TERRITORIAL RESOURCES INC, 10KSB, 1996-07-12

TERRITORIAL RESOURCES INC
10KSB, 1996-07-12
CRUDE PETROLEUM & NATURAL GAS

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U.S. Securities and Exchange Commission
Washington, D.C. 20549

FORM 10-KSB
(Mark One)
--- ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
X SECURITIES EXCHANGE ACT OF 1934
---

For the fiscal year ended March 31, 1996

TRANSITION REPORT UNDER TO SECTION 13 OR 15(d) OF THE
---
SECURITIES EXCHANGE ACT OF 1934
---

For the transition period from to

Commission File No. 0-9617

TERRITORIAL RESOURCES, INC.
(Formerly Egret Energy Corporation)
(Name of Small Business Issuer in its charter)

State of Colorado 84-0821158
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)

450 North Sam Houston Parkway East, Suite 140
Houston, Texas 77060
(Address of Principal Executive Offices)
Issuer's telephone number, including area code: 713/447-3200

Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:

COMMON STOCK, NO PAR VALUE
(Title of Class)

Check whether the issuer (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
--- ---

Check if there is no disclosure of delinquent filers pursuant to Item 405
of Regulation S-B contained herein, and no disclosure will be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [ ]

The issuer's revenues for the fiscal year ended March 31, 1996 were
$41,000.

Aggregate market value of the voting stock held by non-affiliates of the
registrant as of July 10, 1996 (computed by reference to the average of the
highest market maker bid and lowest market maker asked price of such stock as
quoted on the over-the-counter market) was $3,794,741.

Number of shares outstanding of each of the issuer's classes of common
stock, as of July 12, 1996:

Title of each class Number of shares outstanding
Common Stock, no par value 26,160,656

Transitional Small Business Disclosure Format: Yes NO X
--- ---

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PART I

Item 1. DESCRIPTION OF BUSINESS.

BUSINESS DEVELOPMENT

GENERAL-BACKGROUND. Territorial Resources, Inc. (the "Company" or the
"Registrant" or "Territorial") is the successor to two firms which merged in
December 1984: Target Oil & Gas Incorporated ("Target") and Egret Energy
Corporation ("Old Egret"). The Company's name was changed from Egret Energy
Corporation to Territorial Resources, Inc. on July 12, 1988. Target was
incorporated under the laws of Colorado on June 17, 1980. Target completed its
initial public offering on March 5, 1981, and received gross proceeds of
$3,000,000. Old Egret was formed in February 1981, as a privately held Delaware
corporation.

During March, 1992 and fiscal 1993, the Company completed a number of
transactions whereby it extinguished its bank and certain other indebtedness in
exchange for its common stock and the assignment of certain oil and gas
interests. It further acquired certain other oil and gas interests in exchange
for its common stock.

During February and March of 1995, the Company, in two separate transactions and
in exchange for the issuance of shares of its common stock, completed the
acquisition of an interest in a property in the Gulf of Mexico and extinguished
certain indebtedness. See Item 12 "Certain Relationships and Related
Transactions." Additionally, on March 31, 1995, Territorial acquired from
unaffiliated third parties, in separate exchanges for the issuance of shares of
Territorial common stock, an overriding royalty interest in a producing property
located in the Province of Alberta, Canada and a minority interest in a
Mongolian venture. Territorial further became a co-applicant for an exploratory
oil and gas concession in Mongolia, as described below.

During fiscal 1995, the Company pursued only international exploration and
production opportunities, particularly in Mongolia. Previously it had been
engaged in oil and gas exploration and production in the continental United
States and it continues to own working interests, minerals and/or overriding
royalty interests primarily in the Province of Alberta, Canada and Kansas,
Colorado, Texas and California. See Item 2 "Description of Properties."

TRANSACTIONS RELATING TO SOTAMO. The Company became aware of opportunities in
Mongolia because of the involvement of Edward T. Story, Jr., a Director of the
Company. Mr. Story is also the president of SOCO International, Inc., which is
both a subsidiary of Snyder Oil Company and the largest shareholder of SOCO
Tamtsag Mongolia, Inc. ("SOTAMO"). In January 1995, Mr. Story alerted the
Company that two SOTAMO shareholders would prefer to own an interest in a public
company in exchange for a portion of their SOTAMO shares. On March 31, 1995,
the Company acquired these shares, representing one percent (1%) of the
outstanding common stock of SOTAMO for two million shares of Territorial common
stock, then valued at $125,000, plus warrants to acquire an additional two
million shares of Territorial common stock at $.10 each, exercisable through
December 31, 1996 (the "Warrants"). Also on March 31, 1995, the Company
acquired, from Canadian Conquest Exploration, Inc. ("CCE"), a Canadian concern
whose shares are listed on the Toronto Stock Exchange, a 2.5% gross overriding
royalty interest in the Saddle Hills producing property located in the Province
of Alberta, Canada. This interest was valued at $100,000. Territorial issued
one million shares of its common stock to CCE for this interest.

On March 29, 1996, the Company acquired an additional 12% interest in SOTAMO in
exchange for the issuance of 5,450,000 shares of common stock through the
acquisition of an entity affiliated with William C. Penttila, then a Director of
the Company. A value of $1,550,198 was placed on the additional investment in
SOTAMO. As part of the acquisition, Warrants to acquire 975,000 shares of
Territorial common stock were cancelled. See Item 12 "Certain Relationships and
Related Transactions - Transactions with Shareholders and Management."

In 1993, SOTAMO was awarded a production sharing contract covering 11,400 square
kilometers, or approximately 2.8 million acres by the Mongol Petroleum Company
("MGT"), the national oil company of Mongolia. In late 1994, a consortium was
formed which acquired the exploration rights to an additional block, increasing

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SOTAMO's total gross acreage position to 5.3 million acres. Both concessions
are located in the Tamtsag Basin of northeastern Mongolia. In addition to
the two blocks currently under contract, SOTAMO and its partners have two
other production sharing contracts pending before the Mongolian government
which would cover an additional 5 million gross acres. In one of these
blocks, Contract Area XX (the "Block"), should it be awarded, the Company
would own a 15% interest in the concession relating thereto in addition to
its interest in SOTAMO. The Petroleum Authority of Mongolia has accepted the
co-application for the Block and has submitted it to the Mongolian Parliament
for ratification. Without such ratification, the co-application will
terminate. If these concessions are awarded, SOTAMO and its partners would
hold rights to the entire Tamtsag Basin.

Seismic acquisition to date has identified the presence of large structures in a
geological setting that appears to be analogous to the Songliao Basin of China
which contains the giant Daqing field. The prospective potential of the Tamtsag
Basin has long been recognized, although a general concern of the industry has
been the lack of an efficient outlet for any crude discovered. In order to
address this problem, a long-term crude supply contract was negotiated and
executed with the China National United Oil Corporation ("CNUOC"), a joint
venture established under the laws of the People's Republic of China between
China National Petroleum Corporation and SINOCHEM, two state-owned entities.
CNUOC has agreed to purchase, at a mutually-agreeable Mongolian/Chinese border
point, any crude produced by the venture at world market prices less a
transportation charge of $2.00 per barrel. The crude purchase contract is
subject to a number of terms and conditions, and there can be no assurance that
CNUOC will ultimately purchase sufficient quantities of crude that may be
produced, if any. In such event, there can be no assurance that additional
purchasers of product from the Block can be secured on economically viable terms
and conditions.

During fiscal 1995, PT BIP Energimas, an oil and gas subsidiary of PT
Bhuwanatala Indah Permai, an Indonesian company whose shares are publicly traded
in that country, agreed to become an equity partner in SOTAMO and committed to
fully fund the drilling of two 3,400 meter wells. The first well was spudded in
April, 1995, and although the results of this first well were encouraging it was
determined to be noncommercial and was plugged. The second well, SOTAMO 19-2,
was spudded in August 1995.

During the drilling of SOTAMO 19-2 in the fall of 1995, a drilling break was
encountered at approximately 8,850 feet (2,700 meters). Over 800 barrels of
drilling mud were lost in this interval before the well could be controlled by
injecting lost circulation material (LCM) to restore proper mud circulation.
Wireline log and cuttings analyses from this zone indicated an oil saturated
conglomerate with good porosity. After completion of drilling activity, the
well was suspended without conclusive testing due to the lack of proper
equipment and the onset of winter.

In April of this year, SOTAMO re-entered the well for the purpose of testing the
zone of interest. During the testing process, SOTAMO recovered 41DEG. API oil
and associated gas. The drilling mud and LCM that had been injected during
drilling, however, appeared to prevent the well from flowing. The perforated
formation is the Lower Tsagaantsav (Lower Cretaceous age) at 8,865 feet to 8,944
feet. This interval was treated with a series of diesel and treated water
washes in an attempt to recover the drill mud and LCM. Only 25 percent of the
lost material was recovered.

SOTAMO is currently planning to stimulate the SOTAMO 19-2 well in the latter
half of 1996. Should the well stimulation be successful, SOTAMO intends to
complete the well as a producer. Therefore, tankage is being installed which
should enable the initiation of limited oil sales to CNUOC as a test of the
marketing and transportation logistics.

On June 20, 1996, the Board of Directors of the Company (with Mr. Mercier
abstaining from voting) approved, in principle, the concept of a business
combination with Asia Energy Ltd. ("AEL"), the Company's largest shareholder.
In connection therewith, the Board of Directors established a Special Committee
of the Board (the "Special Committee"), consisting of A. Andrew Davis, Edward T.
Story, Jr. and Donald L. Oliver, to negotiate and determine, among other things,
the terms and conditions of such business combination on behalf of the Company.

