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

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

                                 FORM 10-QSB

         [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
                       SECURITIES EXCHANGE ACT OF 1934
                     For the Quarter Ended June 30, 1998
                                      or
         [ ] Transition Report Pursuant to Section 13 or 15(d) of the
                       Securities Exchange Act of 1934

                        Commission file number 0-18995

                       INTERLINE RESOURCES CORPORATION
      (Exact name of small business issuer as specified in its charter)

                 Utah                                   87-0461653
      ------------------------------------      ----------------------------
      (State or other jurisdiction of                (I.R.S. employer
      incorporation or organization)                identification No.)


                 160 West  Canyon  Crest  Road,  Alpine,  UT 84004
                 -------------------------------------------------
                      (Address  of principal executive offices)

      Registrant's telephone number, including area code: (801) 756-3031

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

     Securities registered pursuant to Section 12(g) of the Exchange Act:

                         Common Stock $.005 Par Value
                                Title of Class

   Securities registered pursuant to Section 12(g) of the Exchange Act: None

Check  whether  the Issuer  (1) has filed all  reports  required  to be filed by
Section 13 or 15(d) of the Exchange  Act of 1934 during the  preceding 12 months
(or for such  shorter  period  that the  registrant  was  required  to file such
reports),  and (2) has been subject to such filing  requirements for the past 90
days. Yes X No____.

     Common stock  outstanding  at August 13, 1998 - 14,074,167  shares of $.005
par  value   Common   stock.   


                   DOCUMENTS INCORPORATED BY REFERENCE: NONE

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


<PAGE>



                                 FORM 10-QSB
                       INTERLINE RESOURCES CORPORATION

                               TABLE OF CONTENTS


PART I. - FINANCIAL INFORMATION

Item 1      Financial Statements                                   Page

            Condensed Consolidated Balance Sheet at
            June 30, 1998                                            1

            Condensed Consolidated Statement of Operations for the
            three and six months ended June 30, 1998 and 1997        3

            Condensed Consolidated Statements of Cash Flows for
            six months ended June 30, 1998 and 1997                  4

            Notes to Condensed Consolidated Financial Statements     6

Item 2      Management's Discussion and Analysis of
            Financial Condition and Results of Operations            9


PART II. - OTHER INFORMATION

Item 1      Legal Proceedings                                       21

Item 2      Changes in the Securities                               22

Item 3      Defaults Upon Senior Securities                         22

Item 4      Submission of Matters to a Vote of Security Holders     22

Item 5      Other Information                                       23

Item 6(a)   Exhibits                                                23

Item 6(b)   Reports on Form 8-K                                     23

            Signatures                                              24



<PAGE>




                  FORWARD LOOKING INFORMATION AND RISK FACTORS

      Interline Resources Corporation (the "Company") or its representatives may
make forward looking statements,  oral or written,  including statements in this
report's Management's Discussion and Analysis of Financial Condition and Results
of  Operation,  press  release  and filings  with the  Securities  and  Exchange
Commission,  regarding  estimated future net revenues from  operations,  planned
capital expenditures  (including the amount and nature thereof),  the effects of
the Company's Bankruptcy proceeding, the Company's projected financial position,
results of  operations,  business  strategy and other plans and  objectives  for
future operations.  These statements are forward-looking statements,  within the
meaning of Section  27A of the  Securities  Act of 1993 and  Section  21E of the
Securities Exchange Act, which reflect  Management's  current views with respect
to future events and financial performance.

      Although the Company  believes  that the  expectations  reflected in these
forward looking  statements are  reasonable,  there can be no assurance that the
actual results or  developments  anticipated by the Company will be realized or,
even if substantially  realized, that they will have the expected effects on its
business or results of operations. Such forward-looking statements involve known
and unknown  risks,  uncertainties  and other factors which may cause the actual
results,  performance or achievements of the Company to be materially  different
from any future  results,  performance or  achievements  expressed or implied by
such forward-looking statements. Such factors include but are not limited to the
outcome of the Company's current Bankruptcy Proceeding, the timing and extent of
changes  in  commodity   prices,   unforeseen   engineering  and  mechanical  or
technological  difficulties in connection with the Company's business operations
and other risks.

      Theses  forward-looking  statements  are  subject  to  certain  risks  and
uncertainties  including,  but not limited to, future financial  performance and
future events,  competitive pricing for services,  costs of obtaining capital as
well as national,  regional and local economic conditions.  Actual results could
differ materially from those addressed in the forward-looking statements. Due to
such uncertainties and risks,  readers are cautioned not to place undue reliance
on such forward-looking statements, which speak only as of the date whereof.

     All subsequent oral and written forward-looking  statements attributable to
the Company or persons  acting on its behalf are  expressly  qualified  in their
entirety by these  factors.  The Company  assumes no obligation to update any of
these statements.






                                       

<PAGE>



                             INTERLINE RESOURCES
                                 CORPORATION
                               AND SUBSIDIARIES


                               PART I - ITEM 1

                             FINANCIAL STATEMENTS
                                 (UNAUDITED)

                                June 30, 1998





The condensed  financial  statements included have been prepared by the Company,
without  audit,  pursuant to the rules and  regulations  of the  Securities  and
Exchange  Commission.  Certain  information  and footnote  disclosures  normally
included in financial  statements prepared in accordance with generally accepted
accounting  principles have been condensed or omitted pursuant to such rules and
regulations,  although the Company believes that the disclosures are adequate to
make the  information  presented not misleading.  The Company  presumes that the
user of this interim financial information has read or has access to the audited
financial statements for the preceding fiscal year----and in that context,  this
disclosure  is  adequate  for a fair  presentation  of the  Company's  financial
position.

In the  opinion  of the  Company,  all  adjustments  consisting  of only  normal
recurring  adjustments  as of June 30,  1998,  have been  made.  The  results of
operations for the interim period are not necessarily  indicative of the results
to be expected for the entire year.







<PAGE>



                        INTERLINE RESOURCES CORPORATION
                               AND SUBSIDIARIES

                     Condensed Consolidated Balance Sheet
                                  (Unaudited)




                                                          June 30,
                                                           1998
                                                         ----------

Assets

Current assets:
  Cash and cash equivalents                              $981,458
  Accounts receivable - trade                             390,373
  Income taxes receivable                                  40,000
  Inventories                                              19,566
  Note receivable - current portion                        55,700
  Net assets of discontinued operations                      -
  Other current assets                                     20,095
                                                        -----------

     Total current assets                               1,507,192

Property, plant and equipment                           6,092,014
Accumulated depreciation and depletion                 (2,039,145)
                                                       ------------

     Net property, plant & equipment                    4,052,869

Note receivable                                            78,756
Technology and marketing rights                           933,121
                                                       ------------

    Total assets                                       $6,571,938
                                                       ============


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





                                       1


<PAGE>




                         INTERLINE RESOURCES CORPORATION
                                AND SUBSIDIARIES

                      Condensed Consolidated Balance Sheet
                                   (Unaudited)

                                                          June 30,
                                                            1998
                                                         ----------

Liabilities and Stockholders' Equity

Current liabilities:
  Accounts payable                                       $359,280
  Accrued liabilities                                     288,829
  Accrued interest, related party                       1,063,706
  Note payable, related party                           2,680,089
  Current portion of long-term debt                       262,627
  Other current liabilities                                20,127
                                                      -------------

     Total current liabilities                          4,674,658
                                                      -------------

Long-term debt less current maturities                    529,443
Deferred income                                           206,313
                                                      -------------
     Total liabilities                                  5,410,414

