UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-Q

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

For the quarterly period ended        August 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 Number:                 1-9872
                        --------------------------------------------------------

                              COLUMBUS ENERGY CORP.
--------------------------------------------------------------------------------
             (Exact name of registrant as specified in its charter)

             Colorado                                 84-0891713
--------------------------------------------------------------------------------
  (State or other jurisdiction of                  (I.R.S. Employer
   incorporation or organization)                   Identification
                                                          No.)

     1660 Lincoln St., Denver, CO                         80264
--------------------------------------------------------------------------------
(Address of principal executive offices)                (Zip Code)

                                 (303) 861-5252
--------------------------------------------------------------------------------
              (Registrant's telephone number, including area code)

                                 Not Applicable
--------------------------------------------------------------------------------
             (Former name, former address and former fiscal year, if
                           changed since last report)

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

     Indicate the number of shares  outstanding of each of the issuer's  classes
of common stock, as of the latest practicable date.

             Class                             Outstanding at October 9, 1998
  ----------------------------                 ------------------------------
  Common stock, $.20 par value                            4,081,852

<PAGE>


                              COLUMBUS ENERGY CORP.

                                      INDEX


                                                                           PAGE
                                                                           ----
PART I.  FINANCIAL INFORMATION

     Item 1.  Financial Statements

              Consolidated Balance Sheets -
                August 31, 1998 and
                November 30, 1997                                            3

              Consolidated Statements of Operations -
                Three Months and Nine Months
                Ended August 31, 1998 and 1997                               5

              Consolidated Statement of
                Stockholders' Equity -
                Nine Months Ended August 31, 1998                            6

              Consolidated Statements of Cash Flows -
                Nine Months Ended August 31, 1998
                and 1997                                                     7

              Notes to the Financial Statements                              9

     Item 2.  Management's Discussion and Analysis
                of Financial Condition and
                Results of Operations                                       18

PART II.  OTHER INFORMATION

     Item 1.     Legal Proceedings                                          29

     Items 2-5.  Not Applicable

     Item 6.     Exhibits and Reports
                   on Form 8-K                                              29

     Signatures                                                             30


                                       2

<PAGE>


                         PART I - FINANCIAL INFORMATION

Item 1.  Financial Statements

                              COLUMBUS ENERGY CORP.

                           CONSOLIDATED BALANCE SHEETS


                                     ASSETS

                                           August 31,    November 30,
                                              1998           1997
                                           ---------     -----------
                                          (unaudited)
                                                  (in thousands)

Current assets:
  Cash and cash equivalents                $  1,391        $  1,857
  Accounts receivable:
    Joint interest partners                   1,204           1,932
    Oil and gas sales                         1,389           2,054
    Allowance for doubtful accounts            (116)           (116)
  Inventory of oil field equipment,
    at lower of average cost or market          106             102
  Other                                          73              82
                                           --------        --------

        Total current assets                  4,047           5,911
                                           --------        --------

Property and equipment:
  Oil and gas assets, successful efforts
    method (Note 2)                          35,756          33,803
  Other property and equipment                1,879           2,053
                                           --------        --------

                                             37,635          35,856
  Less:  Accumulated depreciation,
     depletion and amortization
     and valuation allowance                (18,191)        (15,632)
                                           --------        --------

        Net property and equipment           19,444          20,224
                                           --------        --------

                                           $ 23,491        $ 26,135
                                           ========        ========

                                   (continued)

                                       3

<PAGE>


                              COLUMBUS ENERGY CORP.

                    CONSOLIDATED BALANCE SHEETS - (continued)

                      LIABILITIES AND STOCKHOLDERS' EQUITY

                                              August 31,   November 30,
                                                 1998          1997
                                              ---------    -----------
                                             (unaudited)
                                                   (in thousands)
Current liabilities:
  Accounts payable                            $   2,405      $   3,023
  Undistributed oil and gas
   production receipts                              324            393
  Accrued production and property taxes             469            551
  Prepayments from joint interest owners            380            565
  Accrued expenses                                  383            377
  Income taxes payable (Note 3)                      59             42
  Deferred income taxes (Note 3)                    217            201
  Other                                              15             37
                                              ---------      ---------

        Total current liabilities                 4,252          5,189
                                              ---------      ---------

Long-term bank debt (Note 2)                      3,300          2,200
Deferred income taxes (Note 3)                       68            788

Commitments and contingent liabilities
   (Notes 4 and 5)

Stockholders' equity:
  Preferred stock authorized 5,000,000
    shares, no par value, none issued                 -              -
  Common stock authorized 20,000,000
    shares of $.20 par value; shares issued
    4,611,001 in 1998, and 4,492,068 in 1997
    (outstanding 4,157,552 in 1998 and
    3,883,557 in 1997)                              922            898
  Additional paid-in capital                     19,272         18,124
  Retained earnings (accumulated deficit)        (1,167)         2,887
                                              ---------      ---------
                                                 19,027         21,909
  Less: Treasury stock at cost
          453,449 shares in 1998 and
          608,511 shares in 1997                 (3,156)        (3,951)
                                              ---------      ---------
        Total stockholders' equity               15,871         17,958
                                              ---------      ---------
                                              $  23,491      $  26,135
                                              =========      =========


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


                                       4

<PAGE>
                              COLUMBUS ENERGY CORP.

                      CONSOLIDATED STATEMENTS OF OPERATIONS
                                   (Unaudited)
<TABLE>
<CAPTION>
                                                              Nine Months Ended                       Three Months Ended
                                                                  August 31,                              August 31,
                                                         --------------------------              ----------------------------
                                                           1998               1997                 1998                 1997
                                                         --------          --------              --------             -------
                                                                       (in thousands, except per share data)
<S>                                                      <C>                <C>                  <C>                  <C>    
Revenues:
  Oil and gas sales                                      $ 8,113            $ 9,919              $ 2,495              $ 3,275
  Operating and management
    services                                                 988                880                  362                  303
  Interest and other income                                  109                123                   32                   51
                                                         -------            --------             --------             -------
       Total revenues                                      9,210             10,922                2,889                3,629
                                                         -------            --------             --------             -------

Costs and expenses:
  Lease operating expenses                                 1,662              1,402                  445                  451
  Property and production taxes                              802                921                  261                  296
  Operating and management
    services                                                 807                576                  311                  188
  General and administrative                               1,155              1,140                  257                  273
  Depreciation, depletion and
   amortization                                            2,834              2,382                  944                  892
  Impairments                                              2,816                494                    -                  494
  Exploration expense                                        477                505                   49                  125
  Litigation expense (Note 4)                                  -                 11                    -                    -
                                                         --------           --------             --------             -------
      Total costs and expenses                            10,553              7,431                2,267                2,719
                                                         --------           --------             --------             -------
       Operating income (loss)                             (1,343)            3,491                  622                  910
                                                         --------           --------             --------             -------
 Other expenses (income):
  Interest                                                   179                111                   65                   46
  Other                                                       30                 (5)                  (4)                   1
                                                         -------            -------              --------             -------
                                                             209                106                   61                   47
                                                         -------            -------              --------             -------
     Earnings (loss) before
        income taxes                                      (1,552)             3,385                  561                  863

Provision (benefit) for income
  taxes (Note 3)                                            (590)             1,286                  213                  328
                                                         -------            -------              -------              -------
     Net earnings (loss)                                 $  (962)           $ 2,099              $   348              $   535
                                                         =======            =======              =======              =======
Earnings (loss) per share (Note 7):
  Basic                                                  $  (.23)           $   .49              $   .08              $   .13
                                                         =======            =======              =======              =======
  Diluted                                                $  (.23)           $   .48              $   .08              $   .12
                                                         =======            =======              =======              =======
Average number of common shares and common
  equivalent shares outstanding:
  Basic                                                    4,232              4,310                4,209                4,279
                                                         =======            =======              =======              =======
  Diluted                                                  4,232              4,392                4,266                4,372
                                                         =======            =======              =======              =======
</TABLE>

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


                                       5

<PAGE>
                              COLUMBUS ENERGY CORP.
                 CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
                    For the Nine Months Ended August 31, 1998
                                   (Unaudited)

<TABLE>
<CAPTION>
                                                                         Retained
                                      Common Stock         Additional    Earnings       Treasury Stock
                                -------------------------   Paid-in    (Accumulated  -------------------
                                  Shares        Amount      Capital      deficit)    Shares       Amount
                                ----------   ------------  ----------  ------------  -------------------
                                                          (dollar amounts in thousands)
<S>        <C>                   <C>             <C>          <C>          <C>        <C>          <C>     
Balances,
  December 1, 1997               4,492,068       $   898      $18,124      $ 2,887    608,511      $(3,951)

Exercise of employee
  stock options                    109,910            22          592            -     27,193         (229)
Purchase of shares                       -             -            -            -    241,766       (1,831)
Shares issued for Stock
  Purchase Plan                      9,023             2           70            -     (2,275)          15
10% stock dividend                       -             -          492       (3,092)  (386,494)       2,598
Shares issued for
  Incentive Bonus Plan
  and directors' fees                    -             -          (57)           -    (35,252)         242
Tax benefit of disqualifying
  disposition of incentive
  stock options                          -             -           51            -          -            -
Net loss                                 -             -            -         (962)         -            -
                                 ---------       -------      -------      -------    -------      -------
Balances,
  August 31, 1998                4,611,001       $   922      $19,272      $(1,167)   453,449      $(3,156)
                                 =========       =======      =======      =======    =======      =======
</TABLE>


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

                                       6

<PAGE>


                              COLUMBUS ENERGY CORP.