Although no agreement in principle or binding agreement relating to such a
combination with AEL has been entered into as of the date hereof, the Company
currently intends to structure a transaction whereby it will directly or
indirectly acquire substantially all the assets of AEL, other than AEL's shares
of Territorial common stock, in exchange for approximately 1,918,750 shares of
Territorial common stock. AEL's assets currently consist of five

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(5) shares of SOTAMO, the Option to acquire another 24 SOTAMO shares from the
114 currently owned by the Company (as described herein), 5.3 million
Territorial common shares and approximately $250,000 cash.

The form of such transaction, and the terms, conditions and consideration to be
paid by the Company therefor, if any, have not been conclusively determined, and
are subject to change. As a result, there can be no assurance that a business
combination with AEL will ultimately be consummated or what the terms,
conditions and consideration relating to such transaction, will be, if any. If
AEL receives 1,918,750 shares of Territorial common stock in such a transaction
as currently contemplated, AEL would continue to be the largest shareholder of
the Company, with approximately 7,218,750 shares of Territorial common stock,
which would represent approximately 27.6% of the currently outstanding shares of
Territorial common stock as of the date hereof.

Daniel A. Mercier, the Chairman of the Board, a Director and Chief Executive
Officer of Territorial, is the President and a Director of AEL. Mr. Mercier,
together with his spouse, owns approximately 9.0% of the outstanding shares of
capital stock of AEL. Mr. Mercier's father and siblings own an additional 10.3%
of the outstanding shares of capital stock of AEL. Richard A. N. Bonnycastle, a
Director of Territorial, is also a Director of AEL and is the owner of
approximately 11.4% of the outstanding shares of capital stock of AEL. In
addition, Douglas N. Baker, the Vice President Finance and Chief Financial
Officer of Territorial, is the Vice President Finance and Chief Financial
Officer of AEL and together with his spouse is the owner of approximately 1.7%
of the outstanding shares of capital stock of AEL.

BUSINESS OF ISSUER

The Company is involved in the acquisition, exploration and development of
international oil and gas properties as an independent operator or participant.
Domestically, and in Canada, the Company owns non-operated working interests and
overriding royalties in oil and gas leases and has participated with other joint
venture partners in the drilling of exploratory and development wells.

In the future, the Company plans to concentrate its activities primarily on
obtaining foreign concession rights and actively pursuing their development,
with Mongolia presently being its focus. See Item 6 "Management's Discussion
and Analysis or Plan of Operation - Plan of Operation."

The Company's oil and gas business is not generally seasonal in nature. At
certain times, however, weather conditions may affect the Company's ability to
access its oil and gas properties and its ability to drill and operate oil and
gas wells. Also at times, the sale of gas and possibly oil is curtailed due to
lack of demand related to seasonal conditions.

The source and availability of the Company's raw materials are limited to the
availability of oil field equipment and supplies, including tubular steel
products and drilling rigs. Such source and availability can be scarce and the
costs incurred as a result thereof can be greater, for international operations
especially in Mongolia.

Four customers have accounted for more than 10% of the Company's oil and gas
sales during the years ended March 31, 1996, and 1995. Norcen Energy Resources
and Snyder Oil Corporation accounted for approximately $14,000 and $6,000,
respectively, of the Company's oil and gas sales in 1996; and Maxus Energy and
Noram Resources (Arkla) accounted for approximately $9,000 and $14,000,
respectively, of the Company's oil and gas sales in 1995. No single customer
accounted for 10% or more of the Company's sales in the year ended March 31,
1994.

The exploration for, development and production of oil and gas are subject to
intense competition. The principal methods of competition in the industry for
the acquisition of oil and gas concessions and leases are up-front lease bonus
payments at the time of award or acquisition, location damage payments,
supplemental payments, differential royalty rates, annual delay rental payments,
the payment of a co-owner's related financial obligations, stipulations
requiring exploration, and production and other work commitments and obligations
by the concession holder or lessee. Organizations with greater financial
resources, existing staff and labor forces, equipment for exploration, and
experience may be in a better position than the Company to compete for such
concessions or

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leases. Also, since the Company has an insignificant competitive position in
the industry, its ability to market its oil and gas could be severely limited by
its inability to compete with larger companies operating in the same area which
may be willing or able to offer any oil or gas produced by them at a price lower
than that of the Company. In addition, the availability of a ready market for
oil and gas (including among others the market relating to the Company's crude
purchase contract with CNUOC referred to above) will depend upon numerous
factors beyond the Company's control, including the extent of foreign and
domestic production and exports or imports of oil, proximity and capacity of
pipelines and the effect of foreign, federal and state regulation on oil and gas
sales. With its focus being international, the Company is subject to
significant political risk, especially since it is currently concentrating on
primarily one country, Mongolia.

The oil and gas industry is subject to regulation by the public policies of
foreign, domestic and local governments relating to such matters as the award of
exploration and production interests, the imposition of specific drilling
obligations, environmental protection controls, control over the development and
abandonment of a field (including restrictions on production and abandonment of
production facilities) and, in some cases, possible nationalization,
expropriation, regulatory taking, cancellation or frustration of contract
rights, and other political risks in general. The industry is also subject to
the payment of royalties and taxes, which tend to be higher as compared to those
levied on other commercial activities. The Company cannot predict the impact of
future regulatory and taxation initiatives.

Further, the Company is subject to various foreign, federal, state and local
provisions regarding environmental matters, the existence of which may either
hinder or adversely affect the Company's business. Although the Company does
not believe its business operations presently impair environmental quality,
compliance with foreign, federal, state and local regulations which have been or
may be enacted or adopted regarding the environment could have an adverse effect
upon capital expenditures, earnings and the competitive position of the Company.
Since inception, the Company has not made any material capital expenditures for
environmental control facilities and does not expect to make any such
expenditures during the current and succeeding fiscal years.

The Company believes that an ownership change, as defined in Section 382 of the
Internal Revenue Code, occurred in the fiscal 1993 tax year. Accordingly,
utilization of the Company's NOL is limited.

As of June 24, 1996, Territorial had 7 part-time employees.

Item 2. DESCRIPTION OF PROPERTIES.

OFFICE FACILITIES

The Company's executive and administrative office is located at 450 North Sam
Houston Parkway East, Suite 140, Houston, Texas 77060. The Company leases this
space from an affiliated company on a month-to-month basis at a base rent of
$750 per month. The Company has prepaid this rent obligation through March 31,
1997. The affiliated company, Exploration Associates, Inc., is owned by Messrs.
Buck and Penttila, both officers and shareholders of the Company, with Mr.
Penttila also being a Director. See Items 8 and 9 hereof.

OIL AND GAS PROPERTIES

The Company's oil and gas properties are located within the Province of Alberta,
Canada, and the continental United States. No price or supply contracts related
to the North American properties are considered to be material. The Company has
also applied for a concession in Mongolia. Further, by virtue of its 13.2%
stock ownership in SOTAMO, the Company is presently indirectly active in
Mongolia.

TITLE TO PROPERTIES

Internationally, rights to explore for and produce hydrocarbons are generally
obtained through a concession with the host government which can include both
national and local authorities, with the involvement of petroleum,

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taxation and export agencies. While the company believes that it follows the
material requirements in order to be awarded and maintain title to a concession,
no assurance can be given that all necessary requirements are met. Further, the
pertinent laws are subject to change and, as discussed above, significant risks
(including political and product market risks, among others) apply to
international activities.

As is customary in both the North American and international oil and gas
industry, only a perfunctory investigation as to ownership is performed when
acquiring undeveloped properties believed suitable for drilling operations.
Prior to commencement of drilling operations, a thorough title analysis is
normally conducted and any material defects are remedied before proceeding with
operations. The Company believes that title to its North American properties is
generally acceptable in accordance with standards in the oil and gas industry,
subject to exceptions which are not so material as to detract from the value of
such properties. The Company's properties are subject to royalties, overriding
royalties, carried and other similar interests, contractual arrangements, liens
incident to operating agreements, liens for current taxes not yet due and other
relatively minor encumbrances, all of which are customary in the oil and gas
industry.

ESTIMATED NET QUANTITIES OF PROVED OIL AND GAS RESERVES

The Company relies upon estimates of approximately one-half (1/2) of its
reserves derived by a petroleum engineer, Donald L. Oliver, who is also a
Director and a shareholder of the Company. See Items 8 and 9 hereof. Mr.
Oliver received no compensation for his preparation of this report. The
estimate of the Company's major interest, an overriding royalty in the Saddle
Hills property in the province of Alberta, Canada, which accounts for
approximately one-half of the Company's North American reserve value, was
prepared by D. L. Paddock & Associates, an independent reservoir engineering
firm.

No estimates of total proved net oil or gas reserves have been filed with or
included in reports to any other federal authority or agency since the beginning
of the fiscal year.

PRODUCTION, AVERAGE SALES PRICES AND AVERAGE PRODUCTION COSTS PER UNIT

The following table sets forth the Company's oil and gas production (net of all
royalties, overriding royalties and other outstanding interests of others),
average sales prices, production costs and depreciation, depletion and
amortization on a per equivalent unit of production basis for the fiscal years
ended March 31, 1996, 1995 and 1994, respectively:

For the Years Ended March 31,
--------------------------------------
1996 1995 1994
-------- --------- --------

Production:
Oil (Bbls) 1,017 877 2,612
Gas (Mcfs) 25,868 33,403 59,545

Average Sales Prices:
Oil (per Bbl) $ 16.08 $ 15.16 $ 23.15
Gas (per Mcf) $ 1.09 $ 1.83 $ 1.29

Average Sales Price of Oil
and Gas Per Net Equivalent
Barrel of Oil ("NEB") $ 8.34 $ 11.52 $ 10.90

Average Production Costs
(including Windfall Profit
Taxes) Per NEB $ 1.01 $ 3.37 $ 9.09

Average Depreciation, Depletion
and Amortization Per NEB $ 4.94 $ 4.94 $ 6.45

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DEVELOPED ACREAGE AND PRODUCTIVE OIL AND GAS WELLS

The following table sets forth the developed acreage and productive wells, both
with respect to only those wells which would be deemed commercial by a non-
operator, in which the Company owned a leasehold or overriding royalty interest
of material value and which it included in its reserve report as of March 31,
1996:

Developed Acres(1) Productive Wells(2)
------------------ ---------------------------
Gross Net(3) Gross Net(4)
----- ------ ----- ------
Gas Oil(5) Gas Oil
--- ------ --- ---
Alberta, Canada 1,920 40 3 - .0625 -
California 640 24 1 - .0375 -
Colorado 1,280 64 32 - .1588 -
Kansas 2,160 123 3 2 .1813 .0698
Texas 40 2 1 - .0047 -
----- --- -- - ----- -----
6,040 253 40 2 .4448 .0698
----- --- -- - ----- -----
----- --- -- - ----- -----

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

(1) Acreage spaced or assignable to productive wells; an acre in which a
working interest or an overriding royalty interest is owned.

