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<SEC-DOCUMENT>0000720676-98-000032.txt : 19981026

<SEC-HEADER>0000720676-98-000032.hdr.sgml : 19981026

ACCESSION NUMBER:

0000720676-98-000032

CONFORMED SUBMISSION TYPE:

S-1/A

PUBLIC DOCUMENT COUNT:

9

FILED AS OF DATE:

19981023

SROS:

AMEX

FILER:

COMPANY DATA:

COMPANY CONFORMED NAME:

CENTRAL INDEX KEY:

STANDARD INDUSTRIAL CLASSIFICATION:

IRS NUMBER:

STATE OF INCORPORATION:

FISCAL YEAR END:



XCL LTD

0000720676

CRUDE PETROLEUM & NATURAL GAS [1311]

510305643

DE

1231



FILING VALUES:

FORM TYPE:

SEC ACT:

SEC FILE NUMBER:

FILM NUMBER:



333-51937

98729619



BUSINESS ADDRESS:

STREET 1:

CITY:

STATE:

ZIP:

BUSINESS PHONE:



110 RUE JEAN LAFITTE

LAFAYETTE

LA

70508

3182370325



MAIL ADDRESS:

STREET 1:

STREET 2:

CITY:

STATE:

ZIP:



110 RUE JEAN LAFITTE

2ND FLOOR

LAFAYETTE

LA

70508



FORMER COMPANY:

FORMER CONFORMED NAME:

DATE OF NAME CHANGE:



EXPLORATION CO OF LOUISIANA INC

19920703



S-1/A



FORMER COMPANY:

FORMER CONFORMED NAME:

DATE OF NAME CHANGE:

</SEC-HEADER>

<DOCUMENT>

<TYPE>S-1/A

<SEQUENCE>1

<TEXT>



EXPLORATION COMPANY OF LOUISIANA INC

19920128



As filed with the Securities and Exchange Commission on October 23, 1998

Registration Statement No. 333-51937

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

AMENDMENT NO. 2

TO

FORM S-1

REGISTRATION STATEMENT

Under

THE SECURITIES ACT OF 1933

__________



XCL LTD.

(Exact name of registrant as specified in its charter)

Delaware

(State or other jurisdiction of

incorporation or organization)



1311

(Primary Standard

Indutrial Classification

Code Number)



51-0305643

(IRS Employer

Identification No.)



110 Rue Jean Lafitte, 2nd Floor

Lafayette, Louisiana 70508

(318) 237-0325

(Address, including zip code, and telephone number,

including area code, of registrant's principal executive offices)

____________________

Benjamin B. Blanchet

XCL Ltd.

110 Rue Jean Lafitte, 2nd Floor

Lafayette, Louisiana 70508

(318) 237-0325

(Name, address, including zip code, and telephone number,

including area code, of agent for service)

____________________

Copy to:

Peter A. Basilevsky, Esq.

Satterlee Stephens Burke & Burke LLP

230 Park Avenue

New York, New York 10169

(212) 818-9200

____________________________________

<TABLE>

<CAPTION>

CALCULATION OF REGISTRATION FEE

=================================================================================================

Title of Each Class of

Amount To Be

Offering Price

Aggregate

Amount of

Securities To Be Registered

Registered

Per Share

Offering Price Registration Fee

- ---------------------------------------------------- -------------- ----------------=================================================================================================

<S>

<C>

<C>

<C>

<C>

<C>

Amended Series A, Cumulative

Convertible Preferred Stock,

$1.00 par value per share

1,163,115

$85.00 (1)(2)

$98,864,775.00

$29,165.11

Amended Series A, Cumulative

Convertible Preferred Stock,

$1.00 par value per share



56,084



Common Stock, $.01 par value

per share



1,731,285



Common Stock, $.01 par value

per share



170,383



$85.00 (1)(2)



$4,767,140.00



$1,325.26 (6)



$4.125 (3)



$7,141,550.63



$2,106.76



$702,829.88



$207.33



$4.125(3)



