<PAGE>   1
================================================================================



                       SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549

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

                                  FORM 10-QSB

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

(MARK ONE)

[X]  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 1998; OR

[ ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES 
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ________ TO _______

COMMISSION FILE NO.                  
                   --------------------

                             POWER EXPLORATION, INC.
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)


                 NEVADA                                 84-0811647
    (STATE OR OTHER JURISDICTION OF                  (I.R.S. EMPLOYER
     INCORPORATION OR ORGANIZATION)                 IDENTIFICATION NO.)

                            5020 Collinwood, Ste. 201
                             Fort Worth, Texas 76107
               (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)

               REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:
                                 (817) 377-4464

INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED
TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING
THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRATION WAS
REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS: 
YES [X] NO [ ]

INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES OF
COMMON STOCK, AS OF THE LATEST PRACTICABLE DATE:

            Class                          Outstanding as of December 31, 1998
------------------------------            -------------------------------------
Common stock, $0.02 par value                           12,210,925



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                                                                    Page 1 of 21


<PAGE>   2



                                      INDEX

<TABLE>

<S>                                                                                                     <C>
Cautionary Statements Relevant to Forward-Looking Information for the Purpose of                         3
"Safe Harbor" Provisions of the Private Securities Litigation Reform Act of
1995


PART I.  FINANCIAL INFORMATION

Item 1. Financial Statements                                                                             4
         Consolidated Balance Sheet for the Two Most Recent Quarters                                     4
         Consolidated Statement of Operations for the Two Most Recent Quarters                           5
         Consolidated Statement of Cash Flows for the First Quarter of 1998 and 1997                     6
         Notes to Consolidated Financial Statements                                                      7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
         General                                                                                        15
         Overview                                                                                       15
         History of Losses                                                                              15
         Financial Results                                                                              15
         Liquidity And Capital Resources                                                                16
         Operating Environment                                                                          17
         Year 2000 Compliance                                                                           17
         Uncertainties And Risk Factors                                                                 17

PART II. OTHER INFORMATION

Item 1.  Legal Proceedings                                                                              21
</TABLE>



Signature

EXHIBITS

                                                                    Page 2 of 21
<PAGE>   3






        CAUTIONARY STATEMENTS RELEVANT TO FORWARD-LOOKING INFORMATION FOR
                 THE PURPOSE OF "SAFE HARBOR" PROVISIONS OF THE
                PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

This quarterly report on Form 10-QSB contains forward-looking statements
relating to Power Exploration Inc.'s ("Power" or "the Company") operations that
are based on management's current expectations, estimates and projections about
the petroleum and chemicals industries. Words such as "expects," "intends,"
"plans," "projects," "believes," "estimates" and similar expressions are used to
identify such forward-looking statements. These statements are not guarantees of
future performance and involve certain risks, uncertainties and assumptions that
are difficult to predict. Therefore, actual outcomes and results may differ
materially from what is expressed or forecasted in such forward-looking
statements.

Among the factors that could cause actual results to differ materially are crude
oil and natural gas prices; potential failure to achieve, and potential delays
in achieving, expected production from existing and future oil and gas
development projects; potential disruption or interruption of the company's
production, manufacturing or transportation facilities due to accidents or
political events; potential disruption to the company's operations due to
untimely or incomplete resolution of Year 2000 issues by the company and other
entities with which it has material relationships; potential liability for
remedial actions under existing or future environmental regulations; and
potential liability resulting from pending or future litigation. In addition,
such statements could be affected by general domestic and international economic
and political conditions.

The Company undertakes no obligation to publicly release the results of any
revision to any forward-looking statement contained in this Report which may be
made to reflect events or circumstances occurring subsequent to the filing of
this Report with the Securities and Exchange Commission ("SEC"). Readers are
urged to carefully review and consider the various disclosures made by the
Company in this Report and in the Company's other Reports filed with the SEC
that attempt to advise interested parties of the risks and factors that may
affect the Company's business.



                                                                    Page 3 of 21

<PAGE>   4



PART I.   FINANCIAL INFORMATION
ITEM 1.   FINANCIAL STATEMENTS
POWER EXPLORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET FOR THE TWO MOST RECENT QUARTERS

<TABLE>
<CAPTION>


                                                                 DEC. 31, 1998   SEPT. 30, 1998                %
                                                                   UNAUDITED        AUDITED                  CHANGE
                              ASSETS
<S>                                                             <C>               <C>                          <C>
CURRENT ASSETS
Cash                                                            $     19,481      $    129,901                -85%
Accounts Receivable                                                    8,362            11,477                -27%

Accounts Receivable - Related Party                                  121,253           121,253                  0%
Inventory                                                            383,828           352,462                  9%
Prepaid Expenses                                                     130,677           123,542                  6%
TOTAL CURRENT ASSETS                                            $    663,601      $    738,635                -10%

OIL & GAS PROPERTIES, FULL COST METHOD
Properties being amortized                                         5,837,205         5,396,496                  8%
Properties not subject to amortization                             1,303,805         1,312,505                 -1%
                                                                   7,141,010         6,709,001                  6%
Less:  Accumulated depreciation, depletion & amortization             (5,499)           (5,220)                 5%

NET OIL AND GAS PROPERTIES                                         7,135,511         6,703,781                  6%

PROPERTY AND EQUIPMENT
Property and Equipment                                               296,811           296,811                  0%
Accumulated Depreciation                                             (57,088)          (46,037)                24%

Total Property and Equipment                                         239,723           250,774                 -4%

OTHER ASSETS                                                          19,553            13,846                 41%


TOTAL ASSETS                                                    $  8,058,388      $  7,707,036                  5%

               LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES
Accounts Payable and Accrued Expenses                           $    414,973      $    438,717                 -5%
Customer Deposits                                                    230,000           110,000                109%
Debentures Payable                                                                     250,000               -100%