(2) Wells either producing or capable of production in commercial quantities at
current prices; a well in which a working interest or an overriding royalty
interest is owned. The number of gross wells is the total number of wells
in which such interests are owned, with a designated unit counted as only
one well.

(3) When the sum of fractional working interests or overriding royalty
interests in gross acres equals one, then a net acre is deemed to exist.
The number of net acres is the sum of all the fractional working interests
or overriding royalty interests owned in gross acres expressed as whole
numbers and fractions thereof.

(4) When the sum of fractional working interests or overriding royalty
interests owned in gross wells equals one, then a net well is deemed to
exist. The number of net wells is the sum of all the fractional working
interests and overriding royalty interests owned in gross wells expressed
as whole numbers and fractions thereof.

(5) If a well produces both oil and gas, then it is classified as to the
predominant hydrocarbon.

EXPLORATORY ACREAGE

Except for those concessions held by SOTAMO, of which the Company is an indirect
owner, the Company's exploratory acreage is not considered to be of material
value as of March 31, 1996. As discussed in Item 1 "Description of Business,"
the Company is a co-applicant for a 15% interest in a concession in the Tamtsag
Basin of Mongolia, known as Contract Area XX.

OVERRIDING ROYALTY AND MINERAL INTERESTS IN UNDEVELOPED ACREAGE

The Company's mineral or overriding royalty interests in undeveloped acreage are
not considered to be of material value at March 31,1996.

DRILLING ACTIVITY

Except in those wells drilled by SOTAMO and any seismic costs incurred by
SOTAMO, of which the Company has an indirect ownership interest and for which
the Company is obligated to pay its share by means of Mandatory

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Loan Obligations (see Item 6 "Management's Discussion and Analysis or Plan of
Operation - Plan of Operation"), the Company has not participated in any
exploratory or development wells of any material value or expenditure as a
working interest owner during the fiscal years ended March 31, 1994, 1995 and
1996. In North America, the Company may own overriding royalty or mineral
royalty interests in wells drilled or recompleted by others. However, the
Company has no control over such activity, since such interests represent
passive ownership with no exposure to drilling costs. Any value added by such
activities and attributable to such interests is not expected to be material to
the Company.

PRESENT ACTIVITIES

The focus of the Company is international exploration and production
opportunities, particularly in Mongolia. In its North American operations, the
cost or potential results of such activities are not expected to be material to
the Company. For further discussion of the Company's present activities in
Mongolia, see Item 1 "Description of Business - Business Development -
Transactions Relating to SOTAMO."

Item 3. LEGAL PROCEEDINGS.

TRI Mongolia, Inc. ("TRM"), a subsidiary of Territorial, is a named defendant in
an action styled, LEO METCALF, III VS. AMGOL, INC., SOCO INTERNATIONAL, INC.,
EAIT, CP&G CO., ET AL, cause no. 94-29503, in the 113th Judicial District Court
of Harris County, Texas (the "Metcalf Lawsuit"). The plaintiff in the Metcalf
Lawsuit, a former director of Amgol, Inc., has requested certain amounts be
awarded to him based on alleged damages suffered as a result of transactions
entered into by Amgol without his approval and without Amgol contemporaneously
acquiring and paying for certain interests the plaintiff claims to have owned.
TRM has been named as a defendant, according to the lawsuit, as a result of its
ownership interest in SOTAMO (which was owned by TRM's predecessor in interest
at the time the alleged damages were suffered).

Each of the shareholders from whom Territorial acquired TRM have granted certain
limited indemnification rights in favor of Territorial in the event TRM or
Territorial is held liable under the Metcalf Lawsuit. Such shareholders have
also pledged certain of the shares of Territorial common stock received by them
in connection with such acquisition, in order to secure such indemnification
obligations.

On July 1, 1996, SOCO International, Inc., a codefendant in this lawsuit,
obtained a summary judgment confirming that SOCO was not liable for damages
allegedly suffered by the plaintiff as a result of SOCO's ownership in SOTAMO.
The Company intends to file for a similar judgment in the near future.

Although it is impossible at this time to predict the outcome of the Metcalf
Lawsuit (which is currently scheduled for trial in October 1996), the Company
believes TRM is not liable, in whole or in part, for the claims made in the
Metcalf Lawsuit and that the Metcalf Lawsuit will not have a material adverse
effect on the Company's assets or financial condition. The Company intends to
vigorously pursue the defense of the Metcalf Lawsuit.

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

No matter was submitted during the fourth quarter of the fiscal year covered by
this report to a vote of the Company's security holders.

PART II

Item 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

The Common Stock is traded in the over-the-counter market on the Electronic
Bulletin Board and is carried in the "pink sheets." The following table sets
forth the range of high and low closing bid prices of the Common Stock for the
two most recent fiscal years. These prices are believed to be representative
inter-dealer quotations, without retail markup, markdown or commissions, and may
not necessarily represent actual transactions. Although

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$0.01 is used as the low and high bid for fiscal 1995, at various times during
fiscal 1995 no bid may actually have been provided by any market maker in the
common stock of the Registrant.
BID PRICE
---------------
HIGH LOW
---- ---
Fiscal 1995
- -----------
First Quarter $0.01 $0.01
Second Quarter 0.01 0.01
Third Quarter 0.01 0.01
Fourth Quarter (March 31, 1995) 0.25 0.01

Fiscal 1996
- -----------
First Quarter $0.25 $0.0625
Second Quarter 0.0625 0.0625
Third Quarter 1.125 0.0625
Fourth Quarter (March 31, 1996) 0.875 0.0625

The approximate number of stockholders of record of Common Stock as of June 19,
1995 was 2,676. The Company has not paid any dividends on its Common Stock and
does not expect to do so in the foreseeable future.

Item 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.

PLAN OF OPERATIONS

During the fiscal year ending March 31, 1996, the Company intends to concentrate
its activities on obtaining foreign concession rights and actively pursuing
their development, with Mongolia presently being its focus. The Company will
attempt to obtain outside capital on a joint venture basis to share the risk of
such development with other operators engaged in the oil and gas business, and
may attempt to obtain any required capital for these activities and for
Mandatory Loan Obligations (as described below) through the sale of: direct or
indirect interests in its projects; its securities; its remaining North American
assets and, when appropriate, through borrowing. There is no assurance that
such capital will be obtained.

The Company currently is committed to fund mandatory loan obligations for its
share of costs related to its ownership in SOTAMO, ("Mandatory Loan
Obligations"). The costs which may be funded by Mandatory Loan Obligations
include, among other things, the drilling, completion and testing of wells,
training commitments and SOTAMO overhead. In the event the Company does not pay
its share of Mandatory Loan Obligations, under the terms of the SOTAMO
Stockholders Agreement, the Company will be required to forfeit its SOTAMO
shares. The Company's share of Mandatory Loan Obligations for fiscal 1997 are
estimated to be $850,000 and there can be no assurance that the Company will be
able to obtain the funds required for Mandatory Loan Obligations.

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

LIQUIDITY AND CAPITAL RESOURCES. The Company's cash balances decreased during
the past fiscal year primarily as a result of (1) cash used in operating
activities and (2) Mandatory Loan Obligation payments. Working capital became
negative due to accrued liabilities, which primarily consisted of Mandatory Loan
Obligations. To obtain cash the Company continued to sell certain of its
domestic oil and gas interests. Also, to raise additional cash required in
order to continue to fund the Mandatory Loan Obligation, on March 31, 1996, the
Company entered into an Option Agreement (the "Option") with its largest
shareholder, Asia Energy Ltd. ("AEL"). The Option, which was revised by letter
dated April 27, 1996, gives AEL the right to buy up to 29 of the 119 shares of
SOTAMO owned by the Company at a per share price of $50,000. The Option expires
July 31, 1996, unless otherwise extended. AEL paid the Company $20,000 in
consideration for the granting of the Option. On May 9, 1996, AEL purchased
five SOTAMO shares from the Company for $250,000 cash, which has been paid in
full.

On March 29, 1996, the Company issued 5,450,000 shares of its common stock, a
portion of which were acquired by William C. Penttila, in exchange for certain
additional interests in SOTAMO. See Item 12 "Certain Relationships and Related
Transactions." Other than professional fees incurred in connection therewith,
such acquisition did not require any cash outlay by the Company.

<PAGE>

RESULTS OF OPERATIONS. Revenues from the sale of oil and gas were $39,000,
$77,000 and $137,000 for the fiscal years ended March 31, 1996, 1995 and 1994,
respectively. The decrease in sales between 1995 and 1996 was due to the
property sales and declining production. The decrease in sales between 1994 and
1995 was also primarily due to property sales and declining production.

Oil and gas operating expenses were $7,000, $24,000, and $114,000 for the fiscal
years ended March 31, 1996, 1995 and 1994, respectively. The decline from 1994
through 1996 was due to the reduction of total wells from sale of properties,
and that most remaining properties were overriding royalty interests, which have
extremely low operating costs.