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (Unaudited)


                                          Nine Months Ended August 31,
                                          ----------------------------
                                             1998              1997
                                          -----------      -----------
                                                 (in thousands)

Net earnings (loss)                        $   (962)         $ 2,099

Adjustments to reconcile net earnings
  (loss) to net cash provided by
  operating activities:
    Depreciation, depletion, and
      amortization                            2,834            2,382
    Impairments                               2,816              494
    Deferred income tax provision (benefit)    (653)           1,151
    Other                                       249               83
Net change in operating assets and
  liabilities                                 1,776              376
                                           --------          -------

        Net cash provided by
          operating activities                6,060            6,585
                                           --------          -------

Cash flows from investing activities:
  Additions to oil and gas properties        (6,149)          (6,802)
  Additions to other assets                    (101)            (109)
                                           --------          -------

        Net cash used in
          investing activities               (6,250)          (6,911)
                                           --------          -------

Cash flows from financing activities:
  Proceeds from long-term debt                1,800            2,200
  Reduction in long-term debt                  (700)          (1,200)
  Proceeds from issuance of
    common stock                                457              230
  Purchase of treasury stock                 (1,831)          (1,068)
  Other                                          (2)               -
                                           --------          -------

      Net cash provided by (used in)
        financing activities                   (276)             162
                                           --------          -------

Net increase (decrease) in cash and
  cash equivalents                             (466)            (164)
Cash and cash equivalents at
  beginning of period                         1,857            1,396
                                           --------          -------
Cash and cash equivalents at
  end of period                            $  1,391          $ 1,232
                                           ========          =======


                                   (continued)

                                       7

<PAGE>


                              COLUMBUS ENERGY CORP.

               CONSOLIDATED STATEMENTS OF CASH FLOWS - (continued)
                                   (Unaudited)


                                         Nine Months Ended August 31,
                                         ----------------------------
                                            1998              1997
                                         ----------        ----------
                                                (in thousands)

 Supplemental disclosure of cash
  flow information:
    Cash paid during the period for:
      Interest                            $   177           $    119
                                          =======           ========
      Income taxes, net of refunds        $    46           $     26
                                          =======           ========

 Supplemental disclosure of non-cash
  investing and financing activities        None              None


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

                                       8

<PAGE>


                              COLUMBUS ENERGY CORP.

                        NOTES TO THE FINANCIAL STATEMENTS
                                   (Unaudited)


(1)  BASIS OF PRESENTATION

     The accompanying  consolidated financial statements include the accounts of
Columbus Energy Corp. ("Columbus") and its wholly-owned subsidiary, Columbus Gas
Services,   Inc.("CGSI").   All  significant  intercompany  balances  have  been
eliminated in consolidation. The term "Company" as used herein includes Columbus
and its subsidiary.

     The consolidated  financial statements of the Company have been prepared in
accordance with generally accepted accounting  principles and require the use of
management's  estimates.   The  financial  statements  contain  all  adjustments
(consisting  only  of  normal  recurring  accruals)  which,  in the  opinion  of
management,  are  necessary  to present  fairly the  financial  position  of the
Company as of August 31,  1998 and  November  30,  1997,  and the results of its
operations and cash flows for the periods  presented.  The results of operations
for such  interim  periods  are not  necessarily  indicative  of  results  to be
expected for the full year.

     For purposes of the  statements  of cash flows,  the Company  considers all
highly liquid debt instruments purchased with a maturity of three months or less
to be cash  equivalents.  Hedging  activities  are  included  in cash  flow from
operations in the cash flow statements.

     When the  Company  uses  crude oil and  natural  gas swaps to manage  price
exposure,  realized  gains and losses on the swaps are recognized in oil and gas
sales as settlement occurs.

     The Company adopted Statement of Financial  Accounting  Standards  ("SFAS")
No. 128,  "Earnings per Share," effective for the 1998 fiscal year. Prior period
earnings  per  share  data  presented  has been  restated  to  conform  with the
provisions  of SFAS No.  128.  The  purpose of SFAS No. 128 is to  simplify  the
computation of earnings per share. The new standard  replaces the calculation of
"primary  earnings  per share" with a  calculation  called  "basic  earnings per
share" and redefines "diluted earnings per share".

     Earnings per share are computed using the weighted average number of common
shares outstanding. Stock options are included as common stock equivalents, when
dilutive,  using the treasury  stock method.  Common stock  equivalents  include
shares  issuable  upon  assumed  exercise of dilutive  stock  options  using the
average  price  for  diluted  shares.   Historical   average  number  of  shares
outstanding  and  earnings per share have been  adjusted  for the  five-for-four
stock split  distributed  June 16, 1997 to  shareholders of record as of May 27,
1997 and the 10% stock dividend  distributed  March 9, 1998 to  shareholders  of
record as of February 23, 1998.

                                       9

<PAGE>


                              COLUMBUS ENERGY CORP.

                 NOTES TO THE FINANCIAL STATEMENTS - (continued)
                                   (Unaudited)


     Financial Instruments and Concentrations of Credit Risk
     -------------------------------------------------------

     The Company  maintains  demand  deposit  accounts  with  separate  banks in
Denver,  Colorado. The Company also invests cash in the highest rated commercial
paper of large U.S.  companies,  with  maturities  not over 30 days,  which have
minimal  risk of loss.  At August 31, 1998 and November 30, 1997 the Company had
investments in commercial  paper of $1,600,000 and $900,000,  respectively.  The
carrying amount of long-term debt  approximates  fair value because the interest
rate on this instrument changes with market interest rates.

     Financial   instruments,   which   potentially   subject   the  Company  to
concentrations of credit risk, consist  principally of cash and cash equivalents
and  accounts  receivable.  Columbus as  operator  of jointly  owned oil and gas
properties,  sells oil and gas  production to relatively  large U.S. oil and gas
purchasers and pays vendors for oil and gas services. The risk of non-payment by
the purchasers, counter parties to the crude oil and natural gas swap agreements
or joint owners is considered  minimal.  The Company does not obtain  collateral
from its oil and gas  purchasers for sales to them.  Joint interest  receivables
are subject to collection under the terms of operating  agreements which provide
lien rights to the operator.

     Oil and Gas Properties
     ----------------------

     The Company  follows the  successful  efforts  method of account ing. Lease
acquisition  and development  costs  (tangible and intangible) for  expenditures
relating to proved oil and gas  properties  are  capitalized.  Delay and surface
rentals are charged to expense in the year incurred.  Dry hole costs incurred on
exploratory  operations are expensed.  Dry hole costs associated with developing
proved fields are  capitalized.  Expenditures  for  additions,  betterments  and
renewals are  capitalized.  Exploratory  geological  and  geophysical  costs are
expensed when incurred.

     Upon sale or  retirement  of proved  properties,  the cost  thereof and the
accumulated depreciation or depletion are removed from the accounts and any gain
or  loss  is  credited  or  charged  to  income  if  significant.   Abandonment,
restoration, and dismantlement costs and salvage value are taken into account in
determining  depletion  rates.  These  costs are  generally  about  equal to the
proceeds  from  equipment  salvage upon  abandonment  of such  properties.  When
estimated abandonment costs exceed the salvage value, the excess cost is accrued
and expensed. Maintenance and repairs are charged to operating expenses.

                                       10

<PAGE>


                              COLUMBUS ENERGY CORP.

