Home-Stake Oil & Gas Company  ("HSOG" or the "Company") is an  "independent  oil
and gas producer" actively engaged in the acquisition,  exploration, development
and production of oil and gas properties. Oil and gas exploration and production
activities are subject to numerous risks inherent in the business. These include
the volatility of oil and gas prices,  environmental  concerns and  governmental
regulations,  general  business risks and hazards  involving the acquisition and
operation  of oil and gas  properties,  the  ability  to  continue  to find  new
reserves to replace those being  depleted and the highly  competitive  nature of
the business.  Its principal geographic operating areas lie within the states of
Oklahoma, Montana, New Mexico and Texas.

Note 1 - Summary of significant accounting policies

Merger

On December 31, 1997, The  Home-Stake  Royalty  Corporation  ("HSRC") was merged
with and into the Company.  This  transaction  was accounted for by the purchase
method of accounting for business combinations. The merged companies adopted the
name of HSOG,  which  was  deemed  to be the  purchased  entity  for  accounting
purposes since the former HSRC  stockholders  received  approximately 61% of the
merged  entity's  common stock.  Accordingly,  the  statement of operations  and
retained  earnings and  statement of cash flows for the year ended  December 31,
1997, reflect the historical operations of HSRC prior to the merger. The balance
sheets at December 31, 1998 and 1997,  reflect the assets and liabilities of the
merged entity.

Prior to their merger on December 31, 1997, both HSOG and HSRC were under common
management,  with both  frequently  participating  jointly in the acquisition of
mineral and leasehold  interests and in exploration and development  activities.
Each company  generally owned an equal interest in the oil and gas properties in
which they jointly  participated,  however such interests sometime varied.  Only
HSRC,  however,  served as  operator  on  properties  that were not  operated by
outside parties.

In accordance  with oil and gas industry  practice,  the oil and gas ventures in
which both companies participated were considered to be joint, but separate. For
those properties operated by outside parties,  each Company was generally billed
separately  for their  share of  operating  and  drilling  costs and  separately
reimbursed the operator for such costs.  For properties  operated by HSRC,  HSOG
was billed for such costs  monthly.  Payroll  costs for  personnel  were paid by
HSRC, with HSOG reimbursing  one-half share of such costs. For substantially all
other general and  administrative  costs,  each Company  separately paid for its
one-half share.

Use of Estimates in the Preparation of Financial Statements

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

One of the most  significant  estimates made by the Company involves its oil and
gas reserves.  The Company  amortizes  its costs of producing  properties on the
unit-of-production  method over the estimated remaining reserves of the Company.
Since  estimates of remaining  oil and gas  reserves are highly  subjective  and
subject to constantly changing conditions,  most of which are beyond the control
of the Company,  it is reasonably  possible that the  Company's  estimates  will
change over time, affecting the rates of amortization. In addition, in assessing
whether any  impairment  to the  carrying  values of  producing  properties  has
occurred,  similar  estimates  of oil and gas  reserves  are used.  Consequently
impairment adjustments to the carrying values are reasonably possible.




                                       F-6

<PAGE>


                          HOME-STAKE OIL & GAS COMPANY
                   NOTES TO FINANCIAL STATEMENTS - (Continued)

Note 1 - Summary of significant accounting policies (continued)

Fair Value of Financial Instruments

The carrying amounts for cash and cash equivalents and notes payable reported in
the balance sheets approximate fair value.

Cash and cash equivalents

The Company includes  certificates of deposit and money market funds in cash and
cash equivalents  since such amounts are readily  convertible into known amounts
of cash.

Credit risks

The Company sells its oil and gas production  directly or indirectly to numerous
oil refiners and pipeline companies without collateral. In addition, the Company
has numerous  working interest owners to whom it grants credit on wells in which
it serves as operator.  Substantially  all of these owners are industry partners
or individuals who invest in oil and gas drilling ventures. The Company believes
its credit  risks are limited due to the nature of its business and partner base
and has not incurred any significant losses in connection therewith.

Environmental costs

Environmental  liabilities,  which  historically  have  not been  material,  are
recognized  when it is probable  that a loss has been incurred and the amount of
that loss is reasonably estimable.  Environmental liabilities, when accrued, are
based upon estimates of expected future costs without  discounting.  At December
31, 1998 there are no such costs accrued.