Stockholders' equity:
  Preferred stock - $.01 par value. 25,000,000
     shares authorized; 1,000,000 series A shares
     authorized; 0 series A shares issued and o/s            -
  Common stock - $.005 par value. 100,000,000
     shares authorized; 14,074,167 shares
     outstanding at June 30, 1998                          70,371
  Additional paid-in capital                            9,209,017
  Retained earnings                                    (8,117,864)
                                                     --------------

      Total stockholders' equity                        1,161,524
                                                     --------------
      Total liabilities & stockholders' equity         $6,571,938
                                                     ==============

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


                                       2

<PAGE>




                         INTERLINE RESOURCES CORPORATION
                                AND SUBSIDIARIES
                 Condensed Consolidated Statement of Operations
                                   (Unaudited)


<TABLE>
<CAPTION>

                                                 Three months ended               Six months ended
                                                      June 30,                        June 30,
                                             -----------------------------  ----------------------------
                                                 1998           1997             1998           1997
                                             ------------------------------ ----------------------------
                                               <S>          <C>               <C>           <C> 

Revenue                                        $788,063       $813,499        $1,685,633    $2,741,588

Direct costs                                    559,802       $590,766         1,230,680     1,950,299   
                                             ------------------------------ ----------------------------

Gross margin                                    228,261        222,733          454,953       791,289

Selling, general and
   administrative expenses                      221,415       $261,996           513,809       700,311
Research and development                         25,640        $19,397            49,086       117,156
Depreciation, depletion                         169,729       $187,734           340,050       387,404
         amortization
                                             ------------------------------ ----------------------------
 (Loss) from operations                        (188,523)      (246,394)         (447,992)     (413,582)

Other income (expense) net
  Interest income (expense)                     (11,023)       ($8,901)          (21,109)      (24,251)
  Interest expense, related party               (89,456)     ($202,396)         (177,931)     (323,583)
  Gain (loss) from sale of assets                 1,334          ($698)            1,334       773,120
                                             ------------------------------ ----------------------------

Income (loss) before discontinued operati       (287,668)     (458,389)         (645,698)       11,704

Discontinued operations
  Income (loss) from discontinued operati        (29,814)    ($232,180)          (53,868)     (523,236)
  Gain on disposal of discontinued operat         18,885    $2,087,717            18,885     2,087,717
                                             ------------------------------ ----------------------------

  Total discontinued operations                  (10,929)    1,855,537           (34,983)    1,564,481

Net Income (loss)                              ($298,597)   $1,397,148         ($680,681)   $1,576,185
                                             ============================== ============================

Earning per share
  Loss from continuing operations                 ($0.02)       ($0.03)            ($0.05)       $0.00
  Income from discontinued operations             ($0.00)        $0.13             ($0.00)       $0.11
                                             ------------------------------ ----------------------------

  Income (loss) per common share:                 ($0.02)       ($0.10)            ($0.05)       $0.11
                                             ============================== ============================

Weighted average shares o/s                   14,074,167    14,074,167         14,074,167   14,074,167
                                             ============================== ============================

</TABLE>


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


                                       3

<PAGE>






                         INTERLINE RESOURCES CORPORATION
                                AND SUBSIDIARIES
                 Condensed Consolidated Statement of Cash Flows
                                   (Unaudited)


                                                           Six months ended
                                                                June 30,
                                                          1998           1997
                                                         ---------------------

Cash flows from operating activities:
  Net  income (loss)                                    (680,681)    1,576,185
  Adjustment to reconcile net income (loss) to net
    cash (used in) provided by operating activities:
  Depreciation, depletion and amortizatio                340,050       510,042
  Gain on disposal of asset                                1,334      (773,120)
  Common Stock issued for services                        24,000          -
  (Increase) decrease in:
     Accounts receivable                                 (86,283)      (73,054)
     Inventories                                           4,603       (54,715)
     Other current assets                                  1,213       (13,503)
     Note receivable                                     (45,677)       16,203
  Increase (decrease) in:
     Accounts payable                                     60,344    (1,037,845)
     Accrued liabilities                                (741,252)      253,923
     Accrued interest, related party                     177,930      (276,415)
     Other current liabilities                            20,127       137,610
     Deferred income                                     145,220      (102,770)
                                                       -----------  -----------

      Net cash (used) by operating activi               (779,072)      162,541

Cash flows from investing activities:
  Proceeds from sale of equipment                          4,700       524,768
  Proceeds from sale of joint venture                       -          500,000
  Purchase of intangible assets                             -          (16,988)
  Net assets of discontinued operations                  683,853     1,599,791
  Purchase of property, plant & equipment                (23,115)     (265,486)
                                                       -----------  -----------

  Net cash provided (used in) investing activities       665,438     2,342,085



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


                                       4

<PAGE>




                         INTERLINE RESOURCES CORPORATION
                                AND SUBSIDIARIES
                 Condensed Consolidated Statement of Cash Flows
                                   (Unaudited)


                                                     Six months ended
                                                         June 30,
                                                ---------------------------
                                                   1998           1997

Cash flows from financing activities:
  Proceeds from debt obligations                     -               -
  Payment on long-term debt                       (58,107)      (2,043,403)
                                                -----------     -----------

  Net cash provided (used) by financing a         (58,107)      (2,043,403)
                                                -----------     -----------

Net increase (decrease) in cash                  (171,741)         461,223


Cash, beginning of year                         1,153,199        1,090,810
                                                -----------     ------------

Cash,  end of  quarter                            981,458        1,552,033
                                                ===========     ============



                                       5

<PAGE>



                INTERLINE RESOURCES CORPORATION AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements


Oil and Gas Accounting

The  Company  uses the  "successful  efforts"  method to account for oil and gas
operations.  The use of this  method  results  in the  capitalization  of  costs
related to acquisition, exploration and development of revenue producing oil and
gas properties.  The costs of unsuccessful  exploration  efforts are expensed in
the  period in which  they are  determined  unrecoverable  by  future  revenues.
Provision for  depreciation  and depletion of oil and gas properties is based on
the units of production method, based on proven oil and gas reserves.

Segment information  concerning oil and gas reserves and related disclosures are
not  presented  since they are not  significant  in  relation  to the  financial
statements taken as a whole.


Construction Accounting

Construction revenues are recognized on the  percentage-of-completion  method of
accounting.  Profits on contracts  are  recorded on the basis of  "cost-to-cost"
determination  of percentage of completion on individual  contracts,  commencing
when  progress  reaches  a point  where  cost and  estimate  analysis  and other
evidence of trend are  sufficient  to estimate  final  results  with  reasonable
accuracy.  That  portion  of the total  contract  price  which is  allocable  to
contract expenditure incurred and work performed is accrued as earned income. At
the time a loss on a contract  becomes known, the entire amount of the estimated
ultimate loss is accrued.  Claims for  additional  revenue are  recognized  when
settled.  The  aggregate of cost incurred and income  recognized on  uncompleted
contracts  in excess of related  billings is shown as a current  asset,  and the
aggregate  of  billings  on  uncompleted  contracts  in excess of related  costs
incurred and income recognized is shown as a current liability.


Cash Equivalents

For purposes of the consolidated statement of cash flows, cash includes all cash
and investments with original maturities to the Company of three months or less.


Inventories

Inventories  consisting of supplies and  miscellaneous  material are recorded in
the financial statements at their aggregate lower of cost (first-in,  first-out)
or market.


Investments

Investments  in less than  majority  owned  entities are accounted for using the
equity method.  Investments are included in the financial  statements  under the
caption of "Other Assets."