                 NOTES TO THE FINANCIAL STATEMENTS - (continued)
                                   (Unaudited)


     Provision for  depreciation  and depletion of capitalized  exploration  and
development costs are computed on the unit-of-production  method based on proved
reserves of oil and gas, as estimated by petroleum  engineers,  on a property by
property  basis.  Unproved  properties  are assessed  periodically  to determine
whether they are  impaired.  When  impairment  occurs,  a loss is  recognized by
providing a valuation allowance. When leases for unproved properties expire, any
remaining cost is expensed.

     An impairment  loss on oil and gas properties is reported as a component of
income from  continuing  operations.  The Company  recognizes an impairment loss
when the carrying value exceeds the expected  undiscounted future net cash flows
of each  property  pool at which time the  property  pool is written down to the
fair value. Fair value is estimated to be a discounted present value of expected
future net cash flows with appropriate risk consideration.

     The Company follows the entitlements method of accounting for gas balancing
of gas  production.  The Company's gas imbalances are immaterial at November 30,
1997 and August 31, 1998.

     Other Property and Equipment
     ----------------------------

     Other  property and  equipment  consists of office and computer  equipment.
Gains  and  losses  from  retirement  or  replacement  of other  properties  and
equipment  are included in income.  Betterments  and  renewals are  capitalized.
Maintenance and repairs are charged to operating expenses. Depreciation of other
assets is provided on the  straight  line  method  over their  estimated  useful
lives.

     Accounting for Stock-Based Compensation
     ---------------------------------------

     The Financial Accounting Standards Board ("FASB") issued Statement No. 123,
"Accounting  for  Stock-Based  Compensation".   This  statement  prescribes  the
accounting and reporting standards for stock-based  employee  compensation plans
and was  effective  for the  Company's  1997 fiscal  year.  The Company uses the
alternative pro forma annual disclosures as permitted in the Standard.

     New Accounting Pronouncements
     -----------------------------

     SFAS No. 130, "Reporting Comprehensive Income," was issued in June 1997 and
establishes  standards for reporting and display of comprehensive income and its
components   (revenues,   expenses,   gains,  and  losses)  in  a  full  set  of
general-purpose financial statements.  This statement is effective for financial

                                       11

<PAGE>


                              COLUMBUS ENERGY CORP.

                 NOTES TO THE FINANCIAL STATEMENTS - (continued)
                                   (Unaudited)


statements for periods  beginning  after December 15, 1997. The adoption of this
statement will not have a material impact on the Company's financial statements.

     In June 1997, the FASB issued SFAS No. 131,  "Disclosures about Segments of
an Enterprise  and Related  Information,"  effective for fiscal years  beginning
after December 15, 1997. The Company must apply this statement no later than its
fiscal year ending November 30, 1999. SFAS No. 131 requires  disclosing  segment
information using the "management  approach" and replaces the "industry segment"
approach using SFAS No. 14. The segment information  previously presented is not
expected to materially change when SFAS No. 131 is adopted.

     In June 1998,  the FASB  issued SFAS No. 133,  "Accounting  for  Derivative
Instruments and Hedging Activities,"  effective for fiscal years beginning after
June 15, 1999.  The Company  must apply this  statement no later than its fiscal
year ending  November 30, 2000.  SFAS No. 133 requires  recording all derivative
instruments as assets or liabilities  measured at fair value.  This Statement is
not expected to materially affect the Company's financial statements.

(2)  LONG-TERM DEBT

     The Company has a credit agreement with Norwest Bank Denver,  N.A. that was
amended on September 8, 1998 to extend the revolving period to July 1, 2000 when
it entirely  converts to an amortizing term loan which matures July 1, 2003. The
credit agreement is collateralized by a first lien on oil and gas properties.

     As requested by the Company,  the borrowing base was limited to $10,000,000
without  regard to the  maximum  allowable  amount that would be set by the bank
during its semi-annual redetermination.  A commitment fee of .25% is payable for
any unused portion of the amount which is the  difference  between the borrowing
base and the outstanding borrowings.

(3)  INCOME TAXES

     The  Company  files a  consolidated  income  tax  return  with CGSI and has
executed a tax allocation agreement which provides for an allocation and payment
of income taxes based upon each  company's separate  tax liability  calculation.

                                       12

<PAGE>


                              COLUMBUS ENERGY CORP.

                 NOTES TO THE FINANCIAL STATEMENTS - (Continued)
                                   (Unaudited)


Consolidated income taxes are payable only when taxable income exceeds available
net operating loss carryforwards and other credits.

     The Tax Reform Act of 1986 limits the use of corporate tax carryforwards in
any one taxable year if a  corporation  experiences  a 50% change of  ownership.
Columbus experienced such a change of ownership in October 1987 which limits its
use of pre-change  ownership net operating losses to  approximately  $900,000 in
each subsequent year.

     The  Company  uses the asset and  liability  method to  account  for income
taxes.  Under this method,  deferred tax  liabilities  and assets are determined
based on the temporary  differences between financial statement and tax basis of
assets and  liabilities  using enacted rates in effect for the year in which the
differences  are  expected to reverse.  Deferred  tax assets (net of a valuation
allowance)  primarily result from net operating loss  carryforwards,  percentage
depletion  and  certain  accrued  but unpaid  employee  benefits.  Deferred  tax
liabilities   result  from  the  recognition  of  depreciation,   depletion  and
amortization in different periods for financial reporting and tax purposes.

     Because of the Company's previous 1987 quasi-reorganization, the Company is
required to report the effect of its net  deferred  tax asset  arising  prior to
December  1, 1987 as an  increase  in  stockholders'  equity  rather  than as an
increase to net earnings.

     The  provision  (benefit)  for income taxes  consists of the  following (in
thousands):

                                            Nine Months Ended August 31,
                                            ---------------------------
                                               1998                1997
                                             ------              ------
Current:
         Federal                             $    6              $   34
         State                                   57                 101
                                             ------              ------
                                                 63                 135
                                             ------              ------
Deferred:
         Federal                               (632)              1,032
         Use of loss carryforwards                5                  76
         State                                  (26)                 43
                                             ------              ------
                                               (653)              1,151
                                             ------              ------

  Total income tax (benefit) expense         $ (590)             $1,286
                                             ======              ======


                                       13

<PAGE>


                              COLUMBUS ENERGY CORP.

                 NOTES TO THE FINANCIAL STATEMENTS - (continued)
                                   (Unaudited)


     The total tax  provision  has resulted in effective  tax rates which differ
from the statutory  Federal income tax rates. The reasons for these  differences
are:

                                                Percent of Pretax Earnings
                                               Nine Months Ended August 31,
                                               ----------------------------
                                                1998                  1997
                                                ----                  ----

U.S. Statutory rate                             (34)%                  34 %
State income taxes                                2                     3
Other                                            (6)                    1
                                               ----                   ---
                                                (38)%                  38 %
                                               ====                  ====

     During the nine months of fiscal  1998,  certain  tax assets  (shown in the
table below) were utilized.  The tax effect of significant temporary differences
representing  deferred tax assets and  liabilities and changes were estimated as
follows (in thousands):

                                                  Current Year
                                      ------------------------------------------
                                                Stock-
                                       Dec. 1,  holders'              August 31,
                                        1997    Equity    Operations     1998
                                      -------- --------- ----------- -----------
     Deferred tax assets:
       Pre-1987 loss carryforwards     $1,053   $   -      $     -       $1,053
       Post-1987 loss carryforwards       540       -            -          540
       Percentage depletion
         carryforwards                  1,304       -            -        1,304
       State income tax loss
         carryforwards                    105       -           (5)         100
       Other                              327       -           (7)         320
                                      -------    ----       ------       ------
                  Total                 3,329       -          (12)       3,317
          Valuation allowance
            (long-term)                (1,443)      -            -       (1,443)
                                      -------    ----       ------       ------
         Deferred tax assets            1,886       -          (12)       1,874
                                      --------   ----       ------       ------

     Tax benefit of disqualifying
       disposition of incentive
       stock options                        -      51(a)       (51)           -
                                      -------    ----       ------       ------

     Deferred tax liabilities-
       Depreciation, depletion and
         amortization and other        (2,875)      -          716       (2,159)
                                      -------    ----       ------       ------
         Net tax asset (liability)   $   (989)   $ 51      $   653      $  (285)
                                      =======    ====       ======       ======

(a)Credited to additional paid-in capital.


                                       14

<PAGE>


                              COLUMBUS ENERGY CORP.