Depreciation, depletion and amortization expenses of oil and gas property and
equipment were $26,000, $31,000, and $81,000 for the fiscal years ended March
31, 1996, 1995, and 1994, respectively. The decrease between 1994 through 1996
was the result of the reduction in total reserves resulting from property sales,
and the corresponding decline in production. The write down of oil and gas
properties in 1995 and 1994, totalling $79,000 and $241,000, respectively, was
the result of the carrying value of the Company's oil and gas properties
exceeding the ceiling limitation. There was no writedown in fiscal 1996.

The Company disposed of several of its major domestic properties during fiscal
1995 and more during fiscal 1996, using the proceeds to retire debt and
accumulate cash for its Mongolian activities.

General and administrative expenses were $64,000, $88,000 and $128,000 for the
fiscal years ended March 31, 1996, 1995, and 1994, respectively. The decrease
from 1994 to 1996 was due to reduced accounting and administrative costs and the
Company eliminating a paid President's position during fiscal 1994. Legal and
accounting fees related to the above acquisition and divestitures partially
offset these reduced costs by adding to general and administrative expenses
during fiscal 1995 and 1996.

Item 7. FINANCIAL STATEMENTS.

The Financial Statements are presented beginning on page 19 of this Report.

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

None.

<PAGE>

PART III

Item 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.

Name Age Position with Company
- -------------------- --- --------------------------------

Daniel A. Mercier 41 Chairman of the Board, Director
and Chief Executive Officer

William C. Penttila 62 President,
Chief Operating Officer and Director

Douglas N. Baker 42 Vice President Finance and Chief
Financial Officer

Dennis M. Buck 50 Vice President Exploration

Donald L. Oliver 53 Director and Member of Audit
and Special Committees

A. Andrew Davis 55 Director and Member of Special
Committee

Edward T. Story, Jr. 52 Director and Member of Audit
and Special Committees

Richard A. N. Bonnycastle 61 Director and Member of Audit
Committee

All directors of the Company hold office until the next annual meeting of
shareholders of the Company or until their successors are duly elected and
qualified. There are currently two committees of the Board of Directors: a
Special Committee, relating to the proposed business combination with AEL (see
Item 1 "Description of Business - Business Development - Transactions Relating
to SOTAMO"), and an Audit Committee. Executive officers hold office at the
pleasure of the Board of Directors.

PRINCIPAL OCCUPATION AND BUSINESS EXPERIENCE

DANIEL A. MERCIER, who became a Director of the Company in 1995 and became its
Chairman of the Board and Chief Executive Office on June 20, 1996, has been
President and Chairman of Asia Energy Ltd. ("AEL"), a private oil and gas
company since its inception in December 1995. Mr. Mercier was President, Chief
Executive Officer and a Director of Canadian Conquest Exploration Inc., a
publicly held Canadian oil and gas company listed on the Toronto Stock Exchange,
until November 30, 1995. He resigned as an officer of Canadian Conquest as part
of a refinancing, but remains a Director. Mr. Mercier is a mechanical engineer
with over twenty years of experience in the oil and gas industry in Canada and
the United States.

WILLIAM C. PENTTILA, who became a Director of the Company in 1995 and became its
President and Chief Operating Officer on June 20, 1996, is President of
Exploration Associates, Inc., a company of which he has been an officer since
1989. He was a consultant between 1984 and 1989, and held management positions
at Weeks Petroleum, and affiliates from 1980 to 1984. He held various technical
positions at ARCO and its predecessors from 1962 until 1980. He holds both
Geological Engineering and Master of Science degrees from the Colorado School of
Mines.

<PAGE>

DOUGLAS N. BAKER joined the Company as Vice President Finance and Chief
Financial Officer on June 20, 1996. Mr. Baker is also Vice President Finance
and Chief Financial Officer of AEL. Mr. Baker has over 13 years of experience
in senior financial positions with Canadian public oil and gas companies. From
November 1993 to March 1996, Mr. Baker served as Vice President Finance and
Chief Financial Officer of Chancellor Energy Resources Inc. From February 1991
to August 1993, Mr. Baker served as Vice President Finance and Corporate
Secretary for American Eagle Petroleum Ltd. Prior thereto Mr. Baker was Vice
President Finance of Canadian Conquest Exploration Inc.

DENNIS M. BUCK, who became a Vice President Exploration of the Company on June
20, 1996, is Executive Vice President of Exploration Associates, Inc. and one of
its original founders in 1984. Mr. Buck was Chief Geophysicist for Weeks
Petroleum from March 1981 to June 1984. From March 1977 to March 1981, Mr. Buck
was Division Geophysicist for American Petrofina. Prior thereto he held various
technical positions with Amoco, Texas Crude and Mitchell Energy. Mr. Buck has a
B.S. Degree in Geology from the New Mexico Institute of Mining and Technology.

DONALD L. OLIVER joined the Company as President and Director on December 1,
1987 and served as President until November 1994. He spent fifteen years with
Cities Service Company, where he held various engineering and managerial
positions in exploration and production. Subsequently, he held the positions of
Vice President and General Manager of the Texas division for Bawden Drilling and
Vice President of Operations for Conquest Exploration Company.

A. ANDREW DAVIS was Chairman of the Board of the Company from December 1, 1987
until June 20, 1996. He has extensive experience in a number of business areas
and is a qualified Barrister-at-Law in Australia. He is also Chairman and a
Director of Approved Securities Corporation Ltd., and Ormil Resources, Ltd.

EDWARD T. STORY, JR. became a Director of the Company in 1992. Mr. Story has,
since its formation in 1991, been President and Chief Executive Officer of SOCO
International, Inc., a wholly-owned subsidiary of Snyder Oil Corporation, which
is engaged in international oil and gas operations. Mr. Story was a director
and the Vice Chairman and Chief Financial Officer of Conquest Exploration
Company from its formation in August 1981 until August 1990, and was the Chief
Financial Officer of Superior Oil Company prior thereto. Mr. Story is a
director of First Banks, Inc., Snyder Oil Corporation, New Concept Technologies
International Ltd., Command Petroleum Holdings NL, Holland Sea Search Holdings
N. V., Hallwood Realty Partners, L. P., and Hi - LO Automotive.

RICHARD A. N. BONNYCASTLE, who became a Director of the Company on June 20,
1996, is Chairman and President of Harvest Fund Inc., an investment banking
company, Chairman and President of Patheon Inc., a public-traded Canadian
pharmaceuticals custom manufacturing and packaging company and Chairman and
President of Cavendish Investing Ltd., a private investment company. Mr.
Bonnycastle is also a Director of AEL. Mr. Bonnycastle serves on the Boards of
a number of other publicly listed companies.

Based solely upon a review of Forms 3 and 4 and amendments thereto furnished to
the registrant under Rule 16a-3(d) during its most recent fiscal year and Form 5
and amendments thereto furnished to the registrant with respect to its most
recent fiscal year, the Company (a) is aware that AEL and Mr. Mercier each late
filed a Form 3 with the Company and (b) does not know of any other officer,
director or beneficial owner of more than 10 percent of its Common Stock who has
failed to file on a timely basis reports required by Section 16(a) during the
most recent fiscal year or prior years.

<PAGE>

Item 10. EXECUTIVE COMPENSATION.

SUMMARY COMPENSATION TABLE

Annual Compensation
----------------------------
Fiscal Long-Term
Year Salary Bonus Compensation
------ -------- ----- ------------
Don L Oliver (1) 1996 0 0 0
President 1995 0 0 0
1994 47,600 0 0

Brian A. Lingard (2) 1996 0 0 0
President 1995 0 0 0

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

(1) Mr. Oliver resigned as President of the Company in
November, 1994.

(2) Mr. Lingard was elected President of the Company effective
November, 1994.
Mr. Lingard resigned as President and as a Director of the
Company on June 20, 1996.

Other than reimbursement for the cost of attending meetings, the Company's
directors receive no compensation for services as directors.

<PAGE>

Item 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS

The following table sets forth certain information concerning each person
known by the Company to own beneficially more than 5% of the outstanding
shares of common stock (Common Stock") of the Company as of July 10, 1996.
Except as otherwise indicated, the persons listed below have sole voting
power and investment power over the shares beneficially held by them.

Amount and Nature
Name and Address of Beneficial Percent
of Beneficial Owner Owner of Class(1)
- ------------------- ------------------ -----------

A. Andrew Davis 1,982,555(2) 7.58

Edward T. Story, Jr. 1,413,182 5.40
1100 Louisiana Street
Houston, Texas 77002

Brian A. Lingard 3,592,418(3) 13.73
450 N. Sam Houston Parkway E.
Suite 140
Houston, Texas 77060

Dennis M. Buck 1,979,763(4) 7.54
450 N. Sam Houston Parkway E.
Suite 140
Houston, Texas 77060

William C. Penttila 1,979,763(4) 7.54
450 N. Sam Houston Parkway E.
Suite 140
Houston, Texas 77060

Michael C. Nemec 1,842,348 7.04
The Phoenix Resource Companies
6525 N. Meridian Avenue
Oklahoma City, Oklahoma 77116

Asia Energy Ltd. 5,300,000(5) 20.26
333 5 Ave S.W., Suite 950
Calgary, Alberta
Canada T2P 3B6

- ------------------------
(1) Based upon 26,160,656 shares outstanding as of July 10, 1996.

(2) Consists of 1,179,423 shares either owned by Mr. Davis or by companies
controlled by him, with the remaining 803,132 shares owned by three sisters
of Mr. Davis but with voting proxy held by him.

(3) Includes 100,000 shares held by Mr. Lingard's fiancee and 100,000 shares
owned by his minor son with Mr. Lingard named as custodian. Mr. Lingard
disclaims beneficial ownership of these 200,000 shares.