Property and equipment

The Company follows the successful  efforts method of accounting for its oil and
gas  operations.  Costs  of  productive  oil or gas  wells,  as well as costs of
acquiring producing and nonproducing oil and gas properties, are capitalized.
Exploratory costs, annual delay rentals and exploratory dry holes are expensed.

Depreciation, depletion and amortization of producing properties are provided on
the   unit-of-production   method  based  on   estimates  of  proved   reserves.
Depreciation  of other  property and equipment is provided on  straight-line  or
accelerated methods over estimated useful lives.

Impairment  of  producing  properties  is  measured  based on  their  discounted
estimated  future net cash flows and is  included in  accumulated  depreciation,
depletion  and  amortization,  when  required.  As a result  of the  significant
decreases in the average  prices of crude oil and natural gas during  1998,  the
Company's  estimated  future  net  cash  flows  were  reduced,  resulting  in an
impairment charge of $4,775,867 in 1998.

Nonproducing  oil and gas properties  include both perpetual  mineral rights and
term leasehold  interests.  The perpetual  mineral rights are  written-off  when
unsuccessful  exploration information is obtained. The Company does not maintain
an  extensive  inventory  of  nonproducing  leasehold  interests,   rather  such
interests are acquired in connection  with specific  drilling  objectives.  Such
nonproducing  leasehold  interests are  written-off  or reserved as warranted by
drilling results.

Renewals and betterments are capitalized; maintenance and repairs are charged to
expense.  Replacement of individual  items of lease  equipment are  capitalized.
When  leases  or  other  assets  are  sold or  retired,  the  cost  and  related
accumulated  depreciation,  depletion and  amortization  are eliminated from the
accounts and the resulting  gain or loss is recognized in income.  The Company's
historical  experience  has been that the salvage value of equipment on property
abandonments  is  sufficient  to  cover  the  costs  of  dismantlement  and site
restoration. Therefore, the Company does not accrue such costs and salvage value
is not considered in calculating property amortization.


                                       F-7

<PAGE>


                          HOME-STAKE OIL & GAS COMPANY
                   NOTES TO FINANCIAL STATEMENTS - (Continued)

Note 1 - Summary of significant accounting policies (continued)

Oil and gas sales

The  Company  sells  most of its  crude  oil and  natural  gas  concurrent  with
production and does not store significant  volumes for future sales.  Revenue is
recognized on the "sales  method" when oil and gas are sold.  Under this method,
the  Company  may  "sell"  more or less  than  its  proportionate  share  of gas
production in a given period, creating an imbalance position.  However, an asset
or  liability  is  recorded  only to the  extent  that the  Company's  imbalance
position in a property cannot be recouped from remaining reserves. The Company's
net imbalance positions at December 31, 1998 and 1997 were not material.

Derivatives

The Company does not utilize  financial or commodity  derivative  instruments to
hedge its market risks.

Income taxes

Certain  income and  expense  items are  recorded  in one year in the  financial
statements and are reported in a different  year in the income tax return.  Such
items  generally  include  tax credit  carryforwards,  intangible  drilling  and
development costs,  depreciation and depletion.  The tax effects associated with
these  differences are recorded in these  financial  statements and described as
"deferred income taxes".

Net income (loss) per share

Basic net  income  (loss) per share is based on the  weighted-average  number of
common shares outstanding during the period. Diluted net income (loss) per share
includes the dilutive effect of stock options.

                                       F-8

<PAGE>


                          HOME-STAKE OIL & GAS COMPANY
                   NOTES TO FINANCIAL STATEMENTS - (Continued)

Note 2 - Pro Forma Financial Information (unaudited)

Since the  merger of the  Company  and HSRC was  accounted  for by the  purchase
method of  accounting,  the  accompanying  1997 statement of income and retained
earnings does not include any revenues or expenses of the former HSOG. Following
is summarized pro forma 1997 information,  assuming the acquisition had occurred
on January 1, 1997. This pro forma information  reflects the combined historical
amounts for the two companies, adjusted to eliminate the income and amortization
of each  company  related to its  ownership in the other,  and the  increases in
depreciation, depletion and amortization and income taxes related to the merger.