===============================================================================================

Common Stock, $.01 par value

issuable upon conversion or

exercise of:

Amended Series A Preferred

Stock



13,181,970



$7.50 (1)(5)



$98,864,775.00



Amended Series A Preferred

Stock



862,285



$7.50 (1)(4)



$6,467,137.50



$1,797.86 (6)



Amended Series B Preferred

Stock



991,262



$4.75 (1)(4)



$4,708,494.50



$1,389.01



Amended Series B Preferred

Stock



30,738



$4.75 (1)(4)



$146,005.50



$3.0945 (1)(5)



$340,085.55



$3.0945 Warrants expiring

November 1, 2000



109,900



$29,165.11



$40.59 (6)

$100.33



$3.0945 Warrants expiring

May 20, 2004



13,765,284



$3.0945 (1)(5)



$42,596,671.34



$12,566.02



$3.75 Warrants expiring

December 31, 2001



205,000



$3.5122 (1)(5)



$720,001.00



$212.40



$7.50 Warrants expiring

December 21, 2000



196,000



$7.0246 (1)(5)



$1,376,821.60



$406.16



$5.25 Warrants expiring

April 22, 2001



64,000



$5.1739 (1)(5)



$331,129.60



$97.68



$5.25 Warrants expiring

December 21, 2000



148,000



$5.1739 (1)(5)



$765,737.20



$225.89



$7.50 Warrants expiring

December 28, 2000



60,000



$7.50 (1)(5)



$450,000.00



$132.75



$7.50 Warrants expiring

January 2, 2001



28,888



$7.50 (1)(5)



$216,660.00



$63.91



$7.50 Warrants expiring

5 years after first exercise



50,000



$7.50 (1)(5)



$375,000.00



$110.63



$4.65 Warrants expiring

December 21, 2000



46,400



$4.601 (1)(5)



$213,486.40



$62.98



$3.75 Warrants expiring

March 7, 2001



13,600



$3.7105 (1)(5)



$50,462.80



$14.89



$3.75 Warrants expiring

April 22, 2001



12,000



$3.7105 (1)(5)



$44,526.00



$13.14



$3.75 Warrants expiring

July 30, 2001



100,000



$3.1522 (1)(5)



$351,220.00



$103.61



$3.75 Warrants expiring

August 13, 2001



63,467



$3.7105 (1)(5)



$235,494.30



$69.47



$3.75 Warrants expiring

December 31, 1998



20,000



$3.1522 (1)(5)



$70,244.00



$20.72



$1.875 Warrants expiring

December 31, 1999



48,891



$1.8478 (1)(5)



$90,340.79



$26.65



$3.75 Warrants expiring

December 31, 1999



124,964



$3.7105 (1)(5)



$463,678.92



$136.79



$0.15 Warrants expiring

April 9, 2002



683,723



$0.15 (1)(5)



$102,558.45



$30.25



$2.8125 Warrants expiring

August 13, 2001



100,000



$2.7816 (1)(5)



$278,160.00



$82.06



$3.75 Warrants expiring

February 20, 2002



13,333



$3.7105 (1)(5)



$49,472.10



$14.59



$0.15 Warrants expiring

December 31, 2001



153,333



$0.15 (1)(5)



$22,999.95



$6.78



$5.50 Warrants expiring

March 2, 2002



250,000



$5.50 (1)(5)



$1,375,000.00



$405.63



$3.75 Warrants expiring

June 30, 2003



17,000



$3.75 (1)(5)



$63,750.00



$17.72 (6)



$2.50 Warrants expiring

September 30, 1998

351,015

$2.50 (1)(5)

$877,537.50

$243.96 (6)

================================================================================================

TOTAL

33,592,721

$273,123,745.50

$80,362.04

================================================================================================

(1)

Pursuant to Rule 416 there are also being registered

such additional shares of Common Stock as may become issuable

pursuant to applicable anti-dilution provisions.

(2)

Estimated solely for the purposes of calculating the

registration fee using the proposed offering price of the

Amended Series A Preferred Stock, as required by Rule 457 (i).