(4) Includes options to acquire 90,000 shares. Does not include options to
acquire 180,000 shares that commence vesting in 1997.

(5) See footnotes 5, 6 and 7 to table below.

<PAGE>

SECURITY OWNERSHIP OF MANAGEMENT

The table below sets forth the beneficial ownership of shares of Common Stock
as of July 10, 1996, by the Company's directors and by all directors and
officers of the Company as a group and the percent of class represented by
the shares of Common Stock beneficially owned by each person or group.

Amount and Nature
Name of of Beneficial Percent
Beneficial Owner Owner (1) of Class(2)
- ------------------- ------------------ -----------
A. Andrew Davis 1,982,555(3) 7.58

Edward T. Story, Jr. 1,413,182 5.40

Donald L. Oliver 1,099,385 4.20

William C. Penttila 1,979,763(4) 7.54

Dennis M. Buck 1,979,763(4) 7.54

Daniel A. Mercier 5,390,000(5) 20.60

R.A.N. Bonnycastle 5,300,000(6) 20.26

Douglas N. Baker 5,333,333(7) 19.24

Directors and Officers
as a Group 13,877,981 52.49

- ------------------------
(1) The information as to beneficial ownership has been furnished by the
respective persons. Unless otherwise specified, each person or group has
sole voting and investment power with respect to the shares, except with
respect to the shares identified above relating to Messrs. Mercier,
Bonnycastle and Baker. See footnotes below.

(2) Based upon 26,160,656 shares outstanding as of July 10, 1996.

(3) Consists of 1,179,423 shares either owned by Mr. Davis or by entities
controlled by him, with the remaining 803,132 shares owned by three sisters
of Mr. Davis but with voting proxy held by him.

(4) Includes options to acquire 90,000 shares. Does not include options to
acquire 180,000 shares that commence vesting in 1997.

(5) All other shares reported are owned by AEL. Mr. Mercier is a Director and
the President of AEL and (together with shares held by his wife) owns
approximately 9.0% of the outstanding shares of capital stock of AEL. Mr.
Mercier's father and siblings own an additional 10.3% of the outstanding
shares of capital stock of AEL. Mr. Mercier disclaims beneficial ownership
of all shares of capital stock of AEL owned by his father and siblings, and
all shares of Territorial common stock owned by AEL.

<PAGE>

(FOOTNOTES CONTINUED)

(6) All shares reported are owned by AEL. Mr. Bonnycastle is a Director of AEL
and owns approximately 11.4% of the outstanding shares of capital stock of
AEL. Mr. Bonnycastle disclaims beneficial ownership of all shares of
Territorial common stock owned by AEL.

(7) Includes options to acquire 33,333 shares. Does not include options to
acquire 66,667 shares that commence vesting in 1997. All other shares
reported are owned by AEL. Mr. Baker is the Vice President Finance and
Chief Financial Officer of AEL and (together with shares held by his wife)
owns approximately 1.7% of the outstanding shares of capital stock of AEL.
Mr. Baker disclaims beneficial ownership of all shares of Territorial
common stock owned by AEL.

Item 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

INDEBTEDNESS OF MANAGEMENT

No director or officer of the Company, nominee for election as a director, or
any associate of any such director, officer or nominee was indebted to the
Company or its subsidiary at any time since the beginning of the Company's last
fiscal year.

TRANSACTIONS WITH SHAREHOLDERS AND MANAGEMENT

On September 30, 1994, certain shareholders agreed to convert principal and
interest on debt owed them into common stock of the Company. This resulted in
the issuance of 700,000 additional common shares, and the reclassification of
$48,471 of debt to common stock and additional paid-in capital as of September
30, 1994.

On February 7, 1995, the Company acquired a 4% reversionary working interest in
Brazos Block 398 in the Gulf of Mexico (the "Block") from two directors, Brian
A. Lingard and Edward T. Story, Jr., in exchange for the issuance of 4,331,250
and 618,750 shares, respectively, of the Company's common stock. This interest
had significant potential based upon enhancement work which was to be undertaken
by the operator, Falcon Seaboard Oil Company. This work was subsequently
completed and has been unsuccessful. Lingard and Story agreed to serve as
President of, and as a Consultant to, the Company, respectively, without
compensation through March 31, 1996.

On March 29, 1996, the Company acquired an additional 12% interest in SOTAMO in
exchange for the issuance of 5,450,000 shares of the Company's Common Stock.
The acquisition of this interest was consummated through the acquisition by the
Company of a privately held corporation, of which each of William C. Penttila
and Dennis M. Buck was a Director, officer and a significant shareholder. Each
of Messrs. Penttila and Buck received 1,589,583 shares of Territorial common
stock in connection therewith. At the time of the transaction, Mr. Penttila was
a Director of the Company. Subsequent to such transaction, Mr. Penttila also
became the President and Chief Operating Officer of the Company and Mr. Buck
became Vice President Exploration of the Company.

On March 31, 1996, the Company entered into an Option Agreement (the "Option")
with Asia Energy Ltd., the Company's largest shareholder ("AEL"). The Option,
as amended to date, grants to AEL the right to purchase up to 29 of the 119
shares of SOTAMO owned by the Company at a per share price of $50,000. The
Option expires July 31, 1996, unless otherwise extended. AEL paid the Company
$20,000 cash in consideration for the granting of the Option. Daniel A. Mercier,
the President, a Director and a shareholder of AEL, was appointed a Director of
the Company on April 12, 1996. On May 9, 1996, AEL purchased five SOTAMO shares
from the Company for $250,000 cash, which has been paid in full. On
June 20, 1996, Mr. Mercier was appointed Chairman of the Board and Chief
Executive Officer of the Company. Messrs. Bonnycastle and Baker are also
affiliates of AEL. See Item 11 "Security Ownership of Certain Beneficial
Owners and Management."

On June 20, 1996, the Board of Directors of the Company (with Mr. Mercier
abstaining from voting) approved, in principle, the concept of a business
combination with AEL. For a description of this proposed transaction, see
Item 1 "Description of Business - Business Development - Transactions Relating
to SOTAMO."

<PAGE>

On June 20, 1996, the Board of Directors approved the granting of options to
acquire the following numbers of shares of Territorial common stock to the
persons identified below:

William C. Penttila 270,000
Dennis M. Buck 270,000
Daniel A. Mercier 270,000
Douglas N. Baker 100,000
Lois S. Milard 30,000
Dawna Allinson 30,000
Stephen Gray 30,000
---------
1,000,000

The options vest as to one-third immediately, one-third on the first anniversary
date and one-third on the second anniversary date in all cases except Mr. Gray's
which vest immediately. The options are exercisable at $0.30 per share.

<PAGE>

PART IV

Item 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.

(a) The following documents are filed as a part of this report:

1. FINANCIAL STATEMENTS. The financial statements of Territorial
Resources, Inc., and the related report of independent accountants
are provided at page 19 of this Report and are incorporated herein
by reference.

2. EXHIBITS.

10.3 SOCO Tamtsag Mongolia, Inc. share acquisition and related
agreements, including agreements to purchase Territorial
Resources, Inc. warrants, by and between the Company and
Exploration Associates, L.L.C. and MP Holdings Limited, dated
March 31, 1995. (Exhibit 2 to Report on 8-K dated March 31,
1995.)

10.4 Agreement between the Company and Canadian Conquest Exploration,
Inc., concerning Saddle Hills property acquisition and
Territorial Resources, Inc. share issuance, dated March 31, 1995.
(Exhibit 1 to Report on 8-K dated March 31, 1995.)

10.5 Plan and Agreement of Reorganization, dated as of March 12, 1996,
by and among William C. Penttila, Dennis M. Buck, Michael C.
Nemec, Thomas B. Patrick and the Company (Exhibit 2.0 to Report
on Form 8-K dated March 29, 1996.)

10.6 Option Agreement, dated March 1, 1996, by and between Asia Energy
Ltd. and the Company (Exhibit 10.1 to Report on 8-K dated March
29, 1996.)

21 Subsidiaries*

23.1 Consent of Donald L. Oliver, Reserve Engineer*

23.2 Consent of DL Paddock & Associates Ltd.*

27 Financial Data Schedule*

- ---------------
*Filed with this Report.

(b) Reports on Form 8-K and 8-K/A:

Report on Form 8-K dated March 29, 1996, reporting the acquisition of
TRI Mongolia, Inc., as amended by Form 8-k/A-1 thereto.

<PAGE>

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Report to be signed on behalf
by the undersigned, thereunto duly authorized.

TERRITORIAL RESOURCES, INC.

July 12, 1996 By:/s/ Daniel A. Mercier
-------------------------------
Daniel A. Mercier, Chairman of the
Board and Chief Executive Officer

July 12, 1996 By:/s/ Douglas N. Baker
-----------------------------------
Principal and Accounting Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.

July 12, 1996 By:/s/ Andrew Davis
-------------------------------
Andrew Davis
Director

July 12, 1996 By:/s/ Donald L. Oliver
-------------------------------
Donald L. Oliver
Director

July 12, 1996 By:/s/ Edward T. Story, Jr.
-------------------------------
Edward T. Story, Jr.
Director

July 12, 1996 By:/s/ William C. Penttila
-------------------------------
William C. Penttila
Director

July 12, 1996 By:/s/ Daniel A. Mercier
-------------------------------
Daniel A. Mercier
Director

July 12, 1996 By:/s/ Richard A. N. Bonnycastle
-------------------------------
Richard A. N. Bonnycastle
Director

<PAGE>

INDEX TO FINANCIAL STATEMENTS AND SCHEDULES

Page

Independent Auditor's Report
20

Balance Sheets as of March 31, 1996 and 1995 21

Statements of Operations for the Years Ended
March 31, 1996, 1995, and 1994 23

Statement of Changes in Stockholders' Equity
for the Years Ended March 31, 1996, 1995, and 1994 24

Statements of Cash Flows for the Years Ended
March 31, 1996, 1995, and 1994 25

Notes to Financial Statements 26 - 30

<PAGE>

INDEPENDENT AUDITOR'S REPORT

Board of Directors and Stockholders
Territorial Resources, Inc.