Unamortized Discount on Debentures                                    (7,692)           (7,692)                 0%

Notes Payable                                                        950,000           900,000                  6%
Notes Payable -- Related Parties
                                                                      63,000            50,000                 26%
TOTAL CURRENT LIABILITIES                                       $  1,650,281      $  1,741,025                 -5%

LONG TERM LIABILITIES                                                     --                --                 --

TOTAL LIABILITIES                                               $  1,650,281      $  1,741,025                 -5%

STOCKHOLDERS' EQUITY
Common Stock ($.02 par value; 50,000,000 shares authorized,
12,210,925 shares issued & outstanding)                              244,218           221,218                 10%
Additional Paid-In Capital                                        11,292,872        10,415,872                  8%
Accumulated Deficit                                               (5,128,983)       (4,671,079)                10%
TOTAL STOCKHOLDERS' EQUITY                                      $  6,408,107      $  5,966,011                  7%

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                      $  8,058,388      $  7,707,036                  5%
</TABLE>








                                                                    Page 4 of 21

<PAGE>   5


POWER EXPLORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS FOR THE TWO MOST RECENT QUARTERS

<TABLE>
<CAPTION>


                                          3 MONTHS ENDING   3 MONTHS ENDING
                                           DEC. 31, 1998      SEPT. 30, 1998             %
                                             UNAUDITED          UNAUDITED             CHANGE

<S>                                        <C>               <C>                         <C>
REVENUE
Oil and Gas Sales                          $      2,485      $      10,687              -77%
Equipment Sales                                   7,635            (45,059)            -117%

TOTAL REVENUE                                    10,120            (34,372)            -129%


COST OF REVENUE
Lease Operating                                  44,878             83,333              -46%
Production Taxes                                     32                497              -94%
Depreciation, Depletion & Amortization              279            (21,942)            -101%
Exploration                                          --                 --

Cost of Equipment Sales                           1,510            290,062              -99%
TOTAL COST OF REVENUE                            46,699            351,950              -87%

GROSS PROFIT                                    (36,579)          (386,322)             -91%

EXPENSES
General and Administrative                      404,210            757,963              -47%
Interest Expense                                 17,115            367,722              -95%
TOTAL EXPENSES                                  421,325          1,125,685              -63%

PROFIT (LOSS) BEFORE OTHER INCOME
AND PROVISION FOR INCOME TAXES                 (457,904)        (1,512,007)             -70%

OTHER INCOME                                         --                 --               --

PROFIT (LOSS) BEFORE PROVISION
FOR INCOME TAXES
                                               (457,904)        (1,512,007)             -70%

PROVISION FOR INCOME TAXES                           --                 --               --


NET PROFIT (LOSS)                          $   (457,904)     $  (1,512,007)             -70%

PROFIT (LOSS) PER SHARE                    $      (0.04)     $       (0.14)             -71%

WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING                           12,040,382         10,435,748                4%
</TABLE>



                                                                    Page 5 of 21

<PAGE>   6



POWER EXPLORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE FIRST QUARTER OF 1998

<TABLE>
<CAPTION>


                                                           3 MONTHS ENDING
                                                            DEC. 31, 1998
                                                             UNAUDITED


<S>                                                      <C>           
Profit (Loss) After Taxes                                $   (457,904)
Depreciation and Amortization                                  11,329

CASH FLOW FROM INCOME STATEMENT                              (446,575)

Accounts Receivable.................Decr (Incr)                 3,115
Inventory...........................Decr (Incr)               (31,366)
Other Current Assets................Decr (Incr)                    --
Prepaid & Deferred Exp..............Decr (Incr)                (7,135)
Accounts Payable....................Incr (Decr)               (23,744)
Other Current Liab..................Incr (Decr)               120,000
Notes Payable - Related Parties.....Incr (Decr)                    --

CASH FLOW FROM OPERATING ACTIVITIES                          (385,705)


Fixed Assets........................Decr (Incr)                  (278)
Net Oil & Gas Prop..................Decr (Incr)              (131,730)
Other Assets........................Decr (Incr)                (5,707)

CASH FLOW FROM INVESTING ACTIVITIES                          (137,715)


New Borrowings                                                368,500
Repayments                                                   (105,500)
Short Term Debt.....................Incr (Decr)                    --
Long Term Debt......................Incr (Decr)                    --
Common Stock........................Incr (Decr)                    --
Additional Paid In Capital..........Incr (Decr)               150,000

CASH FLOW FROM FINANCING ACTIVITIES                           413,000


Net Increase (Decrease) in Cash                              (110,420)
Beginning Cash                                                129,901

ENDING CASH                                                    19,481


NON CASH ACTIVITY
Note issued for purchase of oil & gas properties              300,000

</TABLE>

                                                                    Page 6 of 21
<PAGE>   7



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations

         The Company is engaged primarily in the fields of acquisition,
development, exploration for and sale of oil and gas, and the construction and
sale of oil and gas extraction equipment.


Basis of Consolidation

         The consolidated financial statements include the accounts of Power
Exploration, Inc. ("Power", formerly Titan Energy Corp., Inc.) and its 100%
owned subsidiaries, Oil Retrieval Systems, Inc. ("ORS"), acquired May 16, 1997
and Oil Seeps, Inc. ("OSI") acquired June 17, 1997. Accordingly, all references
herein to "Power" or the "Company" include the consolidated results of its
subsidiaries. All significant intercompany accounts and transactions have been
eliminated in consolidation.


Use of Estimates

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


Concentration of Credit Risk

         The Company places its cash in what it believes to be credit-worthy
financial institutions. However, cash balances may exceed FDIC insured levels at
various times during the year.