                 NOTES TO THE FINANCIAL STATEMENTS - (continued)
                                   (Unaudited)


     The Company has net operating loss  carryforwards (in thousands)  available
at November 30, 1997 as follows:

                                                          Net
                      Expiration Year               Operating Loss
                      ---------------               --------------
                           1999                         $ 1,808
                           2000                             903
                           2001                             387
                           2010                           1,589
                                                        -------
                                                        $ 4,687
                                                        =======

     For  Alternative  Minimum Tax purposes the Company had net  operating  loss
carryforwards of  approximately  $6,056,000 as of November 30, 1997. The Company
also has percentage  depletion  carryforwards of $3,638,000 which do not expire.
State income tax operating loss  carryforwards  of $1,730,000  were available at
November 30, 1997.

(4)  LITIGATION

     Management is unaware of any asserted or unasserted  claims or  assessments
against the Company which would materially affect the Company's future financial
position or results of operations.

(5)  COMMITMENTS AND CONTINGENT LIABILITIES

     When the Company uses  natural gas and crude oil swaps they are  considered
financial  instruments with off-balance  sheet risk which are used in the normal
course of business to partially reduce its exposure to fluctuations in the price
of crude oil and natural gas. Those  instruments  involved,  to varying degrees,
elements  of market and credit  risk in excess of the amount  recognized  in the
balance sheets. The Company had no natural gas or crude oil swaps outstanding as
of August 31, 1998.

     The Company is not aware of any events of  noncompliance  in its operations
with  any  environmental  laws and  regulations  nor of any  material  potential
contingencies related to environmental issues. The exact nature of environmental
control  problems,  if any, which the Company may encounter in the future cannot
be  predicted,  primarily  because of the changing  character  of  environmental
requirements that may be enacted with applicable jurisdictions.

                                       15

<PAGE>


                              COLUMBUS ENERGY CORP.

                 NOTES TO THE FINANCIAL STATEMENTS - (continued)
                                   (Unaudited)


(6)  RELATED PARTY TRANSACTIONS

     CEC Resources Ltd. ("Resources") was a wholly-owned  subsidiary of Columbus
prior  to its  divestiture  on  February  24,  1995.  Reimbursement  is  made by
Resources to Columbus for services  provided by Columbus  officers and employees
for managing  Resources and reduces  general and  administrative  expense.  This
reimbursement  totaled  $185,000  and  $189,000  for the nine months of 1998 and
1997, respectively.


                                       16

<PAGE>


                              COLUMBUS ENERGY CORP.

                 NOTES TO THE FINANCIAL STATEMENTS - (continued)
                                   (Unaudited)


(7)  EARNINGS PER SHARE

     The following table provides a reconciliation of basic and diluted earnings
per share (EPS):

                                             Nine Months        Three Months
                                           Ended August 31,    Ended August 31,
                                           ---------------     ---------------
                                           1998       1997     1998      1997
                                           ----       ----     ----      ----
                                                     (in thousands,
                                                 except per share data)
Reconciliation of basic and diluted
  EPS share computations:
  Income (loss) available to common
    shareholders - basic and
    diluted EPS (numerator)             $  (962)    $ 2,099   $   348   $  535
                                        =======     =======   =======   ======
Shares (denominator):
  Basic EPS                               4,232       4,310     4,209    4,279
  Effect of dilutive option
    shares                                    -          82        57       93
                                        -------     -------   -------   ------
  Diluted EPS                             4,232       4,392     4,266    4,372
                                        =======     =======   =======   ======

Per share amount:
  Basic EPS                             $  (.23)    $   .49   $   .08   $  .13
                                        =======     =======   =======   ======
  Diluted EPS                           $  (.23)    $   .48   $   .08   $  .12
                                        =======     =======   =======   ======

Number of shares not
  included  in basic EPS that
  would have been  antidilutive
  because exercise price of options
  was greater than the average market
  price of the common shares                170          67       170       67
                                        =======     =======   =======   ======

     Historical average number of shares outstanding and earnings per share have
been adjusted for the  five-for-four  stock split  distributed  June 16, 1997 to
shareholders of record as of May 27, 1997 and the 10% stock dividend distributed
March 9, 1998 to shareholders of record as of February 23, 1998.

                                       17

<PAGE>


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

     The following  summarizes the Company's  financial condition and results of
operations and should be read in  conjunction  with the  consolidated  financial
statements and related notes.

Liquidity and Capital Resources

     Third quarter results continued to suffer from the lowest average crude oil
prices in the last ten years.  Average  natural  gas prices also were lower than
1997's third  quarter while  natural gas  production  was up 2% compared to last
year's  quarter.  Third quarter 1998's cash flow was primarily  reduced by those
weak  product  prices  plus  the  shut-in  of  several  oil  wells  so  it  fell
significantly below 1997's similar quarter.  Net quarterly earnings of $348,000,
or $0.08 per share,  were 35% below last  year's net  earnings of  $535,000,  or
$0.13 per share,  which  enjoyed  natural  gas and oil prices  near the  highest
levels of any quarter in recent years.

     Shareholders'  equity as of the end of the third quarter 1998  decreased to
$15,871,000 from $17,958,000 at November 30, 1997 primarily due to first quarter
impairment  charges.  Working  capital was a temporary  negative  $205,000 as of
August 31,  1998 when a sizable  accrual  of  accounts  payables  related to the
accelerated drilling program occurred in August but these were subsequently paid
early in  September  using a bank  draw.  Cash flow for the fourth  quarter,  in
conjunction with additional bank borrowings  should provide a sufficient  source
of funds to meet the remaining 1998 capital expenditure  program. It appears the
original  budget for 1998 of $6,800,000  which included  developing  undeveloped
reserves and funding an increased  exploratory program which emphasized drilling
several  natural  gas reserve  prospects  along the Gulf Coast of Texas will now
exceed 1998's cash flow. Success to date with the Texas exploratory  wildcats is
adding  completion  cost  expenditures  and will lead to the drilling of several
offset development wells so it is likely that budget will be exceeded also.

     A significant  portion of the costs incurred for wells drilled in late 1997
were  actually  paid  early in 1998 and  those  costs  appear  as  additions  to
properties in the  consolidated  Statements  of Cash Flows in this report.  This
necessitated  a short term draw from the Company's bank credit  facility  during
first quarter of 1998.  Subsequently,  there have been additional draws required
by the accelerated  drilling  expenditures  in recent months.  Regardless of the
recent need for  withdrawals,  management  intends that the  $10,000,000  credit
facility  continue to be  primarily  targeted  for  acquisitions  of oil and gas
properties,  but  obviously  this  credit  can be used for any  legal  corporate
purpose and is therefore available for accelerated capital expenditures.

                                       18

<PAGE>


           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                     AND RESULTS OF OPERATIONS - (Continued)


     Generally accepted  accounting  principles ("GAAP") require cash flows from
operating  activities  to be determined  after giving effect to working  capital
changes.  Accordingly,  GAAP's net cash provided from  operating  activities was
$6,060,000 for the nine months of 1998 which compares with $6,585,000 last year.
This  GAAP cash flow  coupled  with use of the  Company's  credit  facility  has
provided sufficient  liquidity to fund all capital  expenditures to date as well
as treasury share repurchases.

     However,  management places greater reliance upon an important  alternative
method of computing cash flow generally known as Discretionary Cash Flow ("DCF")
(which is not GAAP but is commonly used in the industry). This method calculates
cash flow before  considering  either  working  capital  changes or deduction of
explora  tion  expenses.  Since the  latter  expenditures  can be  increased  or
decreased at management's  discretion,  DCF is often used by successful  efforts
companies  when making  comparisons  with the cash flow results of a majority of
other  independent  energy companies which use the full cost accounting  method.
Their  exploration   expenses  are  capitalized  and  do  not  adversely  affect
immediately  either  operating cash flow or net earnings.  Columbus' DCF for the
nine months of 1998 was $4,761,000 down 29% from 1997's similar period which was
a record  $6,714,000.  As  previously  indicated,  this  decrease was  primarily
attributable to lower crude oil and natural gas prices because daily  production
stated in barrels  equivalent  was  essentially  flat  compared with last year's
similar period.  DCF is calculated  without debt retirement  requirements  being
considered but in Columbus' case it does not matter since  outstanding bank debt
requires no principal  payments before August 1, 2000.  Interest  expense on the
outstanding debt has been relatively insignificant and is always deducted before
arriving at DCF anyway.

     Management  continues to note in all public  filings and reports its strong
exception  to the  Statement  of  Financial  Accounting  Standards  No. 95 which
directs that operating cash flow must only be determined after  consideration of
working capital changes.  This is based on our belief such a requirement by GAAP
ignores  entirely the  significant  impact on working capital that the timing of
income  received for, and expenses  incurred on behalf of, third party owners in
several  properties in which  Columbus owns a small working  interest but is the
operator.