(3)

Estimated solely for the purpose of calculating the

registration fee using the average of the high and low prices



reported on the American Stock Exchange ("AMEX") on April 23,

1998, as required by Rule 457(c).

(4)

Estimated solely for the purpose of calculating the

registration fee using the conversion price of the Preferred

Stock, as required by Rule 457(g)(1), as adjusted for the

reverse stock split.

(5)

Estimated solely for the purpose of calculating the

registration fee using the exercise price of the Warrants, as

required by Rule 457(g)(1), as adjusted for the reverse stock

split and applicable anti-dilution adjustments.

(6)

Calculated using the revised fee rate of $278 per

$1,000,000 (.000278).

</TABLE>

The Registrant hereby amends this Registration Statement on

such date or dates as may be necessary to delay its effective

date until the Registrant shall file a further amendment which

specifically states that this Registration Statement shall

hereafter become effective in accordance with Section 8(a) of

the

Securities Act of 1933 or until this

Registration

Statement

shall become effective on such date

as

the

Commission,

acting pursuant to said Section

8(a),

may

determine.

<PAGE>

SUBJECT TO COMPLETION, DATED OCTOBER 23, 1998

PROSPECTUS

XCL LTD.

1,219,199 SHARES OF 9.50%

AMENDED SERIES A, CUMULATIVE CONVERTIBLE PREFERRED STOCK

33,592,721 SHARES OF COMMON STOCK

This Prospectus offers for resale in transactions

registered under the Securities Act of 1933, as amended (the

"Securities Act"), 1,219,199 issued and outstanding shares

of 9.50% Amended Series A, Cumulative Convertible Preferred

Stock (the "Amended Series A Preferred Stock") of XCL Ltd.

(the "Company"). These shares of Amended Series A Preferred

Stock were originally issued in transactions intended to

qualify for an exemption from registration under

the

Securities Act.



This Prospectus also offers for resale in transactions

registered under the Securities Act, 33,592,721 shares of

Common Stock of the Company which have been or will be

issued in transactions intended to qualify for an exemption

from registration under the Securities Act.

These shares

include shares originally issued in transactions intended to

qualify for an exemption from registration under

the

Securities

Act,

shares the Company is

contractually

obligated to issue and shares that may be issued if holders

of convertible preferred stock convert that stock or if

holders of various warrants exercise those warrants.



In this Prospectus, the shares of Common Stock being

registered that will be issued when various warrants are

exercised are referred to as the "Warrant Shares," and the

warrants are referred to as the "Warrants." The shares of

Common

Stock that will be issued when the Company's

convertible preferred stock is converted into Common Stock

are referred to as the "Conversion Stock." The shares of

Common Stock that the Company is contractually required to

issue are referred to as the "Contract Stock." The Amended

Series A Preferred Stock, Warrant Shares, Conversion Stock

and Contract Stock are collectively referred to as the

"Securities."



This Prospectus is intended for use by the holders (the

"Selling Security Holders") of the Securities in resale

transactions registered under the Securities Act.

The

Company will not receive any proceeds from the sale of the

Securities (other than proceeds upon exercise of

the

Warrants).

See "Selling Security Holders" and "Use of

Proceeds."

The Company will pay the costs of registering

sales of the Securities covered by this Prospectus under the

Securities Act and related costs (although the Selling

Security Holders will pay all applicable stock transfer

taxes, brokerage commissions or other transaction charges or

expenses).

The Company estimates that its expenses in

making this offering will be approximately $152,000.

The Common Stock is quoted on the American Stock

Exchange (the "AMEX") under the symbol "XCL" and on the

London Stock Exchange. On September 30, 1998, the last

reported closing price of the Common Stock on the AMEX was

$3.00.

See "Risk Factors" beginning on page [] of this

Prospectus for a discussion of certain factors that should

be considered in evaluating an investment in the Securities.

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED

BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE

SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE

COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS

PROSPECTUS.