                                       6

<PAGE>


                INTERLINE RESOURCES CORPORATION AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements


Property, Plant and Equipment

Property,  plant and  equipment  are carried at cost.  Depreciation  is computed
using  straight-line  and  accelerated  methods.  When  assets  are  retired  or
otherwise disposed of, the cost and related accumulated depreciation are removed
from the accounts,  and any  resulting  gain or loss is recognized as income for
the  period.  The cost of  maintenance  and  repairs  is  charged  to  income as
incurred;  significant renewals and betterments are capitalized.  Deductions are
made for  retirements  resulting  from  renewals or  betterments.  The estimated
useful lives are as follows:

     Building and equipment  15-25 years
     Equipment and vehicles  3-10 years

Amortization

The Company has amortized its marketing and  technology  rights for the used oil
refining  process over seventeen  years.  This period  approximates  the assets'
useful lives.

Contingencies

During 1996, the Company entered into an agreement to sell certain assets of the
Company. As part of this agreement,  the Company also agreed to guarantee a note
payable between the purchaser and a third party. At June 30, 1998, the remaining
liability on the note was approximately $92,145.

The Company has executed license agreements with licensees to utilize Interlines
used oil technology which includes  technology  received from Petroleum  System,
Inc.  ("PSI")  through an  assignment  agreement of certain  patent  rights (PSI
technology).  Under the  assignment  agreement  the Company is  obligated to pay
royalties to PSI for those Interline  plants using PSI  technology.  The Company
and PSI have been involved in a dispute as to what payments the Company owes PSI
under the  assignment  agreement.  The Company and PSI were first involved in an
arbitration   proceeding  to  determine  the  issues   between  them,   but  PSI
discontinued resolution through arbitration and on July 29, 1997 filed a lawsuit
against the Company and its wholly owned  subsidiary  Interline  Hydrocarbons in
the Third  Judicial  District  Court of the State of Utah ("State Court Action")
alleging that the Company was in breach of the assignment agreement and that PSI
should be allowed to re-acquire  all of the  technology  rights  assigned to the
Company  through  the  assignment  agreement.  PSI filed its  complaint  and the
Company has answered, but no other pleadings have been filed. As a result of the
bankruptcy  proceeding  and its  procedural  rules the State  Court  Action  was
stayed.

On March 26,  1998,  PSI filed  claim  against  the  Company  in the  bankruptcy
proceeding  seeking royalties of $420,000,  asserting breaches of the assignment
agreement and requesting the return of a prototype  production device ("Baby M")
held by the Company. The Company filed an objection to the claim, and a trial of
the claims was held on June 5 and 8, 1998. After hearing testimony of witnesses,
receiving exhibits and hearing arguments of counsel, the court entered an



                                       7

<PAGE>


                INTERLINE RESOURCES CORPORATION AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements

order denying PSI's claim for $420,000, ordering that the Company to return
Baby M to PSI and denying all other claims brought by PSI.

On May 29,  1998,  PSI filed a motion  for  relief  from  automatic  stay in the
bankruptcy  court  seeking  the right to  proceed  with its State  Court  Action
against the Company and its subsidiary  Interline  Hydrocarbons.  After argument
and hearing,  the bankruptcy court requested counsel for PSI to prepare an order
granting  relief  from the  automatic  stay.  The  Company  has  objected to the
proposed  order  granting  relief from the  automatic  stay and a hearing is set
before the court on August 13, 1998.

Common Stock
During the year ended December 31, 1994, as a condition for a private  placement
of the Company's  restricted common stock, the Company entered into an agreement
which  contains  certain  restrictive  covenants.  The  Company may not sell its
restricted common stock for a price less than $4.50 or issue options or warrants
of equal  effect.  The Company also may not repay any related  party debt during
this period. These covenants may be waived upon obtaining written consent of the
other party in the agreement.

Profit Sharing Plan
During 1995, the Company commenced a defined contribution retirement plan, which
qualifies under code section 401(k), for all eligible  employees.  Employees who
work at least  1,000  hours  during a year and are over age 21 are  eligible  to
participate.  Employees  may  contribute  up to fifteen  percent of their annual
compensation subject to regulatory  limitations.  The Company also contributes a
discretionary amount on behalf of the participating  employees. The Company made
contributions  of $1,011 and $1,095 for the three months ended June 30, 1998 and
1997, respectively.

Reclassification
Certain amounts in the prior years financial  statements have been  reclassified
to conform to the June 30, 1998 presentation.

Discontinued Operations
The  financial  statements  for all periods  presented  reflect the revenues and
expenses  generated  from the assets of the Utah oil and gas  operations,  Gagon
Mechanical  construction  and  manufacturing  operations  and the Salt Lake City
refinery   operations  under  the  caption  "Income  (loss)  from   discontinued
operations."  The related assets and  liabilities of Gagon  Mechanical have been
presented  on the  balance  sheet  under  caption  "net  assets of  discontinued
operations."

                                       8
<PAGE>

                                  PART 1 - ITEM 2

                  MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                  FINANCIAL CONDITION AND RESULTS OF OPERATIONS


General

     The Company is a Utah corporation with its principal and executive  offices
located at 160 West Canyon  Crest Road,  Utah 84004  (801)  756-3031.  Interline
Resources  Corporation (the "Company"),  a Utah  corporation,  is engaged in two
areas  of  business,   each  operating  as  separate   subsidiaries:   Interline
Hydrocarbon Inc., a Wyoming corporation, which commercializes the Company's used
oil  refining  technology;  and  Interline  Energy  Services,  Inc.,  a  Wyoming
corporation,  which  manages the  Company's  oil and gas  operations  located in
Wyoming.

      The Company has invested substantial resources  commercializing a used oil
refining technology and has signed license agreements with companies in England,
South Korea,  Dubia,  Australia and Spain. The Company's first used oil refinery
was  constructed  in Salt  Lake  City,  Utah in  1996The  Company's  oil and gas
operations consist of natural gas gathering, natural gas processing and oil well
production all located in Wyoming.

      On September  26, 1997,  the Company  filed a Petition for  Reorganization
under Chapter 11 (the  "Petition")  of the United States  Bankruptcy  Code.  The
Company is continuing  with its operations as a  debtor-in-possession  under the
Bankruptcy  Code.  The  Company's  subsidiaries  did not join the Company in the
Petition  and  are  not  directly  involved  in  the  Bankruptcy  Reorganization
Proceeding,  however, because the Company operates through its subsidiaries, the
bankruptcy reorganization will substantially impact the subsidiaries. During the
time the  Company  is in the  Bankruptcy  Proceeding,  it will be subject to the
jurisdiction of the U.S.
Bankruptcy Court.

     On June 18, 1998, the Company filed a Plan of Reorganization and Disclosure
Statement to the Plan of Reorganization  with the United States Bankruptcy Court
for the District of Utah, Central Division. On July 14, 1998, the Company's Plan
of Reorganization  and Disclosure  Statement to the Plan of  Reorganization  was
approved and  circulation  thereof  authorized by the United  States  Bankruptcy
Court for the District of Utah,  Central Division.  A hearing on confirmation of
the  Plan  of   Reorganization   and   Disclosure   Statement  to  the  Plan  of
Reorganization  is scheduled  with the United  States  Bankruptcy  Court for the
District of Utah, Central Division, for August 27, 1998.