Per Share of Common Stock

         Per share amounts have been computed based on the average number of
common shares outstanding during the period.

         In February 1997, the Financial Accounting Standards Board issued a new
statement titled "Earnings Per Share" (SFAS No. 128). This statement is
effective for both interim and annual periods ending after December 15, 1997 and
specifies the computation, presentation, and disclosure requirements for
earnings per share for entities with publicly held common stock or potential
common stock. All prior-period EPS data presented has been restated to conform
with the provisions for SFAS No. 128.

         Potential common stock has been excluded from the computation of
earnings per share since the inclusion of options and warrants would be
antidilutive.


                                                                    Page 7 of 21
<PAGE>   8

Impact of Recently Issued Accounting Standards

         In June 1997, the Financial Accounting Standards Board issued a new
statement titled "Reporting Comprehensive Income" (SFAS No. 130). This statement
is effective for both interim and annual periods beginning after December 15,
1997. This statement uses the term "comprehensive income" to describe the total
of all components of comprehensive income, including net income. This statement
uses the term "other comprehensive net income" to refer to revenues, expenses,
gains or losses that under generally accepted accounting principles are included
in comprehensive income, but excluded from net income.

         The impact of SFAS No. 130 in the financial statements, had it been
adopted as of September 30, 1998 and 1997, is not applicable, since the Company
had no other comprehensive income.


NOTE 2 - INVENTORY

Inventory at December 31, 1998 and September 30, 19998 consists of the
following:

<TABLE>
<CAPTION>


                                                                  DEC. 31, 1998       SEPT. 30, 1998

<S>                                                               <C>                 <C>           
Raw Material                                                      $    233,485        $      225,604
Work in Process                                                        150,343               126,858
                                                                  ------------        --------------
                                                                  $    383,828        $      352,462
                                                                  ============        ==============
</TABLE>


NOTE 3 - PROPERTY AND EQUIPMENT

Property and equipment at December 31, 1998 and September 30, 1998 consist of
the following:

<TABLE>
<CAPTION>


                                                              DEC. 31, 1998       SEPT. 30, 1998

<S>                                                          <C>                  <C>           
Shop Equipment                                               $       30,852       $       30,852
Furniture and Office Equipment                                       22,887               22,887
Machinery                                                           243,072              243,072
                                                             --------------       --------------
                                                                    296,811              296,811

Less Accumulated Depreciation                                        57,088               46,037
                                                             --------------       --------------

Property and Equipment - Net                                       $239,723       $      250,774
                                                             ==============       ==============
</TABLE>



NOTE 4 - OIL AND GAS PROPERTIES NOT SUBJECT TO AMORTIZATION

The Company's oil and gas properties are located in the United States and
Australia. The $1,303,805 and $1,312,505 cost of unproved oil and gas leases
held at December 31, 1998 and September 30, 1998, respectively, have been
excluded in computing amortization of the full cost pool. All excluded costs at
December 31, 1998 are located in Australia.

A determination cannot be made about the extent of oil reserves that should be
classified as proved reserves for this prospect. Consequently, the associated
property costs and exploration costs have been excluded in computing
amortization of the full cost pool. The Company estimates that amortization of
these costs will begin during the calendar year 1999.




                                                                    Page 8 of 21

<PAGE>   9


NOTE 5 - PARTICIPATION AGREEMENT

         The Company had entered into a participation agreement in the
development of the Revilo Glorieta Unit situated in Scurry County, Texas. Under
this agreement, the Company received an 18% net revenue interest in the
property, with no liability for expenses except as described below. The
agreement was effective January 15, 1997 and was terminated by the Company
during the year ended September 30, 1998.

         The agreement called for the Company to furnish three oil retrieval
systems to facilitate production on the property in order to earn its 18% net
revenue interest. The Company bore no expense in the operation of the units,
except to provide maintenance expense on the equipment.


NOTE 6 - NOTES PAYABLE

Notes payable consist of the following:

<TABLE>
<CAPTION>


                                                          DEC. 31         SEPT. 30
                                                           1998             1998
                                                       ------------     ------------

<S>                                                     <C>              <C>    
Notes Payable
    a) Bank of Commerce                                     100,000          100,000
    b) Business Exchange Investments, Inc.                  250,000          250,000
    c) Dallas Cady Family, LLP                               50,000           50,000
    d) Benchmark Equity Group                                    --          500,000
    e) Trident                                              250,000               --
    f) MB Exploration                                       300,000               --
                                                       ============     ============
Total                                                  $    950,000     $    900,000
                                                       ============     ============

Notes Payable - Related Parties
    g) M.O. Rife IV                                    $     44,500     $     50,000
    h) Directors                                             18,500               --
                                                       ============     ============
Total                                                  $     63,000     $     50,000
                                                       ============     ============

</TABLE>



a) The Company is indebted to the Bank of Commerce under terms of a promissory
note dated December 15, 1998 in the amount of $100,000. Terms of the note
provide for interest at a rate of 8.75% per annum, with a maturity date of
February 16, 1999. A principal stockholder of the Company has guaranteed the
note.

b) The Company is indebted to Business Exchange Investment, Inc. under terms of
a promissory note dated September 15, 1998. Terms of the note provide for
interest at a rate of 10% per annum with an original maturity date of January
15, 1999. The note is collateralized by 100% of the shares of OSI.


c) The Company is indebted to Dallas Cady Family, LLP under terms of a
promissory note dated September 15, 1998 in the amount of $50,000. Terms of the
note provide for interest to be paid in the form of 80,000 common stock purchase
warrants with an exercise price of $1.00 per share. The warrants have been
valued at $44,160.

d) The Company was indebted to Benchmark Equity Group, Inc. under terms of a
line of credit promissory note dated May 7, 1998 in the amount of $500,000. The
note was paid through the issuance of 500,000 common shares on October 7, 1998.