ANY REPRESENTATION TO THE CONTRARY IS

A

CRIMINAL OFFENSE.

The date of this Prospectus is _______________, 1998.

[The following legend appears in the left margin of the

Prospectus cover page.]

Information contained herein is subject to completion or

amendment. A registration statement relating to these

securities has been filed with the Securities and Exchange

Commission. These securities may not be sold nor may offers

to buy be accepted prior to the time the registration

statement becomes effective. This prospectus shall not

constitute an offer to sell or the solicitation of an offer

to buy nor shall there be any sale of these securities in

any state in which such offer, solicitation or sale would be

unlawful prior to registration or qualification under the

securities laws of any such state.

<PAGE>

AVAILABLE INFORMATION

The Company is subject to the informational requirements of the

Securities Exchange Act of 1934, as amended (the "Exchange Act"), and

files reports, proxy and information statements and other information

with the U.S. Securities and Exchange Commission (the "Commission").

Such reports, proxy and information statements and other information can

be inspected and copied at the public reference facilities maintained by

the Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington,

D.C. 20549, and at the following regional offices of the Commission:

Seven World Trade Center, Suite 1300, New York, New York 10048 and

Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois

60661-2511. Copies of such materials can be obtained by mail from the

Public Reference Section of the Commission, at Judiciary Plaza, 450

Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates.

In

addition, the Commission maintains a site on the Word Wide Web that

contains reports, proxy and information statements and other information

filed electronically by the Company with the Commission. These can be

accessed over the Internet at http://www.sec.gov. The Company's Common

Stock is listed on the AMEX. Reports, proxy and information statements

and other information relating to the Company can be inspected at the

offices of the AMEX at 86 Trinity Place, New York, NY 10006-1881.

This Prospectus constitutes part of a registration statement on

Form S-1 (together with all amendments and exhibits referred to in this

Prospectus as the "Registration Statement") filed by the Company with

the Commission under the Securities Act. This Prospectus omits some of

the information contained in the Registration Statement.

Consult the



Registration Statement and its exhibits for further information about

the Company and the Securities covered hereby. Statements made herein

about the provisions of contracts or other documents are not necessarily

complete; each such statement is qualified in its entirety by reference

to the copy of the applicable contract or other document filed with the

Commission. Copies of the Registration Statement and its exhibits are on

file at the offices of the Commission and may be obtained upon payment

of the fee prescribed by the Commission, or may be examined without

charge at the public reference facilities of the Commission described

above.

NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY

REPRESENTATIONS OTHER THAN THOSE CONTAINED OR INCORPORATED BY REFERENCE

IN

THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR

REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE

COMPANY.

NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE

HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE AN IMPLICATION THAT THERE

HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.

THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION

OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY BY ANYONE IN ANY

JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN

WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO

DO SO OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR

SOLICITATION.

DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS

This Prospectus includes (or incorporates by reference) "forwardlooking statements." All statements made in this Prospectus, other than

historical facts (whether set forth or incorporated by reference), are

forward-looking

statements.

Although the Company

believes

such

statements are reasonable, it can give no assurance that they will prove

to be correct.

It is difficult to estimate quantities of proved oil and natural

gas reserves and to project future rates of production, the timing of

development costs and future net revenues. Those estimates depend upon

many factors the Company cannot control. Reserve engineering involves

estimating underground accumulations of oil and natural gas that cannot

be measured in an exact way. The accuracy of any reserve estimate

depends on the quality of available data, the interpretation of that

data and the judgment of the reserve engineers. As a result, estimates

made by different engineers are often different. Because reserve

estimates are only estimates, the actual amounts of oil and natural gas

recovered are usually different from the estimates. Results of drilling,

testing and production subsequent to the date of an estimate may require

reserve estimates to be revised and may change the schedule of

production and development drilling.

Additional important factors that could cause actual results to

differ materially from the Company's expectations are disclosed under

"Risk Factors" and elsewhere in this Prospectus.