        Revenues:                                                               
          Oil and gas sales................................. $ 13,344,522
          Other.............................................    1,303,239
                                                             ------------
                                                               14,647,761
        Costs and expenses:
          Production........................................    4,044,742
          Exploration.......................................    1,351,996
          General and administrative expense................    2,289,280
          Depreciation, depletion and amortization..........    2,552,615
          Interest expense..................................      276,139
          Property and other taxes..........................      231,957
                                                             ------------
                                                               10,746,729
        Income before income tax............................    3,901,032
        Income tax expense..................................    1,351,961
                                                             ------------
        Net income.......................................... $  2,549,071
                                                             ============
        
        Weighted average number of shares outstanding.......    4,517,363
                                                                =========
        Basic net income per share..........................        $ .56
                                                                    =====

Note 3 - Notes payable

Notes payable at December 31, 1998 consisted of the following balances:


        Bank note due May 1, 2000, requiring monthly                            
             principal payments of $110,000, plus 
             interest at prime less1/2% (7 1/4% at 
             December 31, 1998)............................. $  5,610,000
        Bank note due May 1, 1999, requiring monthly 
             payments of interest at prime less 1% 
             (6 3/4% at December 31, 1998) .................      625,000
                                                             ------------
                                                                6,235,000
        Less current portion................................    1,945,000
                                                             ------------
                                                             $  4,290,000
                                                             ============


                                       F-9

<PAGE>


                          HOME-STAKE OIL & GAS COMPANY
                   NOTES TO FINANCIAL STATEMENTS - (Continued)

Note 3 - Notes payable (continued)

During 1998, the Company  entered into a new credit  facility with its bank that
provided long-term  financing for the acquisition of properties and an operating
line-of-credit.  The Company borrowed $6.6 million under the long-term loan that
requires  monthly  principal  payments of $110,000,  plus interest at prime less
1/2%.  This credit  facility also provides for a revolving  term  line-of-credit
until May 1, 1999, in the amount of $5 million,  requiring  monthly  payments of
interest  at prime less 1%. At December  31,  1998,  the  Company  had  $625,000
borrowed under this line of credit. In connection with this line-of-credit,  the
Company pays a commitment fee of one-half of one percent (1/2%) per annum on the
unused portion of the line.

The Company's  credit  facilities  include certain loan covenants which require,
among other  things,  that the Company  maintain  certain  financial  ratios and
minimum  net  worth  requirements.  These  facilities  also  limit  annual  cash
dividends to the lesser of $550,000 or net income. The Company received a waiver
from the bank  permitting  the payment of  dividends  in 1998 and  allowing  its
minimum net worth to fall below the minimum  requirement through the maturity of
the loan.

Note 4 - Income taxes

Deferred  income taxes  represent the net tax effects  associated with temporary
differences  in the net book  values  of  certain  assets  and  liabilities  for
financial  reporting  and income tax  purposes.  Significant  components  of the
Company's  deferred  income tax  liabilities  and assets at December  31, are as
follows:


                                                         1998          1997
                                                         ----          ----
Deferred tax liabilities:
  Intangible drilling costs......................... $  1,520,505  $  1,867,311
  Excess of tax over book depreciation..............      297,864       705,219
  Leasehold costs...................................    1,558,630     2,934,635
                                                     ------------  ------------
                                                        3,376,999     5,507,165
Deferred tax assets:
  Alternative minimum tax credit carryforwards......      281,756       241,611
  Statutory depletion carryforwards.................      138,610             -
  Deferred compensation accrual.....................        9,778        19,556
  Other (net).......................................       32,042        38,450
                                                     ------------  ------------
                                                          462,186       299,617
                                                     ------------  ------------
Net deferred tax liability.......................... $  2,914,813  $  5,207,548
                                                     ============  ============

The  reconciliation  of the income tax  provision  to the  "expected"  provision
computed at the statutory federal income tax rate is as follows:


                                                         1998          1997
                                                         ----          ----

Computed "expected" provision (benefit)..............$ (2,431,310) $    986,263
Excess statutory depletion...........................    (149,363)     (188,966)
Income from equity affiliates........................           -      (181,795)
Other................................................     161,974       122,789
                                                     ------------  ------------
Provision for (benefit from) income taxes............$ (2,418,699) $    738,291
                                                     ============  ============

At December 31, 1998, the Company had nonexpiring alternative minimum tax credit
carryforwards of approximately $282,000 and statutory depletion carryforwards of
approximately  $407,700,  both  available to reduce future federal income taxes,
the benefits of which have been recognized in these financial statements.