                                                                    Page 9 of 21

<PAGE>   10



e)       The Company is indebted to Trident III, LLC under terms of a promissory
note in the amount of $250,000. The note bears interest at 10% per annum and is
due on April 20, 1999. The Company has also issued 100,000 shares of Common
Stock to Trident III.

f)       On December 31, 1998, the Company purchased various oil, gas and/or
mineral leases located in East Texas along with 3-D Seismic Data from MB
Exploration, LLC. The purchase price was $350,000, and the Company paid $50,000
in cash and $300,000 with a promissory note bearing interest at 6% per annum and
due January 31, 1999. The note is collateralized by all properties and data
acquired through this purchase.

g)       The Company is indebted to M.O. Rife IV under terms of a promissory
note dated April 7, 1998 in the amount of $50,000. Mr. Rife is the son of a
principal stockholder of the Company. Terms of the note provide for interest at
a rate of 12% per annum, with an original maturity date of October 6, 1998. The
maturity date of the note has been extended to January 31, 1999, and the
principal has been reduced to $44,500.

h)       The Company uses the services of Rife Oil Properties, which is owned by
a principal stockholder, to drill its wells; in addition, the Company rents its
Fort Worth, Texas office space from Rife Oil, and has small payable to Rife
Trust.


NOTE 7 - DEBENTURES PAYABLE

a)       During July and August 1997, the Company sold $1,250,000 of 12% 
Convertible Debentures, in accordance with Regulation D of the Securities Act of
1933, for net proceeds of $870,000.

         The debentures bore interest at 12% per annum and were due and payable
on July 31, 1998, if not converted earlier. Interest was payable quarterly.

         The principal amount of the debentures was converted at the holders
option anytime 28 days after the closing date into shares of the Company's
common stock at a conversion price for each share of Company common stock equal
to the lower of (a) 80% of the closing bid price of the common stock for the
business day immediately preceding the date of receipt by the Company and notice
of conversion or (b) 80% of the average of the closing bid price of the common
stock for the 5 business days immediately preceding the closing date.

         Costs of $130,000 incurred in connection with the issuance of these
debentures are being amortized over the life of the debentures. Unamortized
issuance costs are charged to additional paid-in capital as debentures are
converted into common stock

         As of September 30, 1997, $467,000 principal amount of debentures had
been converted into 434,702 shares of common stock. During the year ended
September 30, 1998, the remaining $783,000 principal amount of debentures was
converted into 1,239,372 shares of common stock. Accrued interest of $38,607 has
been included in the above conversions.

b)       On October 22, 1997, the Company sold $250,000 of 12% Convertible
Debentures in accordance with Regulation D of the Securities Act of 1933, for
net proceeds of $176,000. Conversion terms are similar to those of the
debentures described in (a) above.



                                                                   Page 10 of 21

<PAGE>   11



         The Company and the buyer of the debenture were in disagreement
concerning the validity of the debenture. On October 29, 1998, the parties
reached an agreement. The agreement provides that the buyer will remit an
additional amount of $150,000 to the Company. The Company will then issue
650,000 shares of common stock to convert the total advances of $400,000 plus
all accrued interest into equity. This conversion occurred on October 30, 1998.



NOTE 8 - WARRANTS

         At September 30, 1998, the Company had the following common stock
purchase warrants outstanding:

 100,000 warrants, each of which entitles the registered holder thereof to
purchase one share of Common Stock, exercisable at any time on or before August
31, 2002 at an exercise price of $2.50 per share (subject to customary
anti-dilution adjustments). The exercise price exceeded the market price of the
underlying common stock on the date of issuance. The warrants were issued in
connection with the placement of the debt described in Note 6(a).

 80,000 warrants, each of which entitles the registered holder thereof to
purchase one share of Common Stock, exercisable at any time on or before August
31, 2003 at an exercise price of $1.00 per share (subject to customary
anti-dilution adjustments). The warrants were issued in connection with the debt
described in Note 5(c) and have been valued at $44,160.

 425,000 warrants, each of which entitles the registered holder thereof to
purchase one share of Common Stock, exercisable at any time on or before October
31,2003 at an exercise price of $1.00 per share (subject to customary
anti-dilution adjustments). The warrants were issued as a fee in connection with
the debt described in Note 5(d) and have been valued at $234,600.

 75,000 warrants, each of which entitles the registered holder thereof to
purchase one share of Common Stock, exercisable at any time on or before October
31, 2003 at an exercise price of $2.50 per share (subject to customary
anti-dilution adjustments). The warrants were issued as a fee in connection with
the debt described in Note 5(d) and have been valued at $103,575.

 20,000 warrants, each of which entitles the registered holder thereof to
purchase one share of Common Stock, exercisable at any time on or before June 1,
2003 at an exercise price of $2.50 per share (subject to customary anti-dilution
adjustments). The warrants were issued as payment for a consulting agreement and
have been valued at $27,620.

 100,000 warrants, each of which entitles the registered holder thereof to
purchase one share of Common Stock, exercisable at anytime on or before June 1,
2003, at an exercise price of $1.00 per share (subject to customary
anti-dilution adjustments). The warrants were issued as payment of interest on a
$100,000 note and have been valued at $55,200.

100,000 warrants, each of which entitles the registered holder thereof to
purchase one share of Common Stock, exercisable at anytime on or before June 1,
2003, at an exercise price of $1.00 per share (subject to customary
anti-dilution adjustments). The warrants were issued as payment for a consulting
agreement and have been valued at $55,200.


                                                                   Page 11 of 21

<PAGE>   12


The warrants issued do not confer upon the holders thereof any voting or other
rights of a stockholder of the Company.