     However, neither DCF nor operating cash flow before working capital changes
may be  substituted  for net income or for cash  available  from  operations  as
defined by GAAP.  Furthermore,  currently reported cash flows,  however defined,
are not  necessarily  indicative  that  there will be  sufficient  funds for all
future cash requirements.  For the first nine months of 1998, GAAP cash flow was
much higher than DCF.

                                       19

<PAGE>


           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                     AND RESULTS OF OPERATIONS - (Continued)


     At the present time, the Company has no hedges in place of either crude oil
or natural gas prices similar to those swaps it negotiated in prior years.  As a
result the  Company's  current oil and gas revenues are fully exposed to risk of
declining prices such as have occurred during fiscal 1998 to date.  However,  it
will be able to fully benefit from any price increases should these occur during
the balance of 1998 or during fiscal 1999.

     Columbus had  outstanding  borrowings  of  $3,300,000 as of August 31, 1998
against its $10,000,000  line of credit with Norwest Bank Denver,  N.A. which is
collateralized by oil and gas properties.  At the end of the third quarter 1998,
the ratio of bank debt to shareholders'  equity was 0.21 and to total assets was
0.14 and outstanding  debt used a LIBOR option with an average  interest rate of
7.2%.  Subsequent  to the end of the third  quarter,  Columbus has drawn down an
additional $1,400,000 to pay accelerated drilling expenses, restore its positive
working capital position and purchase  treasury shares in September as discussed
below.  The net increase (or decrease) of long-term  debt directly  affects cash
flows from  financing  activities  as do the  purchase  of  treasury  shares and
proceeds from the exercise of stock options.

     Working capital at August 31, 1998 had declined to a negative $205,000 from
a positive  $722,000 at November 30, 1997 for reasons  discussed  above.  Actual
nine month's capital expenditures for 1998 only were $4,769,000 for additions to
oil and gas  properties  and  $1,831,000  for the  purchase of 241,766  treasury
shares  affected  working  capital.  However,  the  foregoing  property  capital
expenditures differ from the amount shown in the consolidated  Statement of Cash
Flows which also includes  cash payments made during 1998 for 1997  expenditures
which had been  incurred  but not yet paid as of 1997's  year end.  Those  extra
expenditures also contributed to the increased borrowings in 1998.

     The Company has been  authorized by its Board of Directors  throughout  the
past several  years to repurchase  its common shares from the market  subject to
certain price  limitations.  During May 1998 an additional  200,000  shares were
authorized for repurchase at prices not to exceed $8.25 per share. This excluded
a  small   number  of  shares   which   remained  to  be  acquired   from  prior
authorizations.  For the first nine months of fiscal 1998,  241,766  shares were
repurchased  (246,731  shares  after the  effect of the 10%  stock  dividend  on
certain shares) at a restated average price of $7.36 per share.

     Subsequently,  during  September and October  1998,  an  additional  75,700
shares  have  been  acquired  at an  average  price  of  $6.36  per  share  with
approximately  59,000  shares  remaining  to be  purchased  under the May,  1998
authorization.

                                       20

<PAGE>


           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                     AND RESULTS OF OPERATIONS - (Continued)

     Impact  of the Year  2000  issue.  The Year  2000  issue is the  result  of
computer  programs  being  written  using two digits  rather than four, or other
methods,   to  define  the  applicable   year.   Computer   programs  that  have
date-sensitive  software may recognize a date using "00" as the year 1900 rather
than the year  2000 and  could  result in a system  failure  or  miscalculations
causing  disruptions  of  operations  such as a temporary  inability  to process
transactions, transmit invoices or engage in similar normal business activities.

     The Company  upgraded its major system  computer  software in 1997 to a new
release  of a major  software  vendor  that is  compliant  with the  year  2000.
Columbus has started its review of other less  important  systems as well as its
significant suppliers,  purchasers, and transporters of oil and gas to determine
the extent to which the Company might still be vulnerable to other  failures and
what the impact might be on its operations.

     The  Company's  interest  in  wells  operated  by  other  companies  is not
considered  to be as important  but it is attempting to determine to what extent
those companies are ready for the year 2000.  Outside  services are used for its
payroll and medical  benefits  processing and those  companies have notified the
Company  that  updates to their  software  that is year 2000  compliant  will be
available  before  year-end  1998.  The Company is also somewhat  dependent upon
personal computers and certain spreadsheet and word processing software programs
which may not be year 2000 ready at present.  Evaluations  will be made so as to
establish which of those systems are critical and need to be remedied.

     The Company  also relies on  non-information  technology  systems,  such as
office telephones,  facsimile machines, air conditioning,  heating, elevators in
its leased office  building,  which may have embedded  technology  such as micro
controllers and are generally outside of its control to assess or remedy.  These
might adversely impact the Company's business but in management's  opinion would
not create a material disruption.

     As  previously  disclosed,  the  major  system  computer  software  upgrade
performed in 1997 cost  $16,000.  Management  expects that this  represents  the
majority of the costs,  including  replacement of any non-compliant  information
technology  system,  required  to meet its goal of being  year  2000  ready  for
mission-critical  systems. The Company does not believe that any loss of revenue
will occur as a result of the year 2000  problem  but  regardless  of efforts to
identify and remedy such  problems,  there could be year 2000  related  failures
that cause some  disruption.  The Company has not yet  established a contingency
plan  should year 2000  failures  occur and does not yet know if it will in fact
create a contingency plan.

                                       21

<PAGE>


           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                     AND RESULTS OF OPERATIONS - (Continued)

RESULTS OF OPERATIONS

     During 1998's third quarter,  lower oil and gas sales were  responsible for
gross revenues  decreasing by 24% while  operating  income  declined to $622,000
compared with $910,000 in 1997 despite reduced costs.  Other comparisons for the
1998 quarter versus 1997 related to prices, production and oil and gas sales are
covered later in this section.

     Thus far  during  1998,  the  Company  postponed  all  Williston  Basin oil
drilling.  It has accelerated its exploration  efforts by acquiring  acreage and
3-D seismic  data and  agreeing  to drill at least three new onshore  Gulf Coast
wildcats  located  between  Houston  and  Corpus  Christi  which  have  all been
successful. These include the Wilcox discovery discussed below as well as a Frio
gas  discovery in Matagorda  County and the Vicksburg gas discovery in Jim Wells
County   reported  in  the  prior  quarter.   These  prospects  were  considered
particularly  attractive  because  they  offered  initial well sites which could
produce from several  different zones in the same well bore.  Acquisition  costs
inclusive of acreage and 3-D seismic approximate $700,000 net to Columbus.

     For 1998's third quarter drilling  results,  four gross wells (1.96 net WI)
were all located in the onshore  Gulf Coast area of Texas.  These  included  one
(.65 net WI) successful  development  gas well and one  successful  (.20 net WI)
exploratory  oil well both of which were  extensions of the Sralla Road Field in
Harris County.  Also one (.615 net WI)  development  dry hole was drilled in Jim
Wells County,  but a very important  Wilcox  discovery gas well (.50 net WI) was
completed at its El Squared prospect in Bee County.

     The Sralla Road Field wells included the Cedar Bayou #3 (.65 net WI) offset
extension to the northeast  which began  production in late August at an initial
daily rate of  approximately  600 Mcf of  natural  gas and 35 barrels of oil and
that gas  production  has recently  stabilized at  approximately  280 Mcfd.  The
successful oil discovery was the Jones #1 (.20 net WI) which extended this field
over one mile to the southwest and apparently is separated from the gas cap by a
cross  fault.  It flow  tested 240 barrels of oil and 225 Mcf of natural gas per
day on an 8/64" choke and is a new  reservoir  oil  discovery.  It is  currently
shut-in awaiting completion of a gathering line through a heavily populated area
as the gas cannot be flared.  This  pipeline is expected to be  completed in the
fourth quarter.