     Some of the information provided in the Proposed Plan of Reorganization and
the Proposed  Disclosure  Statement to the Plan of Reorganization are considered
forward looking  statements  within the meaning of Section 27A of the Securities
Act of 1993  and  Section  21E of the  Securities  Exchange  Act.  Although  the
Company's  management  believes that the expectations  reflected in the plan are
reasonable,  there can be no assurance that the actual  results or  developments
anticipated by the Company will be realized or, even if substantially  realized,
that  they  will  have the  expected  effects  on its  business  or  results  of
operations. Such expectations involve known and unknown risks, uncertainties and
other factors which may cause the actual 

                                       9
<PAGE>

results,  performance  or  achievements  of the  Company  to be  materially
different  from any future  results,  performance or  achievements  expressed or
implied by forward looking statements.

     While the Company's Plan of  Reorganization  and Disclosure  Statement have
been approved by the Court and sent to all appropriate  parties,  its acceptance
and  confirmation is subject to their  approval.  There can be no assurance that
the Plan of Reorganization  proposed by the Company or as it may be amended will
be acceptable to its creditors and leave the Company with  sufficient  assets to
continue its operations.  There can be no assurance that the Company will not be
required to liquidate and discontinue its operations.


<PAGE>



      The Company's  current  operating  subsidiaries  are (1) Interline  Energy
Services,  Inc.("Interline  Energy") a Wyoming  corporation  which  manages  the
Company's  oil  and  gas  operations   located  in  Wyoming  and  (2)  Interline
Hydrocarbons,  Inc. ("Interline  Hydrocarbons") a Wyoming corporation which owns
and operates the Company's used oil refining technology.


      Interline Energy Services - Oil and Gas Operations.

      The Company has been engaged in the oil and gas industry since 1990. These
operations  primarily  involve natural gas gathering and  processing,  crude oil
gathering,  fractionation and marketing of natural gas liquids,  and oil and gas
production.  In May,  1997,  the Company sold its Utah  gathering and production
operations to subsidiaries of the Questar  Corporation of Salt Lake City,  Utah,
and is now concentrating on its operations in east-central Wyoming.

      During 1997,  the Company's gas gathering  operations in Wyoming have gone
through a transition  period.  As gathered natural gas volumes have continued to
decline,  substantial  changes were needed to optimize the pipeline system for a
lower throughput  level.  Two large owned  compressors were sold in February and
replaced with a single leased  compressor more suited for the gas volumes in the
field.  Additional  measurement check points and liquid cleanout facilities were
installed in order to optimize system performance.

      At the Well Draw Gas Plant  ("Well  Draw"),  self-generation  of  electric
power was replaced in February with  commercial  power supplied by Pacific Power
and the two gas engine generator sets were sold. This change reduced the Plant's
reliance  on field  gas for  fuel,  and also is a  reflection  of the  declining
availability  of  field  gas for  fuel.  Operations  at Well  Draw  during  1997
continued to be geared primarily towards  fractionation and marketing of natural
gas  liquids  trucked  into the plant from  various  gas  plants  located in the
eastern half of Wyoming.

      The Company buys mixed liquids from several different  plants,  transports
them to Well Draw, fractionates the liquids into commercial propane, butane, and
natural   gasoline,   and  re-markets   these  products  for  its  own  account.
Additionally,  from  time  to  time  the  Company  enters  into  agreements  for
fractionation  of  liquids  from  others  on a fee  basis,  including  the Amoco
contract  and others.  The plant  processed  a total of 60,664  gallons a day of
natural gas liquids for the three months ended June 30, 1998 compared to gallons
a day for the three months ended June 30, 1997. Of the total  gallons  processed
9,540 gallons per day was for the Company and 


                                       10

<PAGE>

51,124 gallons per day for others, as compared to 65,142 and 10,124 gallons
per day  respectively in 1997. In October of 1997, KN Gas Gathering ("KN") began
processing  approximately 20,000 gallons per day at Well Draw under an agreement
which extends to March 31, 1998. During April and May of 1998, KN elected not to
process  their  liquids  at the Well Draw Gas  Plant.  During  June of 1998,  KN
resumed the  processing  agreement  with the Company on a month to month  basis.
During June and July of 1998,  the Company  processed  approximately  20,000 and
40,000 gallons a day respectively.

     The  Company's  natural gas liquids  transportation  operation  transported
approximately  18 million gallons of raw and finished  products during 1997. The
Company operates four tractor-trailer-pup  combination units to move unprocessed
natural gas liquids to Well Draw for  fractionation,  and then to take  propane,
butane,  and  natural  gasoline  from Well Draw to  various  refiners,  chemical
plants,  and end-users.  When time permits,  these trucks also move liquids on a
common  carrier  basis for third  parties.  The  Company  intends to continue to
emphasize this profitable business segment, and believes that our reputation for
flexibility and customer service will allow us to maximize opportunities.

      One  of  the  greatest  factors  impacting  trucking   operations  is  the
increasing  level  of  regulation  from the U.S.  Department  of  Transportation
governing  transportation of hazardous materials.  This has required significant
increases in man-hours  devoted to maintaining  safe and legal  operation of the
Company's  equipment.  A safety review and audit of the Company's operations was
performed by the D.O.T. in November,  and although several minor  record-keeping
discrepancies  were found, no serious violations or citations were issued and no
fines were assessed. It has been and is management's expressed policy to operate
all of its businesses in a safe and legal manner.

      Oil and  natural  gas  production  from the  Company's  wells  in  Wyoming
continue to be a small but profitable  segment of  operations.  Although oil and
gas prices held up during the first three  quarters of 1997,  significant  price
declines  occurred in November and  December  and have  continued in early 1998.
Despite these decreases, the Company intends to continue producing these wells.

      Management is unaware of any significant  future capital  expenditures for
the future in its oil and gas operations.  However, the very nature of equipment
operation,  ware and tear  and  replacement  in this  type of  operation  can be
significant.  Further,  it is noted that most of the revenues earned by the Well
Draw Plant are  derived  from the Amoco  contract  which will  expire in June 1,
2000. If this contract is not renewed,  it will have a substantial impact on the
ability of the Well Draw plant to continue  operations.  Management continues to
seek other liquids and gas connections to expand and diversify its operations in
Wyoming,  however,  its  operations  are in a limited and well  defined area and
expansion is difficult.

                                       11
<PAGE>

      Interline Hydrocarbon - Used Oil Refining.

     Revenues to the  Company,  from its used oil refining  technology  can come
from five  sources:  1) profits  made from  constructing  a used oil  plant,  2)
granting  exclusive  territories to licensee,  3) receiving  royalties  based on
either  production  or a  flat  yearly  licensing  fee,  4)  taking  partnership
interests in  operating  Plants by either  contributing  the  technology  and/or
making cash  contributions  for partnership  interests and, 5) rather than build
plants,  sell the construction  plans and provide  consultation and expertise so
that the customer can build the Plant.

     Based on the  experiences  with the four Plants that have been built by the
Company,  management's  current  feelings  are to  not  be in  the  construction
business.  Further, until the Company gets in better financial condition,  it is
not in a position to take  interests in operating  Plants.  Management  believes
that  the  best  way for it to  capitalize  on the  technology  is to  sell  the
construction  plans  for a  Plant  and  provide  consultation  services  to  the
purchaser.

      On June 10, 1998 the Company signed an engineering and marketing agreement
with Ecolube,  S.A., a subsidiary of Sener Engineering of Madrid,  Spain.  Under
the agreement, the Company provided Ecolube with engineering  specifications and
construction  drawings  for the  building  of a 24,000  gallon per day waste oil
re-refinery.  The plant will be located in Madrid,  Spain.  Under the agreement,
Ecolube will  construct  and operate the plant and produce  lubricant  base oil.
Interline will receive a $534,000  engineering and licensing payment and receive
a running  royalty  of $0.0175 on each  gallon  produced  and sold for 10 years.
Ecolube has the right to build additional plants in the Iberian Peninsula (Spain
and Portugal) for a four year period commencing from the date of plant start up.