The warrants described in items (b) through (g) above are subject to a "cashless
exercise" provision (the "warrant exchange"). In connection with any Warrant
Exchange, the Holder's Warrant certificate shall represent the right to
subscribe for an acquire (I) the number of Warrant Shares (rounded to the next
highest integer) equal to (A) the number of Warrant Shares specified by the
Holder in its Notice of Exchange (the "Total Share Number") less (B) the number
of Warrant Shares equal to the quotient obtained by dividing (i) the product of
the Total Share Number and the existing Exercise Price (as defined) of a share
of Common Stock.


NOTE 9 - RELATED PARTY TRANSACTIONS

During the quarter ended December 31, 1998:

         The Company renewed a promissory note to the son of a principal
stockholder in the amount of $44,500. (See Note 5(f)).

         The Company had liabilities to two directors totaling $18,500 which
consisted of drilling advances and accounts payable.

         A principal stockholder guaranteed the Bank of Commerce promissory note
in the amount of $100,000. (See Note 5(a)).

         The Company occupies space in facilities leased by the stockholder
mentioned above. The Company pays rent to the stockholder in the amount of
$2,000 per month. The space is rented on a monthly basis.

         Where possible the Company prefers to have Rife Oil Properties, Inc.
act as operator of the oil and natural gas properties and prospects in which it
owns an interest.

         M. O. Rife III, the Company's Chairman, owns 100% of Rife Oil
Properties, Inc., and Rife Oil Properties, Inc. is one of the Company's major
stockholders. As mentioned above, and also in Note 10(e), the Company has an
option to acquire Rife Oil Properties, Inc.


NOTE 10 - COMMITMENTS AND CONTINGENCIES

a) The Company has entered into various non-cancelable operating lease
agreements for office and warehouse space and equipment.

Warehouse facilities located in Fort Worth, Texas. The lease term expires on
September 30, 1999 and the Company has an option to review the lease for a two
year period.

Office facilities located in San Antonio, Texas. The lease term expires on
November 30, 1998.

Office facilities located in Tyler, Texas. The lease term expires on January 31,
2000.

Office facilities located in Tyler, Texas. The lease term on January 31, 1999.




                                                                   Page 12 of 21

<PAGE>   13


Various office equipment leases expiring at various times through June 25, 2003.

Future minimum lease payments under the lease agreements for each of the years
ended September 30 are as follows:


             1999                       $   98,485
             2000                           29,209
             2001                           17,421
             2002                            7,805
             2003                            3,048
                                        ----------
Total Minimum Lease Payments            $  154,968
                                        ==========

b) The Company has pledged 100% of the shares of Oil Seeps, Inc., a wholly owned
subsidiary, as collateral for a $250,000 promissory note due on February 15,
1999. (See Note 5(b) and Note 13(a)).

c) The note payable to Benchmark described in Note 5(d) is collateralized by all
fixed, real, tangible and intangible assets owned by the Company. The collateral
was released upon repayment of the note on October 7, 1998.

d) A former employee of Oil Retrieval Systems, Inc. (a subsidiary of the
Company) filed a sexual harassment complaint with the City of Fort Worth. The
Company agreed to engage in mediation, which resulted in the Company paying
$20,000 in exchange for a full and final release from the employee. In other
legal matters, the Company has filed an administrative claim with the Bankruptcy
Court to recover $30,000 from Southern Equipment.

e) The Company has an option to acquire Rife Oil Properties, Inc., a principal
stockholder of the Company, for 3,000,000 shares of Company Common Stock. The
option expires on August 31, 1999.

f) The Company has entered into discussions to acquire certain assets of Power
Exploration Company, Inc., a company owned by certain officers and directors of
the Company, for 2,000,000 shares of common stock. These shares are being held
in trust pending the finalization of any acquisition and are not included in
shares issued or outstanding as of September 30, 1998.

NOTE 11 - SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCIAL ACTIVITIES

During the quarter ended December 31, 1998:

         Debentures payable of $250,000 were converted into shares of common
         stock.

         Oil and gas properties were acquired in exchange for cash and a note
         for $300,000.

         A loan of $500,000 was converted into 500,000 shares of common stock.


During the year ended September 30, 1998:

         A note payable plus accrued interest was satisfied through the issuance
         of 1,000,000 shares of common stock. Principal and interest converted
         totaled $1,343,381.



                                                                   Page 13 of 21

<PAGE>   14



         Common stock totalling 1,239,372 shares was issued on conversion of
         $783,000 of debentures, plus accrued interest.

         Common stock warrants valued at $382,335 were issued in connection with
         various debt agreements.

         Common stock warrants valued at $82,820 were issued in connection
         consulting agreements.

         Common stock warrants valued at $55,200 were issued as payment for
         services.

         Common stock totaling 1,100,000 shares valued at $687,500 was issued as
         payment for services.


NOTE 12 - GOING CONCERN

         The accompanying consolidated financial statements have been prepared
assuming the company will continue as a going concern. As of December 31, 1998,
the Company has a working capital deficit of $986,680 and an accumulated deficit
of $5,128,983. Based upon the Company's plan of operation, the Company estimates
that existing resources, together with funds generated from operations will not
be sufficient to fund the Company's working capital. The Company is actively
seeking additional equity financing. There can be no assurances that sufficient
financing will be available on terms acceptable to the Company or at all. If the
Company is unable to obtain such financing, the Company will be forced to scale
back operations, which would have an adverse effect on the Company's financial
condition and results of operation.