                                      F-10

<PAGE>


                          HOME-STAKE OIL & GAS COMPANY
                   NOTES TO FINANCIAL STATEMENTS - (Continued)

Note 5 - Benefit plans

The Company has a 401(k)  Profit  Sharing Plan  covering  substantially  all the
Company's  employees  that have completed one year of service and provides for a
mandatory Company contribution equal to 3% of the employee's compensation and an
additional matching Company  contribution of up to 3%. Company  contributions to
the Plan were $51,496 and $24,322 in 1998 and 1997, respectively.

Note 6 - Commitments and contingencies

The Company has a  non-cancelable  operating  lease  covering  its office  space
through  December 31, 1999.  This lease  provides for annual rental  payments of
$125,592, subject to an annual expense adjustment.

The Company is involved in various legal actions arising in the normal course of
business.  In the  opinion  of  management  and  legal  counsel,  the  Company's
liabilities,  if any, in these  matters  will not have a material  effect on the
Company's financial position, results of operations or cash flows.

Note 7 - Stockholders' Equity

Common Stock

The Company's  Certificate  of  Incorporation  authorizes  the issuance of up to
12,000,000 shares of common stock, $.01 per share.

Preferred Stock

The Company is authorized to issue up to 2,000,000  shares of Preferred Stock at
the discretion of the Board of Directors.  This stock is commonly referred to as
"blank  check"  stock,  with the Board of  Directors  having  the  authority  to
determine voting rights, dividend rights, preferences, etc.

Incentive Stock Plan

On December 11, 1997, the  stockholders  approved the adoption of the Home-Stake
Oil & Gas Company  1997  Incentive  Stock Plan (the "Stock  Plan")  which became
effective on December 31,  1997.  There are a total of 451,736  shares of common
stock  authorized  and  reserved  under the  Stock  Plan.  The  number of shares
reserved for issuance under the Stock Plan automatically  increases as necessary
so that,  when added to the number of shares subject to stock options granted or
awarded under the Stock Plan, the total number of shares reserved will equal 10%
of the issued and outstanding shares of the Company.

On February 12, 1998, the Board of Directors  granted qualified stock options in
varying amounts to all employees totaling 155,250 shares. Such options vest over
a 5-year  period,  have an option  price of $4.50 per share and  expire 10 years
after the date of grant.  Options for 24,000 of these  shares were  forfeited in
November,  1998. In addition,  there were  non-qualified  options  issued to all
outside directors in the aggregate amount of 100,000 shares that are exercisable
immediately,  at an option price of $4.50 per share. Directors' options expire 5
years after the date of grant. At December 31, 1998, options to purchase 105,250
shares were exercisable. There were no options exercised in 1998.

The Company follows the provisions of APB Opinion No. 25,  "Accounting for Stock
Issued to Employees",  in accounting for the Stock Plan. Accordingly,  since the
exercise  price of stock  options  are equal to the  market  price of the common
stock at the date of grant,  no compensation  expense is recorded.  Had the fair
value  provisions  of  Statement  of  Financial  Accounting  Standards  No. 123,
"Accounting for Stock-Based  Compensation" been applied,  the Company's net loss
and loss per share in 1998  would not have been  materially  different  from the
amounts reported in the Statement of Operations.


                                      F-11

<PAGE>


                          HOME-STAKE OIL & GAS COMPANY
                   NOTES TO FINANCIAL STATEMENTS - (Continued)

Note 7 - Stockholders' Equity (continued)

Shareholder Rights Plan

The  Company  has  a  Shareholder   Rights  Plan  and  has  distributed  to  its
shareholders one "Right" for each outstanding  share of common stock. Each Right
entitles the holder to purchase one-tenth of an additional share of common stock
from the Company and acquire a note  payable  from the Company to the holder or,
under certain  circumstances,  purchase the stock of an acquiring company.  Upon
the occurrence of certain specified events related to a change in control of the
Company,  each holder of a Right (other than a potential acquirer) will have the
right to  acquire,  upon  exercise,  shares  of the  Company's  common  stock at
one-half of the then current market price. The Rights expire January 1, 2000 and
are exercisable  only if a person or group acquires 15% or more of the Company's
common  stock or commences a tender offer that would result in a person or group
acquiring 15% or more of the Company's  common stock.  The Rights are redeemable
in whole,  but not in part,  at a price of $.01 per  Right,  payable  in cash or
stock.