We have audited the accompanying consolidated balance sheets of Territorial
Resources, Inc. and subsidiary as of March 31, 1996 and 1995, and the related
statements of operations, changes in stockholders' equity and cash flows for
each of the years in the three-year period ended March 31, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

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

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Territorial
Resources, Inc. and subsidiary as of March 31, 1996 and 1995, and the results of
its operations and its cash flows for each of the years in the three-year period
ended March 31, 1996, in conformity with generally accepted accounting
principles.

The Company's primary asset is an investment in SOCO Tamtsag Mongolia, Inc.
which is a company engaged in oil and gas exploration in Mongolia. SOCO Tamtsag
Mongolia, Inc. has not yet discovered any proved reserves in Mongolia (see also
discussion of Mandatory Loan Obligations in Note 10).

HEIN + ASSOCIATES, LLP
Houston, Texas

June 17, 1996

<PAGE>

TERRITORIAL RESOURCES, INC.
CONSOLIDATED BALANCE SHEETS
March 31, 1996 and 1995

ASSETS
(in thousands, except share amounts)

1996 1995
-------- --------

CURRENT ASSETS:
Cash $ 39 $ 50
---------- ----------
Accounts receivable:
Oil and gas receivables 10 17
Other, less allowance for
doubtful accounts of $4,000
at March 31, 1995. - 5
---------- ----------
10 22
---------- ----------

Total Current Assets 49 72
---------- ----------

NOTE RECEIVABLE (Note 4) 10 -
---------- ----------

INVESTMENT IN SOCO TAMTSAG
MONGOLIA, INC. (Note 2) 1,744 128
---------- ----------

PROPERTY AND EQUIPMENT, at cost:
Oil and gas, properties,
full cost method 7,934 7,975
Less: Accumulated depreciation,
depletion,impairment and
amortization (7,792) (7,766)
---------- ----------

142 209
---------- ----------

TOTAL ASSETS $1,945 $ 409
---------- ----------
---------- ----------

See accompanying notes to consolidated financial statements.

<PAGE>

TERRITORIAL RESOURCES, INC.
CONSOLIDATED BALANCE SHEETS -- continued
March 31, 1996 and 1995

LIABILITIES AND STOCKHOLDERS' EQUITY
(in thousands, except share amounts)

1996 1995
------ ------

CURRENT LIABILITIES:
Accounts payable $ 15 $ 19
Accrued liabilities and other 49 4
---------- ----------

Total current liabilities 64 23
---------- ----------

COMMITMENTS AND CONTINGENCIES
(Notes 9 and 10)

TOTAL LIABILITIES 64 23
---------- ----------

STOCKHOLDERS' EQUITY (Notes 3 and 7):
Preferred stock, $0.10 par value;
non-voting; non-cumulative;
1,437,500 shares authorized;
none outstanding - -

Common stock, no par value, $.001
stated value; 30,000,000 shares
authorized; 26,066,112 and
11,791,112 shares issued in 1996
1995, respectively 26 12
Stock subscriptions to acquire
8,785,008 shares of common stock - 9
Additional paid-in capital 5,399 3,853
Accumulated deficit, $5,121 deficit
eliminated in quasi-reorganization
effective March 31, 1986 (3,527) (3,471)
Treasury stock, 5,456 shares, at cost (17) (17)
---------- ----------

TOTAL STOCKHOLDERS' EQUITY 1,881 386
---------- ----------

TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $1,945 $ 409
---------- ----------
---------- ----------

See accompanying notes to consolidated financial statements.

<PAGE>

TERRITORIAL RESOURCES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED MARCH 31, 1996, 1995 AND 1994

(in thousands, except per share amounts)

1996 1995 1994
---- ---- ----

REVENUES:
Oil and gas sales $ 39 $ 77 $ 137
Interest and other income 2 - -
---------- ---------- ----------

41 77 137
---------- ---------- ----------

COSTS AND EXPENSES:
Oil and gas production 7 24 114
Depreciation, depletion and
amortization 26 31 81
Write down of oil and gas properties - 79 241
General and administrative 64 88 128
Interest - - 4
---------- ---------- ----------

97 222 568
---------- ---------- ----------

NET LOSS $ (56) $ (145) $ (431)
---------- ---------- ----------
---------- ---------- ----------

Net Loss per share $ (.003) $ (.01) $ (.04)
---------- ---------- ----------

WEIGHTED AVERAGE SHARES OUTSTANDING$ 20,591 12,868* 11,791
---------- ---------- ----------
---------- ---------- ----------

See accompanying notes to consolidated financial statements.

* Stock subscriptions issued were treated as outstanding common stock for
purposes of computing the weighted average shares outstanding.

<PAGE>

TERRITORIAL RESOURCES, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED MARCH 31, 1996, 1995 AND 1994
(in thousands, except share amounts)

Additional Accumu- Treasury
Common Stock Stock Subscriptions Paid-In lated Stock
-----------------------------------------
Shares Amount Shares Amount Capital Deficit Amount
--------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at
April 1, 1994 11,741,112 $ 12 - - $ 3,589 $(2,895) $ (17)
--------------------------------------------------------------------------

Stock warrants
exercised 50,000 - - - - - -

Net Loss - - - - - (431) -
--------------------------------------------------------------------------

Balance at
March 31, 1994 11,791,112 12 - - 3,589 (3,326) (17)
--------------------------------------------------------------------------
--------------------------------------------------------------------------

Shares issued to
acquire assets - - 7,950,000 8 216 - -

Debt converted to
common stock - - 700,000 1 48 - -

Stock warrants
exercised - - 150,000 - 1 - -

Shares acquired from
former officer - - (25,000) - - (1) -

Shares issued as
compensation to
officer - - 10,000 - - - -

Net loss - - - - - (145) -
--------------------------------------------------------------------------

Balance at
March 31, 1995 11,791,112 12 8,785,000 9 3,853 (3,471) (17)
--------------------------------------------------------------------------
--------------------------------------------------------------------------

Stock issued for
stock subscriptions 8,785,000 9 (8,785,000) (9) - - -

Shares issued to
acquire TRI
Mongolia 5,450,000 5 - - 1,545 - -

Shares issued as
compensation to
officer, director and
other third parties 43,000 - - - 3 - -

Shares cancelled as
proceeds for
Account Receivable (3,000) - - - - - -

Net loss - - - - - (56) -
--------------------------------------------------------------------------

Balance at
March 31, 1996 26,066,112 $26 0 $0 $5,399 $(3,527) $(17)
--------------------------------------------------------------------------
--------------------------------------------------------------------------

</TABLE>

See accompanying notes to consolidated financial statements.

<PAGE>

TERRITORIAL RESOURCES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31, 1996, 1995 AND 1994
(in thousands)

1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (56) $ (145) $ (431)
Adjustments to reconcile net loss
to cash used by operations:
Provision for doubtful accounts - 4 -
Depreciation, depletion
and amortization 26 31 81
Write down of oil and gas properties - 79 241
Changes in operating assets
and liabilities:
Accounts receivable 14 (4) 35
Other current assets - 7 -
Accounts payable (4) 14 21
Accrued liabilities and other (3) (8) 4
-------- -------- --------

Cash used by operating activities (23) (22) (49)
-------- -------- --------

CASH FLOWS FROM INVESTMENT ACTIVITIES:
Additions to investment in SOCO Tamtsag Mongolia, Inc. (38) (3) -
Proceeds from the sale of option to acquire SOCO
Tamtsag Mongolia, Inc. stock 20 - -
Additions to property and equipment - (5) -
Proceeds from sales of property 30 79 53
-------- -------- --------

Cash provided by investment activities 12 71 53
-------- -------- --------

CASH FLOWS FROM FINANCING ACTIVITIES:
Advances from stockholders - - 4
Repayment of debt - - (22)
-------- -------- --------

Cash used by financing activities - - (18)
-------- -------- --------

Increase (decrease) in cash (11) 49 (14)
Cash - beginning of year 50 1 15
-------- -------- --------
Cash - end of year $ 39 $ 50 $ 1
-------- -------- --------
-------- -------- --------

SUPPLEMENTAL CASH FLOW INFORMATION:

Acquisition of oil and gas properties
with common stock (subscribed at March 31, 1995) $ - $ 100 $ -
Acquisition of interest in SOCO
Tamtsag Mongolia, Inc. in
exchange for common stock 1,550 125 -
Conversion of debt to common stock - 48 -
Assignment of oil and gas properties
in settlement of liabilities - 65 -
Collection of account receivable in exchange for
cancellation of common stock 2 - -
Note receivable received upon sale of oil and gas properties 10 - -
-------- -------- --------
-------- -------- --------

</TABLE>

See accompanying notes to consolidated financial statements.

<PAGE>

TERRITORIAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1996, 1995 and 1994

1. BUSINESS

BUSINESS

Territorial Resources, Inc., formerly Egret Energy Corporation, (the Company) is
engaged in international oil and gas exploration, primarily in Mongolia.
Through its 13 percent ownership in SOCO Tamtsag Mongolia, Inc., the Company is
presently indirectly active in Mongolia. Such activity may encompass
development and possibly production as well as exploration. In addition, the
Company owns working interests, minerals and/or overriding royalty interests
primarily in the Province of Alberta, Canada and Kansas, Colorado, California,
and Texas.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

INVESTMENT IN SOCO TAMTSAG MONGOLIA, INC.