NOTE 13 - SUBSEQUENT EVENTS

Subsequent to December 31, 1998, the Company:

a) Extended the maturity of the note to Business Exchange Investment, Inc. to
March 15, 1999.

b) Paid the note to Dallas Cady Family, LLP from proceeds of a new note payable
to Rife Oil Properties, Inc. in January, 1999.

c) Renewed the loan with MB Exploration. The Company paid the note down to
$279,500. The new note bears interest at 18% and is due March 31, 1999.

d) Extended the maturity of the note to M. O. Rife IV to April 30, 1999 and
reduced the principal to $24,500.

e) Entered into three cancelable consulting agreements with third parties.
Compensation for services provided under these agreements has been paid in
Common Shares of the Company. The Company issued 2,200,000 shares of Common
Stock, valued at $1,202,000 in connection with these agreements.



                                                                   Page 14 of 21


<PAGE>   15



ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

General

         The following discussion of the consolidated financial condition and
results of operations of the Company should be read in conjunction with the
consolidated financial statements of the Company and the notes thereto included
in Item 1 of Part I of this Report.


Overview

         Power, along with its wholly owned subsidiaries, is a developmental
global resource company engaged in oil and gas exploration. In addition to
exploration and development of new properties, Power redevelops currently
producing oil and gas fields, and researches and develops exploration and
recovery technologies, including the manufacture of new, cutting-edge oil
recovery equipment. (See "Glossary of Selected Oil and Natural Gas Terms" in the
Company's most recent 10-KSB/A for a definition of certain oil and gas industry
terms used in this report.)

         During its history, Power has changed its name several times. At
different times Power has been known as Imperial Energy Corp., Funscape Corp.,
Oil Retrieval Systems, Inc., and Titan Energy Corp. In this report, all of these
entities shall be referred to as Power.

         Power's business activity has stagnated due to current limited capital
resources and cash flow. The company is currently seeking financing that will
provide adequate capitalization. The Company has devised a two-stage financing
program to achieve its goals and financial forecasts. In the first stage, Power
will require approximately $3 million and in the second stage will require an
additional $7 million. The financing is expected to be secured through joint
venture participations for specific purposes.


History of Losses

         Power had a net loss of $457,904 for the three months ended December
31, 1998, and net losses of $628,961 and $2,695,817, for the years ended
September 30, 1997 and 1998, respectively. Power may continue to incur net
losses and, to the extent that natural gas and crude oil prices remain low, such
losses may be substantial.


Financial Results

         Revenues

         Oil and gas sales decreased $8,202, or 77%, to $2,485 for the three
months ended December 31, 1998 from $10,687 for the three months ended September
30, 1998. Equipment sales increased $52,694, or 117%, to $7,635 for the three
months ended December 31, 1998 from a negative $45,059 for the three months
ended September 30, 1998. Even with these increases in revenue and an increase
in gross profit of 91%, income was far short of expenses. To date, Power has
been putting the necessary components in place to create ongoing income, and
these efforts should begin to be realized during the second half of the 1999
fiscal year.



                                                                   Page 15 of 21

<PAGE>   16



         Costs and Expenses

         Power's general and administrative expenses decreased $353,753, or 47%,
to $404,210 for the three months ended December 31, 1998 from $747,963 for the
three months ended September 30, 1998. The change in the dollar amount of
general and administrative expenses was due primarily to a significant decrease
consulting fees which accounted for only 7% of all general and administrative
expenses. Other major components of general and administrative expenses included
officer's salaries at 14%, Tyler office salaries at 14%, non-officer salaries at
14%, and legal fees at 4%. Separately, lease operating expenses decreased
$38,455 to $44,878 for the three months ended December 31, 1998 from $83,333 for
the three months ended September 30, 1998.

         Net Loss

         Net loss for the three months ended December 31, 1998 was $457,904, or
$.04 per share, compared to a loss of $1,512,007, or $.14 per share, for the
three months ended September 30, 1998. Net cash used in operating activities was
$384,034 for the three months ended December 31, 1998, and $2,148,474 for the
three months ended September 30, 1998, representing a decrease of 82% in cash
usage. All cash activities of the business produced a $110,420 decrease in cash
for the three months ended December 31, 1998.

         Liquidity and Capital Resources

         Power's working capital deficit on December 31, 1998 was $986,680
compared to a deficit of $1,002,390 on September 30, 1998. Power had a current
ratio of 0.4 the three months ended December 31, 1998 as well as for the fiscal
year ended September 30, 1998. A comparison of other ratios that measure
financial performance show no change in the quick ratio of 0.2, no change in the
net worth to assets ratio of 0.8, and debt to net worth of (2.3) and (2.4)
respectively. This data all highlights Power's need to raise additional capital,
to convert some short-term debt into long-term debt, or to incur new long-term
debt.

         Cash and cash equivalents totaled $149,096 at December 31, 1998, a
$30,890 increase from December 31, 1997. An increase in short-term debt funded
the company's capital expenditures. The company's debt totaled $1,650,281 at
December 31, 1998, down 5% from September 30, 1998. The decrease was primarily
from the conversion of short-term debt to common stock.

         Long-Term Debt

         On December 31, 1998, Power had no long-term debt. Although 89% of
Power's assets are comprised of oil and gas properties that are not a current
asset, all of Power's borrowings have been short term in nature. This has
aggravated the Company's cash position and produced lower measures of financial
performance than would otherwise be possible.

         Need to Raise Additional Capital

         The growth of Power's business will require substantial capital on a
continuing basis. There is no assurance that any such required additional funds
would be available on satisfactory terms and conditions, if at all. There is
also no assurance that the Company will not pursue, from time to time,
opportunities to acquire oil and natural gas properties and businesses that may
utilize the capital currently expected to be available for its present
operations. The amount and timing of Power's future capital requirements, if




                                                                   Page 16 of 21

<PAGE>   17


any, will depend upon a number of factors, including drilling costs,
transportation costs, equipment costs, marketing expenses, staffing levels and
competitive conditions, and any purchases or dispositions of assets, many of
which are not within the Company's control. Failure to obtain any required
additional financing could materially adversely affect the growth, cash flow and
earnings of Power. In addition, Power's pursuit of additional capital could
result in the incurrence of additional debt or potentially dilutive issuances of
additional equity securities.