Note 8 - Quarterly Results of Operations (unaudited)

                                              1998 Quarter ended
                                              ------------------
                              March 31     June 30      Sept. 30      Dec. 31
                              --------     -------      --------      -------
Revenues.....................$ 2,420,907  $ 2,868,324  $ 2,460,258  $ 2,240,119
Costs and expenses (1).......  2,302,670    2,495,530    2,922,258    9,420,062
                             -----------  -----------  -----------  -----------
Income (loss) before 
  provision for income taxes.    118,237      372,794     (462,000)  (7,179,943)
Provision for (benefit from)
  income taxes...............     28,614      118,713     (125,933)  (2,440,093)
                             -----------  -----------  -----------  -----------
Net income (loss)............$    89,623  $   254,081  $  (336,067) $(4,739,850)
                             ===========  ===========  ===========  ===========

Basic income (loss) 
  per share (2)..............      $ .02        $ .06      $  (.07)     $ (1.10)
                                   =====        =====      =======      =======
Diluted income (loss) 
  per share (2)..............      $ .02        $ .05      $  (.07)     $ (1.10)
                                   =====        =====      =======      =======


                                              1997 Quarter ended (3)
                                              ----------------------
                              March 31     June 30      Sept. 30      Dec. 31
                              --------     -------      --------      -------
Revenues.....................$ 2,609,789  $ 1,741,819  $ 1,648,925  $ 2,069,985
Costs and expenses...........  1,507,249    1,334,405    1,219,958    1,108,133
                             -----------  -----------  -----------  -----------
Income before provision for
  income taxes...............  1,102,540      407,414      428,967      961,852
Provision for income taxes...    335,071       83,745       49,279      270,196
                             -----------  -----------  -----------  -----------
Net income...................$   767,469  $   323,669  $   379,688  $   691,656
                             ===========  ===========  ===========  ===========

Basic and diluted
  income per share...........      $ .23        $ .10        $ .11        $ .20
                                   =====        =====        =====        =====

(1)  Fourth  quarter  1998 costs and  expenses  includes a charge of  $4,775,867
     related  to the  impairment  in the  carrying  value of  certain  producing
     properties. In addition, depreciation, depletion and amortization increased
     approximately $1,500,000 as a result of the fourth quarter reduction in the
     estimates of oil and gas reserves.

(2)  The sum of the net income  (loss) per share for the four  quarters  may not
     equal  total net income  (loss) for the year due to changes in the  average
     number of shares outstanding during the year.

(3)  See  Note 1 (Merger) and Note 2 regarding the comparability of the 1998 and
     1997 amounts presented on this page.



                                      F-12

<PAGE>


                          HOME-STAKE OIL & GAS COMPANY
    SUPPLEMENTARY INFORMATION ON OIL AND GAS PRODUCING ACTIVITIES (unaudited)


Estimated quantities of proved oil and gas reserves

Changes in estimated  proved oil and gas reserve  quantities  are  summarized as
follows:


                                             1998                 1997
                                            ------               ------
                                       Oil        Gas        Oil        Gas
                                      (Bbls)     (Mcf)      (Bbls)     (Mcf)
                                      ------     -----      ------     -----
Proved developed and undeveloped:
   Beginning of year............... 4,470,192  18,540,196  2,432,711  8,835,929
   Revisions of previous estimates.(1,231,355)   (228,628)   187,009  1,625,539
   Purchases of reserves in-place..   122,765   4,718,680        894      2,896
   Extensions, discoveries and 
     other additions...............    11,202     872,003     42,710    542,950
   Added by merger.................         -           -  2,226,892  8,973,426
   Sales of reserves in-place......         -           -   (209,027)  (232,080)
   Production......................  (377,876) (2,489,770)  (210,997)(1,208,464)
                                    ---------  ---------- ---------- ----------
   End of year..................... 2,994,928  21,412,481  4,470,192 18,540,196
                                    =========  ========== ========== ==========
Proved developed producing:
  Beginning of year................ 4,386,132  15,902,988  2,380,522  7,369,964
                                    =========  ========== ========== ==========
  End of year...................... 2,912,403  18,372,372  4,386,132 15,902,988
                                    =========  ========== ========== ==========

The estimates of oil and gas reserves were prepared by Company  employees and do
not include proved undeveloped reserves attributable to either royalty interests
(information is not available) or outside operated working interests (quantities
are not considered  significant to total Company proved reserves).  Furthermore,
these estimates do not include  reserves whose estimates or  recoverability  are
less precise,  commonly  referred to as "probable" or "possible"  reserves.  The
Company has no reserves outside the continental United States.