      It has also become evident to management that demanding royalties based on
production in many  situations and countries is difficult.  Unless and until the
rerefined  oil produced in a Plant can be sold at higher values based on pricing
similar to base  lubricating  oils,  on-going  royalties  based on production is
difficult to obtain. The most viable opportunities management has discovered are
in countries that have governmental concessions resulting in economic incentives
for  collecting  and  processing  used oil.  This  reality has been seen in both
Korea,  where the royalty was terminated for the first plant, and England where,
as described previous filings,  the royalties were reduced and not payable until
profitable.

      Management  still believes that there exists  economic  justification  and
interest in the technology. The Company continues to improve the technology, and
on May 28, 1998 filed a patent  application  in the United  States Patent Office
for a new and  alternative  method from the PSI technology  for processing  used
oil. This new technology has been  implemented  in the Korean,  Austrialian  and
Spanish  Plants.  While  management  continues  to receive  inquiries  about the
technology,   the  Company  is  selective  as  to  potential  purchasers.   From
experience, management is aware of the complicated nature between the balance of
supply  and  demand.   Management   has  become  much  more   selective  in  its
consideration  of selling the  technology to  prospective  purchasers and unless
favorable conditions exist the Company discourages the purchaser. Management has
become  much more  active in  helping  potential  customers  evaluate  their end
product sales markets.

                                       12
<PAGE>

Results of Operations

      The  following  analysis  of  the  financial   condition  and  results  of
operations should be read in conjunction with the Financial Statements and Notes
thereto, included elsewhere in this report.

      During 1997, the following three events occurred, and have been classified
and presented in the financial statement as discontinued operations.  Readers of
the condensed  financial  statements  should keep in mind that prior comparative
information in this report have been changed to reflect these events.

     Salt Lake Refinery - Genesis  Petroleum  Inc.: As disclosed in previous SEC
filings,  the Company  recorded a  liability  for the  repurchase  of a used oil
refinery  located in Salt Lake City, Utah from Genesis  Petroleum,  the original
purchaser. This liability is a result of Genesis exercising the option, provided
in the sales agreement, to require the Company to repurchase the refinery. Prior
to the option being exercised,  the Company was a 26% owner of the joint venture
which  operated the used oil refinery and  accounted  for its  investment on the
equity method through June 19, 1996. The original  purchaser owned the remaining
74% of the joint  venture and operated the plant.  The Company had  consolidated
the  operations  of the refinery and joint  venture since June 19, 1996 the date
the option was executed.

      Effective  September 30, 1997, the Company  reclassified the operations of
the Genesis  Refinery and joint  venture  into  "discontinued  operations".  The
change in  accounting  treatment  was due to the belief of Company's  management
that it will not  retain  the  refinery  and  ownership  in the  joint  venture.
Subsequently,  on December  23, 1997 the Company and Genesis  Petroleum  entered
into an agreement to settle all claims.  (See Legal Proceeding) The consolidated
statement of  operations  presented  for the three and six months ended June 30,
1998 and 1997 reflect the revenue and expense relating to Genesis Refinery under
caption "Income (loss) from discontinued operations".

      Utah Oil and Gas Operations:  As disclosed in previous SEC filings, on May
1, 1997,  the Company  sold all assets of its Utah oil and gas  operations.  The
consolidated  statement  of  operations  presented  for the three and six months
ended June 30, 1998 and 1997,  reflect the revenue and expense relating to these
assets  under  caption  "Income  (loss)  from   discontinued   operations."  The
consolidated  statement  of  operations  presented  for the three and six months
ended June 30, 1998 and 1997,  reflect the gain or loss on sale of these  assets
under caption "Gain (loss) on disposal of discontinued operations."


      Gagon  Mechanical  Operations:  In May 1997, the Company  discontinued the
operations  of  Gagon  Mechanical.  The  consolidated  statement  of  operations
presented for the three and six months ended June 30, 1998 and 1997, reflect the
revenue and expense  relating to these assets under caption  "Income (loss) from
discontinued  operations." The consolidated balance sheet for 


                                       13
<PAGE>

quarter ended June 30, 1998 reflect all assets and liabilities  relating to
the  operations  under  caption  "Net assets of  discontinued  operations".  The
consolidated  statement  of  operations  presented  for the three and six months
ended June 30, 1998 and 1997,  reflect the gain or loss on sale of these  assets
under caption "Gain (loss) on disposal of discontinued operations."


Total Revenues

      Revenues  decreased  $25,436 or 3.13%,  to $788,063  for the three  months
ended June 30, 1998 as compared to $813,499  for the three months ended June 30,
1997. The revenue decrease included a $18,754 or 2.51%,  decrease in oil and gas
revenues; and an $15,082, or 23.17%,  decrease in used oil refining revenues and
an $8,700 increase in other revenues. The Company's total revenues, on a segment
basis, for three months ended June 30, 1998 and 1997 were as follows:

     The following table excludes any revenues  generated from the assets of the
Utah oil and gas operations,  Gagon Mechanical  construction  and  manufacturing
operations,  and  any  revenues  attributed  to  the  Salt  Lake  City  refinery
operation.  The assets of the Utah oil and gas operations were sold May 1, 1997.
Gagon Mechanical  operations were discontinued in May 1997, although the Company
is subcontracting  to G-EPIC,  Inc. the construction of the Australia plant. The
assets  of the  Salt  Lake  Refinery  were  discontinued  due  to the  Company's
agreement  with  Genesis  Petroleum  to settle all claims.  The results of these
operations  are  reflected in the  consolidated  statement of  operations  under
caption "Income (loss) from discontinued operations".

            Revenues For Three Months Ended June 30, 1998 and 1997


                         1998           %               1997          %
-------------------------------------------------------------------------------

Oil and Gas            $729,663       92.59%         $748,417       92.00%
Used Oil refining        50,000        6.34%           65,082        8.00%
Other                     8,400        1.07%                0         .00%
-------------------------------------------------------------------------------
Total Revenue          $788,063         100%         $813,499         100%
===============================================================================


Oil and Gas Revenues
      Oil and gas revenues  contributed  approximately  92.59% of total revenues
for the three months ended June 30, 1998, as compared to  approximately  92% for
the three  months ended June 30, 1997.  Revenues  decreased  $18,754 or 2.51% to
$729,663 for the three  months ended June 30, 1998 as compared to $748,417,  for
the three months ended June 30, 1997.

      The revenues  presented  in the above table are solely from the  Company's
Wyoming  operations.  This  revenue  decrease  of  $18,754  or 2.51%  is  mainly
attributed to several liquid purchase contracts that expired.  The Company tried
to negotiate new terms for these  liquids,  but 

                                       14

<PAGE>

after considering the very low margins and the risk on the structure of the
pricing, the Company did not except the new terms.


Used Oil Refining Revenues
      Since it  commenced  operations  in the used oil  refining  business,  the
Company has primarily derived revenues attributed to fees for engineering, plant
design,  license,  exclusively or other services  associated  with the Company's
used oil refining  technology.  The revenue  attributed to the used oil refining
business varies  significantly  from quarter to quarter reflecting the status of
the Company's fees and plant design services.