Operating Environment and Outlook

The Company's earnings are affected significantly by fluctuations in the price
of crude oil. During 1998, the spot price of West Texas Intermediate (WTI), an
industry benchmark light crude, averaged $14.39 per barrel, representing a 30
percent decline from the corresponding 1997 period. For the month of January
1999, the WTI spot price averaged $11.28 per barrel.


Year 2000 Compliance

         The "Year 2000 problem" results from computer systems and other
equipment that contain embedded chips or processors, and which use two digits,
rather than four, to define a specific year. This creates the potential for the
equipment to be unable to accurately process certain data before, during or
after the year 2000. This could result in system failures or miscalculations,
causing disruptions to various activities and operations.

         The Company's management has conducted a review of its information
systems and related data-processing activities to assess its exposure to the
Year 2000 problem. As a result, Power has upgraded the operating software on
some of its computers to a Year 2000 compliant system, and has upgraded its
accounting software to a Year 2000 compliant version.

         The Company currently uses Year 2000 compliant engineering evaluation
software for acquisition analysis, as well as internal engineering applications.
Power's spreadsheet and word processing software is also Year 2000 compliant.

         Power has potential Year 2000 exposure with regard to its third party
relationships and services including its bank and bank accounts and other vendor
and/or service providers who utilize computers. Although the Company has no
control over Year 2000 compliance implementation by these parties, Power has
inquired and been assured that all of it's service providers currently are, or
will be, Year 2000 compliant.


Uncertainties and Risk Factors

         Concentration of Production

         Power's existing proved producing oil and natural gas reserves and its
production therefrom are located in a single field which consists of 4,500 acres
and contains 650 wells. Accordingly, to the extent that Power experiences any
operating difficulties in connection with such wells or that the estimated
proved reserves attributable thereto are less than those that are currently
estimated to exist, Power could be adversely affected. 



                                                                   Page 17 of 21
<PAGE>   18


Geographic Restrictions

         There are no geographic restrictions that would prevent Power from
acquiring or seeking to acquire any rights or interest in any properties.

         Inability to Develop Additional Reserves

         Power's future success as an oil and natural gas producer, as is
generally the case in the industry, depends upon its ability to find, develop
and acquire additional oil and natural gas reserves that are economically
recoverable. Except to the extent that Power conducts successful development
activities or acquires properties containing proved reserves, Power 's proved
reserves would generally decline as reserves are produced. There can be no
assurance that Power will be able to locate additional reserves or that Power
will drill economically productive wells or acquire properties containing proved
reserves.

         Acquisition Risks

         Power's business strategy includes focused acquisitions of producing
oil and natural gas properties. Any such future acquisitions will require an
assessment of the recoverable reserves, future oil and natural gas prices,
operating costs, potential environmental and other liabilities and other similar
factors. It generally is not feasible to review in detail every individual
property involved in an acquisition. Ordinarily, review efforts are focused on
the higher-valued properties. However, even a detailed review of all properties
and records may not reveal existing or potential problems; nor will it permit
Power to become sufficiently familiar with the properties to assess fully their
deficiencies and capabilities. Inspections are not always performed on every
well, and potential problems, such as mechanical integrity of equipment and
environmental conditions that may require significant remedial expenditures, are
not necessarily observable even when an inspection is undertaken. Even if
problems are identified, the seller may be unwilling or unable to provide
effective contractual protection against all or part of such problems. There can
be no assurance that oil and natural gas properties acquired by Power will be
successfully integrated into Power's operations or will achieve desired
profitability objectives.

         Drilling Risks

         Power's drilling involves numerous risks, including the risk that no
commercially productive natural gas or oil reservoirs will be encountered. Power
must incur significant expenditures for the identification and acquisition of
properties and for the drilling and completion of wells. The cost of drilling,
completing and operating wells is often uncertain, and drilling operations may
be curtailed, delayed or canceled as a result of a variety of factors, including
unexpected drilling conditions, pressure or irregularities in formations,
equipment failures or accidents, weather conditions and shortages or delays in
the delivery of equipment. In addition, any use by Power of 3-dimensional
seismic and other advanced technology requires greater pre-drilling expenditures
than traditional drilling strategies. There can be no assurance as to the
success of Power's future drilling activities.

         Uncertainty of Estimates of Oil and Natural Gas Reserves

         Numerous uncertainties are inherent in estimating quantities of proved
oil and natural gas reserves, including many factors beyond the control of
Power. The process of estimating oil and natural gas reserves is complex,
requiring significant decisions and assumptions in the evaluation of available
geological, 



                                                                   Page 18 of 21

<PAGE>   19


engineering and economic data for each reservoir. As a result, such estimates
are inherently an imprecise evaluation of reserve quantities and the future net
revenue therefrom. Actual future production, revenue, taxes, development
expenditures, operating expenses and quantities of recoverable oil and natural
gas reserves may vary substantially from those assumed in the estimate. Any
significant variance in these assumptions could materially affect the estimated
quantity and value of reserves. In addition, Power's reserves may be subject to
downward or upward revision, based upon production history, results of future
exploration and development, prevailing oil and natural gas prices and other
factors.

         Geographic Concentration of Operations

         Virtually all of Power's current operations are located in Texas and
Australia. Because of this concentration, any regional events that increase
costs or competition, reduce availability of equipment or supplies, reduce
demand or limit production will impact Power more adversely than if Power were
geographically diversified.

         Certain Industry and Marketing Risks

         Power's operations are subject to the risks and uncertainties
associated with drilling for, producing and transporting of oil and natural gas.
Power's future ability to market its natural gas and oil production will depend
upon the availability and capacity of natural gas gathering systems and
pipelines and other transportation facilities. Federal and state regulation of
oil and natural gas production and transportation, general economic conditions,
changes in supply and in demand all could materially adversely affect Power's
ability to market its oil and natural gas production.