PROSPECTUS SUMMARY

Because this is a summary, it does not contain all

the

information that may be important to you.

You should carefully

read

the whole Prospectus and its appendices, as well as

the

information

incorporated

by

reference

into

this

Prospectus.

Usually

in

this Prospectus, the terms "XCL" or the

"Company"

refer

to

XCL

Ltd.

and all of its subsidiaries.

Except

as

otherwise noted, the reported reserve data are based on reserve

estimates

made by the Company's independent petroleum engineers.

See "Glossary of Terms" for definitions of certain oil and gas

terminology.

The Company

----------XCL

is

principally engaged in the exploration

for

and

development of oil and gas in the Zhao Dong Block (the "Zhao Dong

Block") located in the shallow waters of the Bohai Bay in the

People's

Republic of China ("China").

The Company

obtained

a

second production sharing contract covering the Zhang Dong Block

(the "Zhang Dong Block"),

also in the shallow waters of Bohai

Bay,

effective October 1, 1998.

To date the Company has

not

generated any profits from these operations.

The Company's only

historic revenues were derived from its financing activities and

properties

currently held for sale or investment or

previously

sold.

See

"Management's Discussion and Analysis

of

Financial



Condition

and Results of Operations."

The Company is

development stage with respect to its operations in China

not

generated

any

revenues from

operations

related

properties and interests in China.



in

and

to



the

has

its



The Zhao Dong Block is located in one of China's major oilproducing basins. Geologic information suggests that a portion of

the Zhao Dong Block is an extension of the onshore Dagang oil

field

complex

to the west.

Approximately 700 million

barrels

have already been produced from that field and it is still under

production.

The Zhao Dong Block is also about 40 miles northwest

of the Shengli oil field, the largest in the basin, from which

about 4 billion barrels have already been produced.

The Shengli

oil

field

is

still

under production as

well.

Of

course,

production in those fields does not ensure that there will

be

production from the Zhao Dong Block.

In early 1993, XCL became the first foreign company to enter

into

an

onshore Production Sharing Agreement (the

"Contract"),

with

China

National

Oil and Gas Exploration

and

Development

Corporation ("CNODC") (which is a Chinese state enterprise).

The

Contract provides for exploration, development, and production of

the

Zhao

Dong Block. CNODC is the arm of the China National

Petroleum Company ("CNPC"), also a state enterprise, in charge of

all onshore exploration and production activity in China out to

five meters in water depth. CNODC operates in this area through

its subsidiary, Dagang Oilfield (Group) Co. Ltd. ("Dagang").

The



Contract provides that the "Foreign Contractor"

(the

Company

and

Apache Corporation ("Apache") as a group,

working

through

a

participation agreement) is to pay

all

exploration

costs. The Contract also states that, when a commercial discovery

is made, CNODC may choose to participate in development, with up

to

51%

of

all development and operating costs and

allocable

remainder

oil

and gas production allocated to CNODC

and

the

remaining

interest

to

the

Foreign

Contractor.

The

Foreign

Contractor's

share is divided equally between XCL

and

Apache.

See "Business -- The Contract" and "Business -- Apache Farmout."

XCL and Apache have successfully tested six of ten wells

drilled to date on the Zhao Dong Block, with total test rates

exceeding 39,500 barrels of oil per day.

Of the four wells not

tested, one (the D-3) was proven productive by wire line samples

and tests in several sands but was not drill-stem tested, while a

second (the F-1) was drilled but not fully evaluated.

Drilling

activities on the F-1 have been abandoned. Development of the CD Field for production is now proceeding.

Based on the report of H.J. Gruy and Associates ("Gruy"),

the

Company's

independent

petroleum

engineers,

net

proved

reserves

in

the C-D Field are estimated to be 11.76

million

barrels as of January 1, 1998, and the estimated present value of

future pre-tax net cash flows is $64.8 million.

The standardized

measure

of

discounted

future net

cash

flows

determined

in

accordance with the rules prescribed by FASB No. 69

is

$53.8

million.