     Used oil  refining  revenues  contributed  6.34% of total  revenues for the
three  months  ended June 30, 1998  compared to 8.0% for the three  months ended
June 30, 1997. The revenues  decreased  $15,082,  or 23.17%,  to $50,000 for the
three months ended June 30, 1998  compared to $65,082 for the three months ended
June 30 1997.  The revenue of $50,000 for the three  months  ended June 30, 1998
was derived from the engineering and licensing  agreement with Ecolube,  S.A., a
subsidiary of Sener  Engineering  of Madrid,  Spain.  Under the  agreement,  the
Company will receive an  engineering  and licensing  payment of $534,000.  As of
June 30, 1998,  the Company  received  $200,000  from  Ecolube.  Of the $200,000
received  during  the  three  months  ended  June  30,  1998,  $50,000  has been
classified  as revenue and $150,000 has been  classified on the balance sheet as
deferred  income.  During the three and six months ended June 30, 1998 and 1997,
the Company received no revenues for royalties for it used oil technology.

      The results of the Salt Lake City refinery operations during the three and
six months ended June 30, 1997, are reflected in the  consolidated  statement of
operations under the caption "Income (loss) from discontinued operations".

Direct Costs
     Direct costs decreased $30,964,  or 5.24%, to $559,802 for the three months
ended June 30, 1998  compared to $590,766  for the three  months  ended June 30,
1997.  The  decrease  of $30,964  for the three  months  ended June 30, 1998 was
mainly  attributed  to a decrease  in the  Company's  revenues.  As a percent of
revenues,  direct costs  decreased to 71.04% for the three months ended June 30,
1998 compared to 72.62% for the three months ended June 30, 1997.  This 1.58% of
revenue  decrease is mainly  attributed  a  reduction  in  personnel  within the
Company's oil and gas operations located in Wyoming.

Selling, General and Administrative
     Selling,  general and administrative expenses decreased $40,581, or 15.49%,
to $221,415 for the three  months  ended June 30, 1998  compared to $261,996 for
the three months June 30, 1997. As a percent of revenues,  selling,  general and
administrative  expenses  were 28.10% for the three  months  ended June 30, 1998
compared to 32.21% for the three months ended June 30,  1997.  During 1997,  the
Company's management developed a plan to increase cash flow and reduce expenses.
Part of the plan included a reduction of personnel,  including  both  management
and  operations  personnel.  During  1997,  the  Company  reduced  3  management
positions and 25  


                                       15
<PAGE>

operational  positions.  During 1998,  the Company  reduced an additional 4
management positions and 2 operational positions.  The Company did incur outside
legal fees of $75,380 for the six months ended June 30, 1998 compared to $71,319
for the six months ended June 30, 1997. These legal costs were mainly attributed
to the Company's legal proceedings and bankruptcy filing.


Depreciation and Amortization

     Depreciation  and  amortization  expenses  decreased  $18,005,  or 9.59% to
$169,729 for the three  months ended June 30, 1998  compared to $187,734 for the
three  months ended June 30, 1997.  As a percent of revenues,  depreciation  and
amortization  expenses  decreased  to 21.54% for the three months ended June 30,
1998 compared to 23.08% for the three months ended June 30, 1997.

Research and Development

     Research and development  expenses  increased $6,243, or 32.19%, to $25,640
for the three months ended June 30, 1998  compared to $19,397 for the year ended
June 30, 1997.  As a percent of  revenues,  research  and  development  expenses
increased to 3.25% for the three  months  ended June 30, 1998  compared to 2.38%
for the three months ended June 30, 1997.

      Research  and  development   expenses  were  mainly  attributable  to  the
development and enhancement of the Company's used oil refining  technology.  The
Company will continue to incur research and development expenses as it continues
to develop its used oil refining technology.

(Loss) from operations
     Loss from  operations  decreased  $57,871,  or 23.49%,  to $188,523 for the
three  months  ended June 30,  1998  compared  to a $246,394  loss for the three
months ended June 30, 1997.  The $57,871  decrease in loss from  operations  was
mainly attributed to a decrease in selling,  general and administrative  expense
of $40,581,  or 15.49%,  to $221,415  for the three  months  ended June 31, 1998
compared to $261,996 for the three months ended June 30, 1997.

Other income (expenses)
     Net interest income (expense)  increased  $2,122, or 23.84%, to $11,023 for
the three months ended June 30, 1998 compared to $8,901 for the three months end
June 30, 1997. The net increase was mainly  attributed to a decrease in interest
earned on the Company's  money market and interest  bearing  accounts.  

     Interest  expense to a related  party  decreased  $110,972  or  54.83%,  to
$91,424 for the three  months  ended June 30, 1998  compared to $202,396 for the
three months ended June 30,  1997.  The decrease in interest to a related  party
was  attributed  to the note balance  being  $5,030,089  during the three months
ended June 30, 1997,  and the note  balance  being  $2,680,089  during the three
months ended June 30,  1998.  During  1997,  the Company paid the related  party
$2,350,000. The $2,350,000 was all applied to principle.


(Loss) from discontinued operations.
     Loss from discontinued operations decreased $202,366, or 87.16%, to $29,814
for the three months ended

                                       16

<PAGE>

June 30, 1998  compared to a loss of $232,180  for the three  months  ended
June 30, 1997.  Income (loss) from the Utah oil and gas  operation  (sold May 1,
1997) was $0 for the three month ended June 30, 1998 and 1997. Losses attributed
to the Genesis refinery (discontinued September 30, 1997) decreased $203,800, or
100%,  to $-0- for the three months ended June 30, 1998 compared to $203,800 for
the  three  months  ended  June  30,  1997.  Losses  from the  Gagon  Mechanical
(discontinued  May 1, 1997) increased $1,434, or 5.05%, to $29,814 for the three
months  ended June 30, 1998  compared to $28,380 for the three months ended June
30, 1997. The Company's total income or loss from discontinued operations,  on a
segment  basis,  for the  three  months  ended  June 30,  1998 and 1997  were as
follows:


                   Income (Loss) From Discontinued Operations
                For The Three Months Ended June 30, 1998 and 1997


                              1998           1997         Change         %
-------------------------------------------------------------------------------
Utah Oil and Gas               $0             $0             0          .00%
Gagon Mechanical          -29,814          -28,380        -1,434      -5.05%
Genesis Refinery                0         -203,800      -203,800     100.00%
-------------------------------------------------------------------------------
    Total               - $29,814       - $232,180    - $202,366    - 87.16%
===============================================================================


Liquidity and Capital Resources

      Sources  of  liquidity  for the  Company  are  revenues  from  oil and gas
operations and revenues from the sale of its  hydrocarbon  refining  technology.
Currently,  the only consistent  ongoing revenue sources to the Company are from
its oil and gas operations in Wyoming.  The Company  receives  revenues from its
used oil  refining  technology  when a sale or  license  is  executed.  On going
royalty fees will be received only from the Austrilian  Plant, when operational,
and the Spanish  Plant,  when  constructed  and  operational.  While the Company
continues to work with potential  purchasers of its  technology,  such sales and
expected   revenues  are   uncertain   and   unpredictable.   If  an  acceptable
reorganization   plan  is  accepted  in  the  Company's  Chapter  11  bankruptcy
proceeding,  management  believes  that the  Company's  cash from its  operating
activities and cash retained under the reorganization  plan would be adequate to
meet its operating  needs in the near term and would provide a plan to meet debt
obligations.  Management has put strict  restraints on all capital  expenditures
with the exception of necessary expenditures to maintain current operations. The
Company will continue to incur research and development costs as it continues to
develop its refining technology. At present these activities are being performed
by current Company employees and part time contract consultants

      If the Company is unable to obtain approval of a reorganization plan under
its Chapter 11 bankruptcy  proceeding,  the Company may be compelled to file for
liquidation under Chapter 7.