         Effects of Changing Prices

         The future financial condition and results of operations of Power
depend upon the prices it receives for its oil and natural gas and the costs of
acquiring, developing and producing oil and natural gas. Oil and natural gas
prices have historically been volatile and are subject to fluctuations in
response to changes in supply, market uncertainty and a variety of additional
factors that are also beyond Power's control. These factors include, without
limitation, the level of domestic production, the availability of imported oil
and natural gas, actions taken by foreign oil and natural gas producing nations,
the availability of transportation systems with adequate capacity, the
availability of competitive fuels, fluctuating and seasonal demand for natural
gas, conservation and the extent of governmental regulation of production,
weather, foreign and domestic government relations, the price of domestic and
imported oil and natural gas, and the overall economic environment. A
substantial or extended decline in oil and/or natural gas prices could have a
material adverse effect on Power's estimated value of its natural gas and oil
reserves, and on its financial position, results of operations and access to
capital. Power's ability to maintain or increase its borrowing capacity, to
repay current or future indebtedness and to obtain additional capital on
attractive terms is substantially dependent upon oil and natural gas prices.

         Power uses the full cost method of accounting for its investment in oil
and gas properties. Under the full cost method of accounting, all costs of
acquisition, exploration and development of oil and gas reserves are capitalized
into a "full cost pool" as incurred, and properties in the pool are depleted and
charged to operations using the unit-of-production method based on the ratio of
current production to total proved oil and gas reserves. To the extent that such




                                                                   Page 19 of 21
<PAGE>   20

capitalized costs (net of accumulated depreciation, depletion and amortization)
less deferred taxes exceed the SEC PV-10 (present value discounted at 10% as
dictated by the SEC) of estimated future net cash flow from proved reserves of
oil and gas, and the lower of cost or fair value of unproved properties after
income tax effects, such excess costs are charged against earnings. Once
incurred, a write-down of oil and gas properties is not reversible at a later
date even if oil or gas prices increase.

         Operating Hazards and Uninsured Risks

         Power's operations are subject to the risks inherent in the oil and
natural gas industry, including the risks of fire, explosions, blow-outs, pipe
failure, abnormally pressured formations and environmental accidents such as oil
spills, gas leaks, ruptures or discharges of toxic gases, brine or well fluids
into the environment (including groundwater contamination). The occurrence of
any of these risks could result in substantial losses to Power due to injury or
loss of life, severe damage to or destruction of property, natural resources
and, equipment, pollution or other environmental damage, clean-up
responsibilities, regulatory investigation and penalties and suspension of
operations. In accordance with customary industry practice, Power maintains
insurance against some, but not all, of the risks described above. There can be
no assurance that any insurance maintained by Power will be adequate to cover
any such losses or liabilities. Further, Power cannot predict the continued
availability of insurance, or availability at commercially acceptable premium
levels. Power does not carry business interruption insurance. Losses and
liabilities arising from uninsured or under-insured events could have a material
adverse effect on the financial condition and operations of Power. From time to
time, due primarily to contract terms, pipeline interruptions or weather
conditions, the producing wells in which Power owns an interest have been
subject to production curtailments. The curtailments range from production being
partially restricted to wells being completely shut-in. The duration of
curtailments varies from a few days to several months. In most cases Power is
provided only limited notice as to when production will be curtailed and the
duration of such curtailments. Power is not currently experiencing any material
curtailment on its production.

         Substantial Competition

         The oil and natural gas industry is highly competitive and there are
many other companies engaged in the oil and natural gas business. Power is
likely to encounter substantial competition from major oil companies, other
independent oil and natural gas concerns and individual producers and operators
in acquiring oil and natural gas properties suitable for exploration and
development. Many of the companies with which Power competes have substantially
greater financial, technical and other resources and may have greater experience
in the oil and natural gas business than Power. Therefore, competitors may be
able to pay more for desirable leases and to evaluate, bid for and purchase a
greater number of properties or prospects than the financial or personnel
resources of Power will permit.

         Volatility of Stock Price

         The market price for shares of the Common Stock has varied
significantly and may be volatile depending on news announcements or changes in
general market conditions. In particular, news announcements, quarterly results
of operations, competitive developments, litigation or governmental regulatory
action impacting Power may adversely affect the Common Stock price. In addition,
because the number of shares of Common Stock held by the public is relatively
small, the 




                                                                   Page 20 of 21

<PAGE>   21


sale of a substantial number of shares of the Common Stock in a short period of
time could adversely affect the market price of the Common Stock.

PART II. OTHER INFORMATION

ITEM 1.  Legal Proceedings

         A former employee of Oil Retrieval Systems, Inc. (a subsidiary of the
Company) filed a sexual harassment complaint with the City of Fort Worth. The
Company agreed to engage in mediation, which resulted in the Company paying
$20,000 in exchange for a full and final release from the employee. In other
legal matters, the Company has filed an administrative claim with the Bankruptcy
Court to recover $30,000 from Southern Equipment.







SIGNATURE

                                    ---------

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




                                               Power EXPLORATION, INC.
                                            ------------------------------
                                                     (Registrant)




Date      February 19, 1999                        /s/ MARK S. ZOUVAS
      -------------------------             ------------------------------
                                        Mark S. Zouvas, Chief Financial Officer
                                           (Principal Accounting Officer and
                                                 Duly Authorized Officer)


                                                                   Page 21 of 21
<PAGE>   22


                                INDEX TO EXHIBITS



<TABLE>
<CAPTION>

Exhibit
Number              Description
-------             -----------
<S>                 <C>

  27                Financial Data Schedule

</TABLE>