Future reserve values are based on year end prices and

operating costs, production and future development costs based on

current costs with no escalation. See "Business -- Oil and Gas

Reserves" and "Supplemental Oil and Gas Information" in the Notes

to the Consolidated Financial Statements.

The Company's Development Program

--------------------------------The C-D Field was discovered by the drilling of the C-1 and

D-1 Wells. The Field has been appraised by the C-2, C-2-2, C-2-2

sidetrack,

C-3,

D-2, and D-3 Wells.

On

the

basis

of

the

calculated

reserves, Apache and XCL have

prepared

an

Overall

Development

Plan

("ODP")

for the Field.

The

ODP

presently

projects the drilling of 45 wells, of which 32 are producers, 8

are water injection wells for the purpose of reservoir pressure

maintenance

to

achieve higher levels of recovery

of

ultimate

reserves

and

5 are water disposal wells.

The ODP

has

been

approved

by

the

Joint

Management

Committee

("JMC"),

which

oversees operations on the Zhao Dong Block, and has been approved



by CNPC subject to certain modifications that XCL and Apache are

studying.

CNODC has given notice that it will participate as to

its full 51% share in the C-D Field.

XCL,

Apache

and

CNODC

are currently

collaborating

on

engineering

studies to refine the ODP, both to reduce

capital

commitments

for

development and to accelerate

production,

and

have, as a result, suggested some revisions to the original ODP.

It

is expected that these studies will assist the parties

in

determining the

most efficient method for development, including

the practicability of beginning production before all development

operations have been completed. The Company has been informed by

CNODC

that they desire that production on the Zhao Dong Block

begin as soon as practicable and the parties are assessing how

that

would

be commercially feasible.

Initial results

indicate

that

1999

production is possible and the Company, Apache

and

CNODC have decided to attempt to commence initial production in

1999.

XCL's current estimate (which is subject to revision as the

project moves forward) of the costs to develop the reserves in

the

C-D Field that are identified in the ODP by Apache

(the

"Operator") (which XCL understands are higher than the

reserves

identified

by

XCL's petroleum engineers) is approximately

$185

million

(of

which

XCL's share would

be

approximately

$45.3

million).

This is less than amounts projected by the Operator in

the

original

ODP

for several reasons.

Cost

reductions

are

expected in part based on design changes that would eliminate one

drilling

platform

and one production platform

from

the

ODP.

While formal Chinese approval for these changes has not yet been

obtained, all parties believe that such approval can be secured.

Further, cost reductions are expected as a result of preliminary

bids that suggest that cost estimates in the ODP have been too

high.

In

addition,

the

initial

ODP

included

estimates

of

contingencies

larger than the industry standard.

Finally,

cost

reductions from the Operator's projections are also based on the

assumption that if the project moves forward with dispatch, the

current

weakness of certain Asian currencies

could

result

in

substantial reductions in the costs of steel and fabrication for

the project.

The revised ODP design anticipates that once production and

loading facilities have been installed in the field, wells will

be placed on production as they are drilled.

In this case, cash

flow

from this production would be available to fund part

of

XCL's capital requirements for the development of the C-D Field.

The Company's financial plans include the use of such cash flow

as part of the Company's source of funds.

Production tests of the C-4 Well, announced by XCL on

October 7, 1997, indicate a combined daily rate from 8 zones of

15,359 barrels per day, and 6,107 Mcf of gas, plus a ninth zone

daily rate of 4,600 Mcf and 14 barrels of condensate. This well

suggests a new field discovery on the Zhao Dong Block.

In August

1998,

CNODC,

XCL,

and Apache commenced drilling

a

well

to

appraise the C-4 Well.

If this drilling proves successful, early

production from the two initial wells in the C-4 Well area may

begin by mid-1999; initial feasibility studies indicate that this

is

possible.

The

capital

costs attributable

to

such

early

production are not included in the 1998 work program and budget.

Successful appraisal of the C-4 Well could also cause XCL

and

Apache to move promptly toward development of this area.