Standardized measure of discounted future net cash flows

In  accordance  with the  requirements  of  Statement  of  Financial  Accounting
Standards No. 69 ("SFAS No. 69") presented  below are  projections of future net
oil and gas cash flows (sales less production taxes, operating expenses, certain
development  costs and  estimated  income taxes) and related  present  values of
proved oil and gas reserves.  As required by SFAS No. 69, these  projections are
based on end of period prices and costs,  held constant for all future  periods.
Present values of the future net oil and gas cash flows were calculated  using a
10% discount  factor as required.  While this  information  was  developed  with
reasonable  care and disclosed in good faith,  it is emphasized that some of the
data are necessarily imprecise and represent only approximate amounts because of
the subjective  judgments involved in developing such information.  Accordingly,
this  information  may not  represent  the present  financial  condition  of the
Company or its expected future results.  This  information  does not include any
amounts applicable to "probable" or "possible"  reserves which may become proved
in the future.

Although these  disclosures  have been prepared in accordance  with SFAS No. 69,
this  information  does not  purport to  present  the fair  market  value of the
Company's  oil and gas  properties  or a fair  estimate of the present  value of
future cash flows  expected to be obtained  from their  production.  The reserve
estimates,  while carefully made, may be  significantly  revised based on future
events.  In  addition,  estimates  of the timing of  production,  actual  prices
realized and related production costs and taxes may also vary significantly from
those used in these calculations.


                                      F-13

<PAGE>


                          HOME-STAKE OIL & GAS COMPANY
    SUPPLEMENTARY INFORMATION ON OIL AND GAS PRODUCING ACTIVITIES (unaudited)



                                                         1998           1997
                                                         ----           ----
Future net cash flows:
  Oil and gas sales..................................$ 70,149,666  $130,251,202
  Lease operating expenses........................... (19,006,610)  (39,352,926)
  Production taxes...................................  (5,629,857)   (9,916,302)
  Development costs..................................    (616,777)     (646,142)
  Income taxes....................................... (11,486,053)  (20,500,870)
                                                     ------------  ------------
                                                       33,410,369    59,834,962
     Less discount to present 
          value at 10% rate.......................... (11,673,440)  (26,643,527)
                                                     ------------  ------------
Standardized measure of discounted
          future net cash flows......................$ 21,736,929  $ 33,191,435
                                                     ============  ============

The following  information  summarizes the principal changes in the standardized
measure of discounted future net cash flows.


                                                         1998          1997
                                                         ----          ----
Beginning of year....................................$ 33,191,435  $ 20,992,095
Sales of oil and gas, net of production costs........  (6,233,288)   (4,802,923)
Net changes in prices and production costs........... (12,766,121)   (4,410,247)
Extensions and discoveries...........................     705,777       772,995
Purchases of reserves-in-place.......................   4,301,677         8,314
Added by merger......................................           -    16,198,548
Sales of reserves-in-place...........................           -    (1,530,374)
Revisions of previous quantity estimates.............  (5,733,382)    2,686,262
Net change in income taxes...........................   4,082,167     1,638,638
Other (net)..........................................     869,520      (461,083)
Accretion of discount................................   3,319,144     2,099,210
                                                     ------------  ------------
End of year..........................................$ 21,736,929  $ 33,191,435
                                                     ============  ============



                                      F-14

<PAGE>


                          HOME-STAKE OIL & GAS COMPANY
    SUPPLEMENTARY INFORMATION ON OIL AND GAS PRODUCING ACTIVITIES (unaudited)

Costs incurred

Costs incurred in oil and gas producing activities include:


                                                         1998          1997
                                                         ----          ----

Acquisition costs - proved properties................$  6,442,989  $      3,486
Acquisition costs - unproved properties..............     360,186       646,496
Exploration costs....................................     604,095       432,250
Development costs....................................   2,016,424       837,628
                                                     ------------  ------------
                                                     $  9,423,694  $  1,919,860
                                                     ============  ============

Acquisition  costs for proved and unproved  properties  related to the merger at
December 31, 1997 were $16,389,405 and $823,817, respectively.



                                      F-15

<PAGE>