     As described in prior quarterly reports,  the most significant  exploratory
test well to be drilled in recent years was the Long #1 well in Bee County which
prospect is within an area of numerous prolific,  multi-zone oil and natural gas
fields.  A 50%  participation  was  acquired in an acreage  block of 4,024 acres
which has 3-D seismic coverage. The initial  test  well  was  drilled  to  about

                                       22

<PAGE>


           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                     AND RESULTS OF OPERATIONS - (Continued)

10,700 feet and tested three Slick and two Luling sands of the Wilcox formation.
The Long #1 has been completed in 38 feet of  perforations  in the two uppermost
Slick  sands  which were 46 feet and 37 feet  thick  respectively,  between  the
depths of 9704 and 9835 feet.  Also, a third Slick sand was penetrated which was
183 feet  thick and also  flowed  natural  gas and  water  from the top 40 feet.
However, this zone is proposed to be completed in a companion well which will be
drilled a few hundred feet northwest  where the third Slick should be found at a
much  higher  structural   position.   This  will  also  add  the  potential  of
successfully  completing  one or both of the two 90-foot thick Luling sands that
were  penetrated  in the first  well bore  which also had gas shows but the logs
indicated  they were  probably wet. It is expected this second well bore will be
commenced  later in October  after  further  review of the seismic has helped to
select  a  surface  location  where  the  up-to-the-coast  major  fault  can  be
penetrated  in the very top of the third  Slick sand and where the Luling  sands
should be over 100 feet higher structurally.

     The Long #1 was tested on various  size chokes for its  official  Texas RRC
test and through the largest, which was a 16/64th inch choke, the well flowed at
the rate of 2.9  million  cubic  feet per day  (MMCFD)along  with 20  barrels of
condensate and 70 barrels of water per day. It has  subsequently  been connected
temporarily  to a nearby  gathering line and began selling gas in early October.
Recent sales rate exceeded 2 MMCFD with 11 barrels of condensate  and 48 barrels
of water per day with a flowing tubing pressure of 1540 psi.

     The aforementioned dry hole development well was an offset to the Vicksburg
sand gas discovery  reported in the second quarter.  This  development well site
was located using  subsurface  control only and was off structure.  At present a
3-D seismic program in this area which encompasses this acreage is being shot by
others and Columbus will have access to it early next year. This will be used to
select what should be a more favorable structural location for at least one more
Vicksburg well plus there is a possibility of deeper  prospective  zones to test
also.

                                       23

<PAGE>


           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                     AND RESULTS OF OPERATIONS - (Continued)

     Oil and Gas Revenues and Operating Costs
     ----------------------------------------

     The following table shows  comparative  crude oil and natural gas revenues,
sales volumes,  average prices and percentage  changes  between  periods for the
third  quarters of 1998 and 1997 and the third quarter of 1998 versus the second
quarter of 1998.


<TABLE>
<CAPTION>
                                              Third Quarter
                                          ---------------------        %          Second Qtr.      %
                                           1998           1997       Change          1998        Change
                                          ------         ------      ------       -----------    ------

<S>                            <C>                       <C>          <C>           <C>            <C> 
         Natural gas revenues M$          $1,914         $2,016       (5)%          $ 2,017        (5)%
         Oil revenue M$                   $  581         $1,259      (54)%          $   764       (24)%
         Natural gas sales volumes:
           Millions of cubic feet            892            874        2 %              856         4 %
           MCF/day                         9,696          9,497                       9,303

         Oil sales volumes:
           Barrels                        50,944         67,944      (25)%           57,570       (12)%
           Barrels/day                       554            739                         626

         Average price received:
           Natural gas - $/MCF            $ 2.15         $ 2.31       (7)%           $ 2.36        (9)%
           Oil - $/BBL                    $11.41         $18.53      (38)%           $13.27       (14)%
</TABLE>

     Natural  gas  revenues  decreased  5% in the  third  quarter  of 1998  when
compared to 1997's  quarter  solely a result of decreased  prices since  volumes
improved  by 2%.  Several  gas wells were  completed  and  connected  during the
intervening  months  but this  was  offset  by the sale of a Berry R. Cox  Field
property and normal decline. Average gas prices were down 7% commensurate with a
lack of  increased  demand due to a warm winter and high  percentage  of storage
refill.  The latest  quarter  compared  to the second  quarter of 1998 showed 4%
higher sales volumes due to production  from new wells  connected  just prior to
the close of the  quarter.  However,  the 9% decrease in average  prices for the
quarter  versus the second  quarter  was  affected  by the same  storage  refill
influence.  Therefore,  gas revenues  decreased  5% as a direct  result of those
lower prices since production was up 4%.

     Oil revenues for 1998's third quarter were down  significantly  by 54% when
compared to the similar 1997 quarter which was the result of a  substantial  38%
decrease  in the  average  price and a lower  sales  volume of 25%.  The  latter
directly  reflected the sharp decline of a 90%-owned Montana well which had been
recompleted uphole during 1997's third quarter and contributed its initial flush
production  for the period.  Also,  during 1998's third  quarter,  several wells
became  marginal and were shut down. Any well which had pump or tubing  problems
was not  repaired  nor were  workovers  performed.  Oil revenues for last year's
third  quarter had also  benefitted  by $46,900 ($.69 per barrel) from crude oil
swap  participation but unfortunately no such crude oil swaps were in place this
year to offer protection from this latest price debacle.

                                       24

<PAGE>


           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                     AND RESULTS OF OPERATIONS - (Continued)

     When  compared  with  1998's  second  quarter  results,  third  quarter oil
revenues  were  down  24%  due to a 14%  decrease  in the  average  price  while
production declined 12% due to the aforementioned  lack of workovers,  postponed
downhole equipment repairs or replacements,  and the election to shut down wells
which became uneconomic at prevailing prices.

     Columbus' 1998 third quarter  average sales volumes of natural gas of 9,696
Mcfd  (which was a  quarterly  record)  and oil and  liquids  production  of 563
barrels per day equates to an average  daily  production of 2,179 barrels of oil
equivalent  (BOE)  compared  to 2,330  BOE of  production  during  1997's  third
quarter.  A sale of a gas property in the Berry R. Cox field,  the sharp decline
during the intervening period in the Montana oil well  recompletion,  as well as
the aforementioned  shut-ins of several oil wells more than offset the increases
generated  by new gas wells  which  were  connected  between  those  comparative
periods.

     Lease  operating  expenses for the third quarter were comparable to 1997's.
Essentially  all  expensive   workovers  and  downhole  and  surface   equipment
replacements  on older wells had occurred  during the first six months of fiscal
1998.  Lease operating costs on a BOE basis were $2.22 in 1998 compared to $2.10
in 1997 which had higher production. Operating costs as a percentage of revenues
were up to 18% as a result  of lower  sales  versus  only  14% in  1997's  third
quarter when excellent  prices also helped to generate  record revenues for that
period.

     Production and property taxes  approximated  10% of revenues in 1998 and 9%
in 1997.  These vary based on Texas'  percentage  share of the total  production
where oil tax rates are lower than gas tax rates.  The relationship of taxes and
revenue  is  not  always  directly  proportional  since  several  of  the  local
jurisdiction's  property taxes are based upon reserve  evaluations as opposed to
revenues received or production rates for a given tax period.

     Operating and Management Services
     ---------------------------------

     This  segment of the  Company's  business is  comprised  of opera tions and
services  conducted on behalf of third parties including  compressor rentals and
salt water disposal facilities.

     Operating and  management  services  gross profit was $181,000  during nine
months 1998 compared to a $304,000 profit during the equivalent  period in 1997.
There was only a $51,000 profit for the third quarter 1998 due to unusually high
workover  expenses required to clean out sand from the well bore of a salt water
disposal well in Texas.  Revenues did improve during 1998's third quarter as the
number of operated wells and drilling activity  increased along with an increase
from 50% to 100%  ownership  interest  in four  compressors  operating  in South
Texas.

                                       25

<PAGE>


           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                     AND RESULTS OF OPERATIONS - (Continued)


     Interest Income
     ---------------

     Interest  income is earned  primarily  from  short-term  invest ments whose
rates  fluctuate with changes in the commercial  paper rates and the prime rate.
Interest income during the third quarter was $32,000 in both 1998 and 1997.

     General and Administrative Expenses
     -----------------------------------

     General and administrative expenses are considered to be those which relate
to the direct  costs of the Company  which do not  originate  from  operation of
properties or providing of services.  Corporate expense  represents a major part
of this category.

     The Company's general and administrative  expenses for the third quarter of
1998 were 6% less than last year  despite  salary  increases  which were granted
effective  December  1,  1997  for  non-officer  employees  and May 1,  1998 for
officers.  Costs in 1998 decreased for data  processing  and outside  accounting
services  while more labor  costs  were  allocated  by  employees  to  operating
services portion of the Company's business for the latest period.