The Company accounts for its investment in SOCO Tamtsag Mongolia, Inc. under the
cost method of accounting as its investment represents a minority,
non-controlling interest of approximately 13 percent (119 shares) of the
outstanding common stock of SOCO Tamtsag Mongolia, Inc. All costs related to
this investment are capitalized. A director of Territorial is also the Managing
Director of SOCO Tamtsag Mongolia and the President of SOCO International, Inc.,
the largest shareholder of SOCO Tamtsag Mongolia. The Company's investment in
SOCO Tamtsag Mongolia Inc. is periodically reviewed for impairment in value.

OIL AND GAS OPERATIONS

The Company accounts for its oil and gas exploration and development activities
under the full cost method of accounting. Under this method, all productive and
nonproductive exploration and development costs incurred in finding oil and gas
reserves are accumulated and capitalized in cost centers. The Company has two
cost centers (the continental United States and Canada) for its oil and gas
activities. No gain or loss is recognized on the sale or disposition of a
property, except in extraordinary circumstances. Net oil and gas properties
were $142,000 and $209,000 at March 31, 1996 and 1995, respectively.
Substantially all of the Company's oil and gas properties at March 31, 1996 are
classified as proved developed reserves.

LIMITATION ON CAPITALIZED COSTS

Capitalized costs of productive and nonproductive properties in a cost center
are limited to the present value of after tax future net revenues (discounted at
10%) from estimated proved oil and gas reserves and the lower-of-cost or fair
market value of unproved properties. The Company wrote down its oil and gas
properties at March 31, 1995 and March 31, 1994 by $79,000 and $241,000
respectively , to reduce the carrying value of the properties to the limitation
described above. There was no write-down during fiscal 1996.

DEPRECIATION, DEPLETION AND AMORTIZATION

Depreciation, depletion and amortization (DD&A) of the cost of oil and gas
properties is provided on the unit-of-production method based on proved oil and
gas reserves. Gas is converted to equivalent barrels on a basis of six MCF of
gas to one barrel of oil. DD&A per equivalent barrel was $4.94, $4.94 and $6.45
for the years ended March 31, 1996, 1995 and 1994, respectively.

<PAGE>

TERRITORIAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

INCOME TAXES

The Company accounts for income taxes in accordance with Statement of Financial
Accounting Standards No. 109, Accounting for Income Taxes. Under this method,
deferred income taxes are recognized for the tax consequences of temporary
differences by applying enacted statutory tax rates applicable to future years
to differences between the financial statement and tax bases of its existing
assets and liabilities. Income tax expense or benefit represents the current
tax payable or refundable for the period plus or minus the tax effect of the net
change in the deferred tax assets and liabilities.

NET LOSS PER SHARE OF COMMON STOCK

Net loss per share of common stock was computed based on the weighted average
number of common shares outstanding. There were no common stock equivalents
outstanding in 1994, since all shares issued to a former officer were considered
vested. Stock subscriptions issued in 1995 were treated as outstanding common
stock for purposes of computing the weighted average number of common shares.
Primary and fully-diluted net loss per share were substantially the same for all
years presented. Stock warrants were outstanding for a portion of fiscal 1995
and all of fiscal 1996. These warrants were antidilutive and were therefore not
considered in determining the weighted average number of common shares
outstanding for fiscal 1995 and fiscal 1996.

3. QUASI-REORGANIZATION

On June 13, 1986, the Board of Directors resolved that a quasi-reorganization be
implemented as of March 31, 1986, for financial reporting purposes.
Accordingly, the Company transferred the deficit ($5,121,000) in retained
earnings as of March 31, 1986, to additional paid-in capital.

4. NOTE RECEIVABLE

The note receivable represents an amount due from the sale of an oil and gas
property. The note is to be repaid from a percentage of net production revenue
generated by the property for a fixed time period, and is secured by the
property.

5. INCOME TAXES

At March 31, 1996, the Company had net operating loss carry forwards (NOL'S) of
approximately $8,800,000 available to offset future taxable income. The carry
forwards expire beginning in 1996. The NOL's are limited as to usage to
approximately $32,000 per year. As of March 31, 1996, approximately $126,000 of
the NOL was available for use. The Company also has a tax credit carry forward
of $55,000. The usage of this credit is also limited.

As of March 31, 1995 and 1996, the Company's deferred tax assets exceeded its
deferred tax liabilities. A valuation allowance for the entire amount of the
excess was provided at both March 31, 1995 and 1996.

6. REVENUES - SIGNIFICANT CUSTOMERS

<PAGE>

TERRITORIAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

7. STOCKHOLDERS' EQUITY

On September 30, 1994, certain shareholders forgave the principal and interest
on debt owed the shareholders, amounting to $48,471, in exchange for 700,000
shares of the Company's common stock. The shares of common stock were issued
subsequent to March 31, 1995 and were recorded as stock subscriptions in the
accompanying balance sheet at March 31, 1995 and as shares outstanding at March
31, 1996.

On December 10, 1994, legal counsel of the Company exercised warrants to acquire
150,000 shares of the Company's common stock at $.01 per share. The shares of
common stock were issued after March 31, 1995 and were recorded as stock
subscriptions at March 31, 1995 and as shares outstanding at March 31, 1996.

On February 7, 1995, the Company acquired a 4% reversionary working interest in
Brazos Block 398 in the Gulf of Mexico (the "Block") from two directors, Brian
A. Lingard and Edward T. Story, Jr., in exchange for the issuance of 4,950,000
shares of the Company's common stock. The reversionary working interest was
recorded at zero cost because Mr. Lingard and Mr. Story had no basis in the
working interest. The shares of common stock were issued subsequent to March
31, 1995 and were recorded as stock subscriptions at March 31, 1995. Lingard
and Story served as President of, and as consultant to, the Company,
respectively, without compensation for the year ended March 31, 1996.

On March 31, 1995, the Company acquired a one percent (1%) interest in SOCO
Tamstag Mongolia, Inc. ("SOTAMO"), in exchange for the issuance of two million
shares of the Company's common stock, along with warrants to acquire two million
additional shares at $.10 per share, which expire December 31, 1996 (the
"Warrants"). Mr. Edward T. Story, Jr. is the President of SOCO International,
Inc., the largest shareholder of SOTAMO. A value of $125,000 was placed on the
investment in SOTAMO, based upon previous cash purchases of common stock of
SOTAMO. The shares of common stock were issued subsequent to March 31, 1995 and
were recorded as stock subscriptions at March 31, 1995.

On March 31, 1995, the Company acquired from Canadian Conquest Exploration, Inc.
("CCE"), an unaffiliated third party, a 2.5% gross overriding royalty interest
in the Saddle Hills producing property located in the Province of Alberta,
Canada in exchange for one million shares of the Company's common stock. The
acquisition was valued at $100,000 based upon a reserve report prepared by an
independent party. The shares of common stock were issued subsequent to March
31, 1995 and were recorded as stock subscriptions at March 31, 1995 and as
shares outstanding at March 31, 1996.

On March 31, 1995, the Company compensated its corporate secretary for services
rendered to the Company by the issuance of 10,000 shares of its common stock. A
cost of $390 was recorded for the services, based upon the fair market value of
the shares. The shares of common stock were issued subsequent to March 31, 1995
and were recorded as stock subscriptions at March 31, 1995.

On March 31, 1995, the Company settled a dispute concerning compensation for
services rendered to the Company by the former corporate secretary. 25,000
shares of its common stock previously issued to its former corporate secretary
were returned to the Company without compensation. The shares of common stock
were reacquired without compensation subsequent to March 31, 1995, and were
recorded as retired at March 31, 1995. A cost of $975 was placed on the
reacquisition of these shares, based upon the fair market value of the shares.

On March 29, 1996, the Company acquired an additional 12% interest in SOTAMO in
exchange for the issuance of 5,450,000 shares of the Company's Common Stock. A
value of $1,550,198 was placed on the additional investment in SOTAMO, which was
based on the net book value per share of the Company's original investment in
SOTAMO, plus the related Mandatory Loan Obligations made through March 31, 1996,
multiplied by the additional shares acquired. As part of the acquisition,
975,000 of the Warrants were cancelled. At March 31, 1996, warrants to acquire
1,025,000 shares of common stock remain outstanding.

<PAGE>

TERRITORIAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

On March 31, 1996, the Company entered into an Option Agreement (the "Option")
with its largest shareholder, Asia Energy Ltd. ("AEL"). The Option, which was
revised by letter dated April 27, 1996, gives AEL the right to buy up to 29 of
the 119 shares of SOTAMO owned by the Company at a per share price of $50,000.
The Option expires July 31, 1996, unless otherwise extended. AEL paid the
Company of $20,000 in consideration for the granting of the Option. On May 9,
1996, AEL purchased five SOTAMO shares from the Company for $250,000 cash, which
has been paid in full. Further, on June 20, 1996, the Company's Board of
Directors approved, in principle, the acquisition of AEL. The approval, in
principle, provides, among other things, for the Company to issue 7,218,750 of
its common shares to the AEL shareholders. AEL's assets include 5.3 million
Territorial common shares which will be cancelled as part of this transaction.

During fiscal 1996, the Company compensated its corporate secretary, a director
and two professionals for services rendered to the Company by the issuance of
43,000 shares of its common stock. A cost of $2,687 was recorded for the
services, based on the estimated fair value of the shares. During fiscal 1996,
the Company collected an account receivable due from a shareholder for $2,000 in
exchange for the cancellation of 3,000 shares, which were valued at $187.

8. SUBSEQUENT EVENTS

At the June 20, 1996 Board meeting the Company also approved the issuance of
100,000 shares of the common stock of the Company in exchange for the
termination of 1,000,000 of the Warrants. Once this transaction is complete,
25,000 Warrants will remain outstanding - exercisable at $.10 per share, and
expiring on December 31,1996.