                                       17

<PAGE>

The  Company  can seek to raise  additional  financing  through the sale of
equity,  debt and assets but there can be no assurance  that the Company will be
able to continue its current operations.

      The  Company's  operations  used $779,072 of cash for the six months ended
June 30, 1998  compared to cash  provided by  operations of $162,541 for the six
months ended June 30, 1997. Of the $779,072 cash used in operations  for the six
months ended June 30, 1998,  $750,000 was  attributed  to an one time payment to
Genesis  Petroleum,  Inc.  to settle all claims  (See Item 1 Legal  Proceeding).
Without the one time payment to Genesis Petroleum, Inc., cash used in operations
for the six months ended June 30, 1998 was $4,072.

 Of the $162,541 cash  provided by operations  for the six months ended June 30,
1997,  $400,000 was attributed to a marketing  agreement with Dukeun  Industrial
Company of South Korea.  Without the one time payment received from Dukeun,  the
Company's  operations  would have used cash of $237,459 for the six months ended
June 30, 1997.

     The decrease in cash used by operations  (exclusive of the $750,000 payment
to Genesis  Petroleum,  Inc.  and the  $400,000  payment  received  from  Dukeun
Industrial  Company) was mainly attributed to changes implemented by management.
During 1997 and 1998,  the Company's  management  implemented a plan to increase
cash flow and reduce expenses. The plan included the following:

1.   In May of 1997, the Company  discontinued the Gagon  Mechanical  operations
     and has been  subcontracting  any work formerly done by Gagon.  In the year
     ended  December 31, 1997,  Gagon's loss from  discontinued  operations  was
     $4,609  compared to a loss of  $2,022,857  for the year ended  December 31,
     1996. In the six months ended June 30, 1998, Gagon's loss from discontinued
     operations  was $53,868  compared to a loss of $278,328  for the six months
     ended June 30, 1997.

2.   During 1997, the Company reduced its workforce by 28 personnel. Included in
     the reduction was 3 management positions and 25 operational positions. This
     reduction  in  workforce  reduced  the  Company's  salaries  and  wages  by
     approximately  $550,000.  During 1998, the Company  reduced an additional 4
     management positions, 1 operational position and 1 clerical position.

3.   During 1997, the Company  received  proceeds in the amount of $5,014,024 on
     the sale of assets and reduced debt by $2,461,077. Included in assets sold,
     were  the  Company's  Utah  oil and gas  operations  (Monument  Butte)  for
     $4,000,000,  the 40% interest in Interline  (UK) Joint Venture for $500,000
     in which the Company has received 200,000,  the sale of two compressors for
     $502,111  located in Wyoming and other  equipment and vehicles for $11,913.
     On March 1,  1998,  the  Company  sold the  Gagon  Mechanical  construction
     equipment,  parts and salvage material for the sum of $65,000. Also, on May
     28, 1998, the Company sold the Gagon Mechanical building, located in Sandy,
     Utah for $885,106.  Net proceeds to the Company after commissions,  closing
     costs and payoff of secured debt was $568,743.

                                       18
<PAGE>


4.   On September 30, 1997, the Company deemed its Salt Lake Refinery  operation
     to be a  discontinued  operation.  Subsequently,  on December 23, 1997, the
     Company entered into a agreement with Genesis Petroleum, Inc. to settle all
     claims  between  both  parties.  The  agreement  resulted  in  the  Company
     transferring  all its  rights to the Salt Lake  Refinery,  the  payment  of
     $750,000  (made on January  29,  1997),  and  granting  of a license of the
     Company's  technology for three additional sites with no license fees to be
     paid to the Company. In the year ended December 31, 1997 loss from the Salt
     Lake Refinery was $191,044 compared to $281,832 for the year ended December
     31,  1996.  For the six months  ended June 30,  1998 there  where no losses
     compared to $328,655 for the six months ended June 30, 1997.

5.   During 1997,  the Company  reduced  capital  expenditures  from  continuing
     operations  by $78,023,  to $153,378  for the year ended  December 31, 1997
     compared to $231,401 for the year ended  December 31, 1996.  For 1998,  the
     Company  has put strict  restraints  on all capital  expenditures  with the
     exception of necessary expenditures to maintain current operations. Capital
     expenditures  from continuing  operations for the six months ended June 30,
     1998 were  $23,115  compared to $265,486  for the six months ended June 30,
     1997.


     During  1997,  the  Company  paid  a  related  party  $2,350,000  of  which
$2,200,000  was proceeds  from the sale of the Utah oil and gas  operations  and
$150,000 was  proceeds  from the sale of two  compressor  located in the Wyoming
operations. The $2,350,000 was all applied to principal. As of June 30, 1998 the
balance owed to the related party is  $2,680,089 in principal and  $1,063,706 in
interest.


             Note Payable and Accrued Interest Due to Related Party

                  Initial        Interest         Current        Accrued
                  Balance          Rate           Balance        Interest
-------------------------------------------------------------------------------

Note 1            $250,000         12%            $250,000       $104,890
Note 2           1,500,000         12%           1,500,000        374,301
Note 3             780,089         16%                   0        500,451
Note 4           2,500,000         16%             930,089         84,064
-------------------------------------------------------------------------------
Total           $5,030,089                      $2,680,089     $1,063,706
===============================================================================


      As  disclosed  in previous  SEC  filings,  three of the  following  Senior
Secured  notes  to  a  shareholder  totaled  $2,530,089.  This  amount  and  the
associated interest was due September 1, 1996. As a result of non payment by the
Company,  the notes are currently in default. (An event of default under another
$2.5 million note (see # IV) has  occurred,  which permits  acceleration  of the
Company's obligation to repay the principal and interest.)


                                       19

<PAGE>


I.   During 1994, the Company issued a $250,000 senior  convertible note payable
     to a related party. The note bears interest at 10% and was due on September
     1, 1996. After December 31, 1994, the note is convertible in full to 67,750
     shares of the Company's  restricted  common stock at the option of the note
     holder. As a result of the default, the interest rate has changed to 12%.

II.  On February 29, 1996 the Company obtained $1,500,000 in a 6% senior secured
     note from the same related party. The obligation was due September 1, 1996.
     In the event of a default on the note the  principal  can be  converted  to
     shares of the  Company's  common  stock at the price of the lesser of $3.20
     per share or 80  percent of the  average  closing  price for the  Company's
     shares  for  the  five  consecutive  trading  days  preceding  the  date of
     conversion. The note was secured by all of the issued and outstanding stock
     of  two  subsidiaries,  Interline  Energy  Services  and  Gagon  Mechanical
     Contractors.  As a result of the default,  the interest rate has changed to
     12%.

III. On July 19, 1996,  the Company  obtained  $780,089 in a 9.5% senior secured
     note from the same related party. The obligation was due September 1, 1996.
     The note is secured by the outstanding shares of Interline Energy Services,
     Gagon Mechanical and Interline Hydrocarbon. As a result of the default, the
     interest rate has changed to 16%.