     Reimbursement  for services provided by Columbus officers and employees for
managing Resources is expected to decrease during 1998's fourth quarter. This is
based on the assumption that the new President and Chief  Executive  Officer who
has  purchased a 4.5% equity  position in  Resources as of June 30, 1998 will be
adding  staff  during the next  several  months.  Notice of  termination  of the
services  contract  by  Resources  requires  only 30 days but  requires a 90 day
notice for Columbus to completely  withdraw from providing  personnel  services.
When  such  notice  does  occur,  it is  expected  that  Columbus'  general  and
administrative  expense will rise commensurately  since staff reductions are not
presently  contemplated  although  some  contract  services  could  be  reduced.
Reimbursement of $62,000 for 1998 compares with $58,000 during the third quarter
of 1997 for providing services to Resources.

     Depreciation, Depletion and Amortization
     ----------------------------------------

     Depreciation,  depletion  and  amortization  of  oil  and  gas  assets  are
calculated  based upon the units of production for the period compared to proved
reserves of each  successful  efforts  property  pool.  This expense is not only
directly  related to the level of  production,  but also is dependent  upon past
costs to find,  develop,  and recover related reserves in each of the cost pools
or fields.  Depreciation  and  amortization  of office  equipment  and  computer
software is also included in the total charge.

                                       26

<PAGE>


           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                     AND RESULTS OF OPERATIONS - (Continued)


     Total  charges for this  expense  item  increased  over 1997 as a result of
increased  production and development  expenditures in the intervening period as
well as reduced  reserves in several cost pools brought about by lower crude oil
prices.  This resulted in a 1998 third quarter  depletion  rate of $4.60 per BOE
compared with the $4.01 per BOE for the like period of fiscal 1997 and $3.91 per
BOE for all of 1997.

     Exploration Expense
     -------------------

     In  general,   the  exploration  expense  category  includes  the  cost  of
Company-wide   efforts  to  acquire  and  explore  new  prospective  areas.  The
successful  efforts  method of accounting  for oil and gas  properties  requires
expensing the costs of unsuccessful exploratory wells. Other exploratory charges
such as seismic and geologic costs must also be immediately  expensed regardless
of whether a prospect is ultimately proved to be successful. Exploration charges
of $49,000 for 1998's  third  quarter were down from 1997's  $125,000  which had
included $74,000 for a non-commercial  exploratory oil well. Several exploratory
natural gas  prospects  will be drilled over the next few months along the Texas
Gulf Coast on leaseholds either already owned or under consideration. At present
no  exploratory  oil wells are  planned  for any of the 3-D  seismic  structures
mapped on our Williston Basin leasehold blocks in Montana until crude oil prices
improve. Earlier in 1998 3-D seismic costs of $135,000 had been incurred in this
area because of an  anticipated  improvement  in crude oil prices and  leasehold
expirations which will occur during 1999. All such exploration  charges not only
decrease net earnings but also reduce  reported  GAAP cash flow from  operations
even though they are  discretionary  expenses;  however,  such charges are added
back for  purposes of  determining  DCF which is why it more nearly  tracks cash
flow  reported by full cost  accounting  companies who  capitalize  these costs.
Approximately $300,000 of 3-D seismic costs were originally budgeted for 1998 in
Richland County, Montana but with crude oil prices in disarray, this program was
deferred indefinitely and the money spent on Gulf Coast gas exploration.

     Impairments
     -----------

     No  impairment  loss was  necessary  for the 1998 third quarter even though
crude oil and natural  gas prices  declined  further  from the end of the second
quarter.

                                       27

<PAGE>


           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                     AND RESULTS OF OPERATIONS - (Continued)

     The non-cash  impairment  loss of $2,816,000 thus far in 1998 was primarily
recognized  during the first  quarter  with the  extremely  low crude oil prices
being a major  contributor  along with a  Louisiana  well's  performance.  These
resulted in a reduction in reserve  quantities as well as the remaining carrying
value of several  successful  efforts pools after  remaining  unamortized  costs
suddenly  exceeded  the newly  calculated  undiscounted  future net cash  flows.
Certain  property pools were written down to a fair value based on an assumption
that the  average  future  crude oil price  would be $18.75 per barrel  over the
remaining  life of those  pools.  Some  portion of those  crude oil  reserves is
expected to be restored at such time as crude oil prices improve but none of the
impairment charges may be reversed.  An additional  $400,000 of impairments were
also  provided  for  probable  loss in value  of  undeveloped  acreage  holdings
(unproved  properties)  located primarily in Louisiana plus $56,000 was expensed
for an expired lease.

     Interest Expense
     ----------------

     Interest expense varies in direct proportion to the amount of bank debt and
the level of bank interest  rates.  The average amount of bank debt  outstanding
has been higher  during  1998's  third  quarter  than in 1997.  The average bank
interest rate paid this latest quarter was 7.1% which compares to 7.2% in 1997.

     Income Taxes
     ------------

     During  the first  nine  months of 1998,  the net  deferred  tax  liability
decreased  to  only  $285,000  as a  result  of the  large  financial  statement
impairment  write-offs which substantially reduced the book versus tax temporary
differences.  The  liability is comprised  of a $217,000  current  portion and a
$68,000  long-term  portion.  A tax  deduction  of $51,000  from the  benefit of
disqualifying   disposition  of  incentive  stock  options  has  been  added  to
additional  paid-in capital during 1998. The estimated  increase in deferred tax
assets was $653,000  during the nine months.  The effective tax rate for 1998 is
38%.  See also  Note 3 to the  consolidated  financial  statements  for  further
explanation of income taxes.

     Statement  Pursuant to Safe  Harbor  Provision  of the  Private  Securities
     ---------------------------------------------------------------------------
     Litigation Reform Act of 1995
     -----------------------------

     This report may contain certain "forward-looking statements" that have been
based  on  imprecise   assumptions  with  regard  to  production  levels,  price
realizations,  and  expenditures for exploration and development and anticipated
results  therefrom.  Such statements are subject to risks and uncertainties that
could cause actual results to differ  materially from those expressed  herein or
implied by such statements.

                                       28

<PAGE>


                           PART II - OTHER INFORMATION


Item 1.  LEGAL PROCEEDINGS

     Management is unaware of any asserted or unasserted  claims or  assessments
against the Company which would materially affect the Company's future financial
position or results of operations.

Item 6.  EXHIBITS AND REPORTS ON FORM 8-K

          (a)  Exhibits

               10(a)- First  Amendment of Credit  Agreement  dated  September 8,
                      1998  between  Columbus  Energy  Corp.  and  Norwest  Bank
                      Colorado, National Association.

               10(b)- Second  Amendment  of Credit  Agreement  dated  October 6,
                      1998  between  Columbus  Energy  Corp.  and  Norwest  Bank
                      Colorado, National Association.

               27   - Financial data schedule - August 31, 1998

          (b)  Reports on Form 8-K

               None 

                                       29

<PAGE>


                                   SIGNATURES

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


                                                       COLUMBUS ENERGY CORP.
                                                    ----------------------------
                                                           (Registrant)


DATE:      October 13, 1998                     /s/ Harry A. Trueblood, Jr.
      ---------------------------------             ----------------------------
                                                    Harry A. Trueblood, Jr.
                                                    Chairman, President and
                                                    Chief Executive Officer
                                                    (a duly authorized officer)


DATE:      October 13, 1998                     /s/ Ronald H. Beck
      ---------------------------------             ----------------------------
                                                    Ronald H. Beck
                                                    Vice President
                                                    (Chief Accounting Officer)

                                       30

<PAGE>


                                                      Commission File No. 1-9872


                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549



                                     EXHIBIT

                                       TO

                                    FORM 10-Q


                                QUARTERLY REPORT

                         PURSUANT TO SECTION 13 OR 15(d)

                                       OF

                       THE SECURITIES EXCHANGE ACT OF 1934

                      FOR THE QUARTER ENDED AUGUST 31, 1998





                              COLUMBUS ENERGY CORP.
                           (Exact Name of Registrant)

                               1660 Lincoln Street
                             Denver, Colorado 80264
                     (Address of Principal Executive Office)

<PAGE>
                                                                   Exhibit 10(a)


                       FIRST AMENDMENT OF CREDIT AGREEMENT
                       -----------------------------------

     THIS FIRST AMENDMENT OF CREDIT  AGREEMENT (this  "Amendment"),  dated as of
September  8,  1998,  is by  and  between  COLUMBUS  ENERGY  CORP.,  a  Colorado
corporation  (herein  called  "Borrower"),and  NORWEST BANK  COLORADO,  NATIONAL
ASSOCIATION, a national banking association (herein called "Norwest").


                                    RECITALS

     A.  Borrower  and  Norwest  entered  into an Amended  and  Restated  Credit
Agreement dated as of October 23, 1996 (the "Credit Agreement"), in order to set
forth the terms upon which  Norwest  would make  available to Borrower a line of
credit and by which the line of credit would be governed. Capitalized terms used
herein  without  definition  shall  have the same  meanings  as set forth in the
Credit Agreement.