On June 20, 1996, the Board of Directors approved the granting of options to
acquire common shares to the following executives and employees:

William C. Penttila 270,000
Dennis M. Buck 270,000
Daniel A. Mercier 270,000
Douglas N. Baker 100,000
Lois S. Milard 30,000
D.Allinson 30,000
Steve Gray 30,000
---------
1,000,000

The options vest as to one-third immediately, one-third on the first anniversary
date and one-third on the second anniversary date in all cases except Mr. Gray
which vest immediately. The options are exercisable at $0.30 per share.

9. CONTINGENCIES

TRI Mongolia, Inc. ("TRM"), a subsidiary of Territorial, is a named defendant in
an action styled, Leo Metcalf, III vs. Amgol, Inc., SOCO International, Inc.,
EAIT, CP&G Co., et al, cause no. 94-29503, in the 113th Judicial District Court
of Harris County, Texas (the "Metcalf Lawsuit"). The plaintiff in the Metcalf
Lawsuit, a former director of Amgol, Inc., has requested certain amounts be
awarded to him based on alleged damages suffered as

<PAGE>

TERRITORIAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

a result of transactions entered into by Amgol without his approval and without
Amgol contemporaneously acquiring and paying for certain interests the plaintiff
claims to have owned. TRM has been named as a defendant, according to the
lawsuit, as a result of its ownership interest in SOTAMO (which was owned by
TRM's predecessor in interest at the time the alleged damages were suffered).

There are presently no other legal actions to which the Company is a party.

10. COMMITMENT

In connection with its investment in SOTAMO, the Company has had, and expects to
continue to have, Mandatory Loan Obligations. At the present time the Company
does not have the financial resources to meet its expected Mandatory Loan
Obligations. (The Company is currently seeking funds to be able to meet those
obligations.) As discussed in Note 7, the Company sold five shares of SOTAMO to
AEL for $250,000 and is currently negotiating a business combination with AEL
pursuant to which the Company will acquire certain of the assets of AEL in
exchange for common stock of the Company. AEL's assets include cash of
approximately $250,000. Should the Company be unable to meet its Mandatory Loan
Obligations, the Company will be subject to the default provisions of those loan
obligations, which could lead to the Company forfeiting its ownership interest
in SOTAMO.

<PAGE>

SUPPLEMENTAL INFORMATION - DISCLOSURES OF OIL AND GAS
PRODUCING ACTIVITIES - UNAUDITED

Costs incurred in Oil and Gas Producing Activities

Years Ended March 31,
--------------------------------------
1996 1995 1994

Acquisition of proved properties $ - $100,000 $ -
Acquisition of unproved properties - - -
Exploration costs - - -
Development costs 8,978 4,918 -
-------- -------- --------
$ 8,978 $104,918 $ -
-------- -------- --------
-------- -------- --------

RESERVE QUANTITIES

The following tables present estimates of the Company's proved developed oil and
gas reserves. The Company has no proved undeveloped reserves. The Company
emphasizes that reserve estimates are inherently imprecise and that estimates of
new discoveries are more imprecise than those of producing oil and gas
properties. Accordingly, the estimates are expected to change as future
information becomes available. The estimates for March 31, 1994, 1995 and 1996
are based primarily upon a report prepared by a director of the Company, Mr.
Donald L. Oliver, who is also the Company's former President. Estimates for
1996 only were based in part on a separate report prepared by D. L. Paddock &
Associates, Ltd., an independent engineering firm.

Oil (Bbls) Gas (Mcfs)
---------- ----------

Reserves - March 31, 1993 104,800 556,400
------- -------

Revisions to previous estimates (51,171) (278,032)
Production 2,600 59,500
------- -------

Reserves - March 31, 1994 56,229 218,868
------- -------
------- -------

Purchase of minerals in place - 202,311
Property sales (53,580) (91,850)
Revisions to previous estimates 1,819 10,961
Production (877) (33,403)
------- -------

Reserves - March 31, 1995 3,591 306,887
------- -------
------- -------

Property sales (613) (41,627)
Revisions to previous estimates 57 66,245
Production (1,017) (25,868)
------- -------

Reserves - March 31, 1996 2,018 305,637
------- -------
------- -------

Breakdown of reserves by country
at March 31, 1996
United States 2,018 42,637
Canada - 263,000
------- -------
2,018 305,637
------- -------
------- -------

<PAGE>

Standardized Measure of Discounted Future Net Cash Flows

The following table presents the standardized measure of discounted future net
cash flows relating to proved oil and gas reserves, in accordance with the
Financial Accounting Standards Board Statement No. 69:

Years Ended March 31,
-------------------------------------------
1996 1995 1994
----------- ----------- ------------

Future cash inflows $ 254,593 $ 441,686 $1,402,021
Future production costs (12,971) (100,067) (533,023)
Future development costs - - -
--------- ---------- ----------
241,622 341,619 868,998

Future income taxes 0 0 (32,684)
--------- ---------- ----------

Future net cash flows 241,622 341,619 836,314

10% annual discount for estimated
timing of cash flows (79,130) (132,962) (478,673)
--------- ---------- ----------

Standardized measure of
discounted future net cash flows $162,492 $ 208,657 $ 357,641
--------- ---------- ----------
--------- ---------- ----------

Changes in the Standardized Measure

The following are the principal sources of changes in the standardized measure
of discounted future net cash flows for each of the three years ended March 31:

Years Ended March 31,
------------------------------------------------
1996 1995 1994
------------ ------------ ------------

<S> <C> <C> <C>
Standardized measure of discounted future net
cash flows (Beginning) $ 208,657 $ 357,641 $ 732,000

Sales of oil and gas, net of production costs (32,000) (53,000) (23,000)

Net changes in prices and production costs (29,554) (89,000) (66,472)

Revisions of previous quantity estimates 23,081 53,000 (365,300)

Accretion of discount 20,865 35,764 73,200

Purchases of reserves in place - 97,046 -

Sales of reserves in place (33,101) (267,593) -

Net change in income taxes - 32,684 63,173

Other 4,544 42,115 (55,960)
------------ ------------ ------------

Standardized measure of discounted future net
cash flows (Ending) $ 162,492 $ 208,657 $ 357,641
---------- ---------- ----------
---------- ---------- ----------

</TABLE>

<PAGE>

INDEX TO EXHIBITS

10.3 SOCO Tamtsag Mongolia, Inc. share acquisition and
related agreements, including agreements to purchase
Territorial Resources, Inc. warrants, by and between the
Company and Exploration Associates, L.L.C. and MP
Holdings Limited, dated March 31, 1995. (Exhibit 2 to
Report on 8-K dated March 31, 1995.)

10.4 Agreement between the Company and Canadian Conquest
Exploration, Inc., concerning Saddle Hills property
acquisition and Territorial Resources, Inc. share
issuance, dated March 31, 1995. (Exhibit 1 to Report on
8-K dated March 31, 1995.)

10.5 Plan and Agreement of Reorganization, dated as of March
12, 1996, by and among William C. Penttila, Dennis M.
Buck, Michael C. Nemec, Thomas B. Patrick and the
Company (Exhibit 2.0 to Report on Form 8-K dated March
29, 1996.)

10.6 Option Agreement, dated March 1, 1996, by and between
Asia Energy Ltd. and the Company (Exhibit 10.1 to Report
on 8-K dated March 29, 1996.)

21 Subsidiaries*

23.1 Consent of Donald L. Oliver, Reserve Engineer*

23.2 Consent of DL Paddock & Associates Ltd.*

27 Financial Data Schedule*

- -----------------
*Filed with this Report.

<PAGE>

Exhibit 21

SUBSIDIARIES

1. TRI Mongolia, Inc., a Texas corporation, which is wholly owned by
Territorial.

<PAGE>

Exhibit 23.1

Donald L. Oliver
10341 Rowlock Way
Parker, Colorado 80134

June 10, 1996

Territorial Resources, Inc.
1300 Main Street
Suite 1840
Houston, Texas 77002

Gentlemen:

I have prepared oil and gas reserve estimates for Territorial Resources, Inc.,
(the "Company"), for the Company's fiscal years ended March 31, 1994, 1995 and
1996. Such estimates are included in the notes to the Financial Statements of
the Company which appear in the Company's annual report on Form 10-K for the
fiscal year ended March 31, 1996.

I hereby consent to the identification in such Form 10-K of myself as the expert
which has prepared such estimates. I also hereby consent to the inclusion of
this letter as an exhibit to such Form 10-K and registration statements.

Very truly yours,

/s/Donald L. Oliver

Donald L. Oliver

<PAGE>

Exhibit 23.2

INDEPENDENT PETROLEUM ENGINEERS CONSENT

The undersigned firm of Independent Petroleum Engineers, of Calgary, Alberta,
Canada, knows that it is named as having prepared a Constant Dollar evaluation
effective March 31, 1996, dated June 6, 1996, of the interests of Territorial
Resources, Inc., and hereby gives its consent to the use of its name and to the
use of the said estimates.

DL PADDOCK & ASSOCIATES LTD.

/s/D. L. Paddock
----------------------------
D. L. Paddock, P. Eng.
President

<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1996
<PERIOD-END> MAR-31-1996
<CASH> 39
<SECURITIES> 0
<RECEIVABLES> 10
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 49
<PP&E> 9,678
<DEPRECIATION> 7,792
<TOTAL-ASSETS> 1,945
<CURRENT-LIABILITIES> 64
<BONDS> 0
0
0
<COMMON> 26
<OTHER-SE> 1,855
<TOTAL-LIABILITY-AND-EQUITY> 1,945
<SALES> 39
<TOTAL-REVENUES> 41
<CGS> 7
<TOTAL-COSTS> 7
<OTHER-EXPENSES> 90
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (56)
<INCOME-TAX> 0
<INCOME-CONTINUING> (56)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (56)
<EPS-PRIMARY> 0
<EPS-DILUTED> (.003)

</TABLE>