IV.  On May 15, 1996, the Company obtained  $2,500,000 in a 9.25% senior secured
     note from the same related party as above. The note is due January 15, 1998
     and is secured by the outstanding  shares of Interline  Energy Services and
     Gagon  Mechanical.  Upon default,  the loan may be converted into shares of
     the  Company's  common stock at the lesser of $3.12 per share or 80 percent
     of the average  closing price for shares of the Company's  common stock for
     five  consecutive  trading  days  preceding  the  date  of  conversion.  As
     additional  consideration  for  the  shareholder  making  the  Loan  to the
     Company,  the Company has issued a Warrant to purchase up to 250,000 shares
     of  common  stock at $3.90  per  share.  As a result  of the  default,  the
     interest rate has changed to 16%.


Inflation

      The Company's business and operations have not been materially affected by
inflation  during the past three years and the  current  calendar  quarter.  The
Company  believes that inflation  will not  materially nor adversely  impact its
business plans for the future.


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<PAGE>


                          PART II - OTHER INFORMATION


Item 1.     Legal  Proceedings

Bankruptcy Proceeding

      On July 29, 1997, Genesis  Petroleum,  Inc. ("GPI") and Petroleum Systems,
Inc. ("PSI") filed a Petition for an involuntary Bankruptcy against the Company.
The Company filed a Motion to Dismiss  claiming that the Petition was improperly
filed.  The  Bankruptcy  Court  ruled  that the court did not have  jurisdiction
because  only two  creditors  had joined in the  Petition.  Another  hearing was
scheduled to consider the joiner of additional creditors. On September 26, 1997,
the Company filed its own Petition for  Reorganization  (Bankruptcy  #97C-26571)
under Chapter 11 of the United States Bankruptcy Act.

     On June 18, 1998, the Company filed a Plan of Reorganization and Disclosure
Statement to the Plan of Reorganization  with the United States Bankruptcy Court
for the District of Utah, Central Division. On July 14, 1998, the Company's Plan
of Reorganization  and Disclosure  Statement to the Plan of  Reorganization  was
approved and  circulation  thereof  authorized by the United  States  Bankruptcy
Court for the District of Utah,  Central Division.  A hearing on confirmation of
the  Plan  of   Reorganization   and   Disclosure   Statement  to  the  Plan  of
Reorganization  is  schedule  with the United  States  Bankruptcy  Court for the
District of Utah, Central Division, for August 27, 1998.

Genesis Petroleum Inc.

The Company has previously  reported a lawsuit that had been filed against it in
the Third Judicial District Court of Salt Lake County, State of Utah, by Genesis
Petroleum Inc.  ("GPI") for breach of a Sale and Purchase  Agreement.  Under the
Agreement,  the Company  agreed to purchase GPI's interest in the Salt Lake City
used oil refinery  that had been  operated by a joint venture owned by GPI and a
subsidiary of the Company. In July 1997, the Court granted GPI a judgment in the
litigation and awarded GPI damages for breach of contract. The Court awarded GPI
damages in the amount of  $2,320,836,  less an offset of the value of the assets
which the Company had agreed to purchase from GPI under the Agreement,  but as a
result of the  Company's  default,  these  assets had been  retained by GPI. The
Company  was to present  evidence  to the Court as to the value of the Plant and
the amount of the offset (See  Liquidity  and Capital  Resources).  Prior to the
Company presenting the Court with such evidence,  GPI and another creditor filed
a Petition for Involuntary Bankruptcy against the Company.

      On January 20, 1998 the United States Bankruptcy Court for the District of
Utah approved a settlement  agreement between the Company and Genesis Petroleum.
The Company and Genesis were joint ventureres in an used oil refinery located in
Salt Lake City, Utah. The settlement agreement provided for, among other things,
the following: 1) the litigation between them was terminated;  2) Interline paid
Genesis the sum of $750,000;  3) the Company  granted Genesis a license to build
and operate three additional used oil refineries  using the technology  assigned
to it by PSI  without  the  payment of any  royalties  or other  payments to the
Company; 

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<PAGE>


4) the Company transferred all of its right in the joint venture and in the
Salt Lake  Refinery to  Genesis;  and, 5) all  previous  agreements  between the
Company and Genesis were terminated.


Petroleum Systems Inc.
     The Company has  executed  license  agreements  with  licensees  to utilize
Interlines used oil technology which includes technology received from Petroleum
System,  Inc.  ("PSI") through an assignment  agreement of certain patent rights
(PSI technology). Under the assignment agreement the Company is obligated to pay
royalties to PSI for those Interline  plants using PSI  technology.  The Company
and PSI have been involved in a dispute as to what payments the Company owes PSI
under the  assignment  agreement.  The Company and PSI were first involved in an
arbitration   proceeding  to  determine  the  issues   between  them,   but  PSI
discontinued resolution through arbitration and on July 29, 1997 filed a lawsuit
against the Company and its wholly owned  subsidiary  Interline  Hydrocarbons in
the Third  Judicial  District  Court of the State of Utah ("State Court Action")
alleging that the Company was in breach of the Assignment agreement and that PSI
should be allowed to re-acquire  all of the  technology  rights  assigned to the
Company  through  the  assignment  agreement.  PSI filed its  complaint  and the
Company has answered, but no other pleadings have been filed. As a result of the
bankruptcy  proceeding,  and its  procedural  rules the State  Court  Action was
stayed.

     On March 26, 1998,  PSI filed claim  against the Company in the  bankruptcy
proceeding  seeking royalties of $420,000,  asserting breaches of the assignment
agreement and requesting the return of a prototype  production device ("Baby M")
held by the Company. The Company filed an objection to the claim, and a trial of
the claims was held on June 5 and 8, 1998. After hearing testimony of witnesses,
receiving exhibits and hearing arguments of counsel,  the court entered an order
denying PSI's claim for $420,000, ordering that the Company return Baby M to PSI
and denying all other claims brought by PSI.

     On May 29, 1998,  PSI filed a motion for relief from  automatic stay in the
bankruptcy  court  seeking  the right to  proceed  with its State  Court  Action
against the Company and its subsidiary  Interline  Hydrocarbons.  After argument
and hearing,  the bankruptcy court requested counsel for PSI to prepare an order
granting  relief  from the  automatic  stay.  The  Company  has  objected to the
proposed  order  granting  relief from the  automatic  stay and a hearing is set
before the court on August 13, 1998.


Item 2. Changes in Securities:  None


Item 3. Defaults Upon Senior Securities:

      The Company is  currently  in default on notes due to a  shareholder  (See
Liquidity and Capital Resources).


Item 4. Submission of Matters to a Vote of Security Holders:  None


                                       22

<PAGE>


Item 5. Other Information:

      The Company  announced on August 13, 1997 that the American Stock Exchange
(AMEX) made a final determination to delist the Company from the AMEX's Emerging
Company marketplace.

      As of August  13,  1998,  a market is being made of the  Company's  common
stock on the NASD Bulletin Board under symbol "IRCE".


Item 6(a). Exhibits:  None


Item 6(b) Form 8-K:   None


                                       23

<PAGE>


                                   SIGNATURES

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


Dated: August 13, 1998              INTERLINE RESOURCES CORPORATION




                                    By:  /s/ Michael R. Williams
                                         ---------------------------------
                                             Michael R. Williams
                                             CEO/President
                                             Principal Executive Officer
                                             Director



                                    By:  /s/ Mark W. Holland
                                         ---------------------------------
                                             Mark W. Holland
                                             Chief Financial Officer



      In accordance  with the Exchange Act, this report has been signed below by
the following  persons on behalf of the Company and in the capacities and on the
dates indicated.



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


August  13, 1998       CEO/President          /s/ Michael R. Williams
                       and Director           Michael R. Williams


August 13, 1998        Secretary/             /s/ Michael A. Megee
                       Director               Michael A. Megee










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