     B. Borrower and Norwest wish to enter into this Amendment in order to amend
further certain terms and provisions of the Credit Agreement.


                                    AGREEMENT

     NOW,  THEREFORE,  in  consideration  of $10.00 and other good and  valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties hereby agree as follows:

     1. Credit Agreement.  The Credit Agreement shall be, and hereby is, amended
as follows as of the date hereof:

          (a)  The  following   shall  be  substituted  for  the  definition  of
     "Borrowing Base Period" in Section 1.1 on page 2 of the Credit Agreement:

               "Borrowing  Base Period"  means:  (a) the period from the date of
          this Agreement through March 31, 1997; (b) thereafter,  until April 1,
          2000, each twelve-month  period beginning on April 1 of each year; and
          (c) the period from April 1, 2000 to July 1, 2000.

          (b)  The  following   shall  be  substituted  for  the  definition  of
     "Principal Payment Date" in Section 1.1 on Page 8 of the Credit Agreement:

<PAGE>


               "Principal  Payment  Date" means:  (a) the first  Business Day of
          each  calendar  month,  commencing  August  1,  2000,  and  (b) if all
          Obligations  due and payable on any such date are not then paid,  each
          succeeding day until all due and payable Obligations are paid in full.

          (c)  The  following   shall  be  substituted  for  the  definition  of
     "Principal Payment Date" in Section 1.1 on page 8 of the Credit Agreement:

               "Revolving  Period"  means the time  period from the date of this
          Agreement to July 1, 2000.

     2. The Note. The Note shall be amended, such amendment to be effected by an
Allonge (the"Allonge") to be attached to the Note and to be substantially in the
form of Exhibit A attached hereto and made a part hereof.

     3. Loan Documents.  All references in any document to the Credit  Agreement
and the Note  shall  refer to the  Credit  Agreement  and the Note,  as  amended
pursuant to this Amendment and the Allonge.

     4.  Conditions  Precedent.  The  obligations  of  the  parties  under  this
Amendment  and under the foregoing  amendments  to the Credit  Agreement and the
Note are subject,  at the option of Norwest,  to the prior  satisfaction  of the
condition  that  Borrower  shall have  executed  and  delivered  to Norwest  the
following (all documents to be satisfactory in form and substance to Norwest):

          (a) This Amendment.

          (b) The Allonge.

          (c) A Consent of  Guarantor  executed by CGSI in the form of Exhibit B
     attached hereto and made a part hereof.

     5.  Representations  and Warranties.  Borrower hereby  certifies to Norwest
that as of the date of this Amendment: (a) all of Borrower's representations and
warranties  contained in the Credit Agreement are true, accurate and complete in
all material  respects,  and (b) no Default or Event of Default has occurred and
is continuing under the Credit Agreement.

     6.  Continuation  of the  Credit  Agreement.  Except as  specified  in this
Amendment and the Allonge,  the provisions of the Credit  Agreement and the Note
shall  remain in full force and effect,  and if there is a conflict  between the
terms of this Amendment and the Allonge and those of the Credit Agreement or the
Note, the terms of this Amendment and the Allonge shall control.

                                      -2-

<PAGE>


     7. Expenses.  Borrower shall pay all expenses  incurred in connection  with
the transactions  contemplated by this Amendment,  including without  limitation
all fees and expenses of Norwest's attorney.

     8.  Miscellaneous.  This Amendment shall be governed by and construed under
the laws of the State of  Colorado  and shall be  binding  upon and inure to the
benefit of the parties hereto and their  successors and assigns.  This Amendment
may be  executed  in any  number  of  counterparts,  each of  which  shall be an
original, but all of which together shall constitute one instrument.

     Executed as of the date first above written.

                                               COLUMBUS ENERGY CORP.


                                               By:  /s/ Michael M. Logan
                                                        ------------------------
                                                        Michael M. Logan
                                                        Vice President


                                                NORWEST BANK COLORADO, NATIONAL
                                                ASSOCIATION


                                                By:  /s/ J. Thomas Reagan
                                                         -----------------------
                                                         J. Thomas Reagan,
                                                         Vice President


                                       -3-

<PAGE>


                                                                   Exhibit 10(b)


                      SECOND AMENDMENT OF CREDIT AGREEMENT
                      ------------------------------------

     THIS SECOND AMENDMENT OF CREDIT AGREEMENT (this  "Amendment"),  dated as of
October 6, 1998, is by and between COLUMBUS ENERGY CORP., a Colorado corporation
(herein called "Borrower"),  and NORWEST BANK COLORADO,  NATIONAL ASSOCIATION, a
national banking association (herein called "Norwest").

                                    RECITALS

     A.  Borrower  and  Norwest  entered  into an Amended  and  Restated  Credit
Agreement  dated as of October 23, 1996, as amended by an amendment  dated as of
September 8, 1998 (the "Credit Agreement"), in order to set forth the terms upon
which Norwest would make available to Borrower a line of credit and by which the
line of  credit  would  be  governed.  Capitalized  terms  used  herein  without
definition shall have the same meanings as set forth in the Credit Agreement.

     B. Borrower and Norwest wish to enter into this Amendment in order to amend
further certain terms and provisions of the Credit Agreement.

                                    AGREEMENT

     NOW,  THEREFORE,  in  consideration  of $10.00 and other good and  valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties hereby agree as follows:

     1. Credit Agreement.  The Credit Agreement shall be, and hereby is, amended
as follows as of the date hereof:

          (a) By substituting the following for Section 6.2(a) on page 33 of the
     Credit Agreement:

               (a) Net Worth.  The  Consolidated  Tangible Net Worth of Borrower
          shall  not at any time be less  than:  (i)  $12,000,000,  plus (ii) 50
          percent of: (A)  Borrower's  Cumulative  Net Income  after  August 31,
          1998, minus (B) an amount equal to the exploration  expenses  actually
          incurred by Borrower  after  August 31, 1998 (as set forth in the line
          item  entitled  "Exploration  Expenses"  in the  financial  statements
          submitted  by Borrower  pursuant  to Section  6.1(b)  above),  up to a
          maximum  of  $5,000,000  of such  exploration  expenses  which  may be
          subtracted for any Fiscal Year of Borrower.

          (b) By deleting Section 6.2(c) on page 34 of the Credit Agreement.

     2. Loan Documents.  All references in any document to the Credit  Agreement
shall refer to the Credit Agreement, as amended pursuant to this Amendment.

<PAGE>


     3.  Conditions  Precedent.  The  obligations  of  the  parties  under  this
Amendment  and  under the  foregoing  amendments  to the  Credit  Agreement  are
subject,  at the option of Norwest,  to the prior  satisfaction of the condition
that Borrower  shall have  executed and delivered to Norwest the following  (all
documents to be satisfactory in form and substance to Norwest):

          (a) This Amendment.

          (b) A Consent of  Guarantor  executed by CGSI in the form of Exhibit A
     attached hereto and made a part hereof.

     4.  Representations  and Warranties.  Borrower hereby  certifies to Norwest
that as of the date of this Amendment: (a) all of Borrower's representations and
warranties  contained in the Credit Agreement are true, accurate and complete in
all material  respects,  and (b) no Default or Event of Default has occurred and
is continuing under the Credit Agreement.

     5.  Continuation  of the  Credit  Agreement.  Except as  specified  in this
Amendment, the provisions of the Credit Agreement shall remain in full force and
effect, and if there is a conflict between the terms of this Amendment and those
of the Credit Agreement, the terms of this Amendment shall control.

     6. Expenses.  Borrower shall pay all expenses  incurred in connection  with
the transactions  contemplated by this Amendment,  including without  limitation
all fees and expenses of Norwest's attorney.

     7.  Miscellaneous.  This Amendment shall be governed by and construed under
the laws of the State of  Colorado  and shall be  binding  upon and inure to the
benefit of the parties hereto and their  successors and assigns.  This Amendment
may be  executed  in any  number  of  counterparts,  each of  which  shall be an
original, but all of which together shall constitute one instrument.

     EXECUTED as of the date first above written.

                                             COLUMBUS ENERGY CORP.


                                             By:      /s/ Michael M. Logan
                                                          ----------------------
                                                          Michael M. Logan
                                                          Vice President

                                             NORWEST BANK COLORADO, NATIONAL
                                             ASSOCIATION


                                             By:      /s/ J. Thomas Reagan
                                                          ----------------------
                                                          J. Thomas Reagan,
                                                          Vice President


                                       -2-