The Company's Additional Ventures

--------------------------------The

Company is also proceeding with certain other energy

related ventures in China, including a joint venture with

CNPC

United

Lube

Oil

Corporation to engage in

the

manufacturing,

distribution

and

marketing of lubricating

oil

in

China

and

Southeast Asian markets and a cooperative venture with the China

National

Administration of Coal Geology to explore and

develop

coalbed

methane

in

two areas of China.

See

"Organizational

Chart" below and "Business -- United/XCL Lube Oil Joint Venture"

and

"-- Coalbed Methane Project."

Further, in August 1998 the

Company,

through

its wholly owned subsidiary

XCL-Cathay

Ltd.,

signed a production sharing contract with CNODC for the 12,000acre

Zhang

Dong

Block which was approved in September

1998,



effective

October

1,

1998.

See "Management's

Discussion

Analysis

of

Financial Condition and Results

of

Operation

Liquidity, Capital Resources and Management's Plans."



and

--



Securities the Resale of Which are Being Registered

--------------------------------------------------This Prospectus offers for resale the following issued and

outstanding Securities and Securities to be issued upon exercise

or

conversion

of certain outstanding Securities

and

Warrants.

See "Selling Security Holders."

Amended Series A Preferred Stock

- -------------------------------o



294,118



Shares issued in an Equity Offering on May 20,

1997

in

which

the

Company

offered

privately

294,118

units, each consisting of

one

share

of

Amended

Series A Preferred Stock and one

warrant

to

buy

21.8 shares of Common Stock (the "Equity

Warrants").



o



11,816



Shares

issued

in partial payment

of

interest

payable

on

the

Company's

Secured

Subordinated

Notes due April 5, 2000 (the "Subordinated Debt"),

which were paid in full on October 15, 1997.



o



726,905



Shares

issued

on

recapitalization

of

the

Company's

Series

A,

Cumulative

Convertible

Preferred

Stock ("Series A Preferred Stock")

into

shares of Amended Series A Preferred Stock and the

payment of accrued and unpaid dividends thereon.



o



63,706



Shares

issued

on

recapitalization

of

the

Company's

Series

E,

Cumulative

Convertible

Preferred

Stock ("Series E Preferred Stock")

into

shares of Amended Series A Preferred Stock and the

payment of accrued and unpaid dividends thereon.



o



12,917



Shares

issued in payment of dividends

Amended

Series A Preferred Stock payable

1, 1997.



on

the

November



o



53,442



Shares

issued in payment of dividends

Amended

Series A Preferred Stock payable

1998.



on

May



o



56,295



Shares issuable

Amended

Series A

2, 1998.



on

the

November



_________

1,219,199



in payment of dividends

Preferred Stock payable



the

1,



Shares of Amended A Preferred Stock being

registered for resale (including in each case

listed above shares, if any, not yet issued

attributable to fractional shares and tax

withholding).



Common Stock

- -----------o



1,731,285



Shares of Common Stock currently outstanding

issued in private placement transactions between

April 1996 and September 30, 1998 as follows:

o 451,172



Shares issued in payment

payable on Subordinated Debt.



o



Shares issued in payment of a

finders fee for Regulation S Offerings

conducted in Europe in December 1995,

March 1996 and April 1996.



4,858



of



interest



o 584,696



Shares

issued

upon

exercise

various stock purchase warrants.



of



o



30,000



Shares

litigation.



of



o



26,666



Shares



issued

issued



in



in



settlement



partial



payment



of



a consulting fee.

o 633,893



o



Shares issued upon conversion of all

the

outstanding shares of

the

Company's

Series

F,

Cumulative

Convertible

Preferred

Stock

("Series

F

Preferred

Stock").



170,383



Shares issuable to meet various contractual

obligations of the Company.



o 14,044,255



Shares

issuable

upon

conversion

outstanding Amended Series A Preferred Stock.



o



6,084,772



Shares

issuable upon exercise

of

Warrants issued in the Equity Offering

1997.



o



6,400,000



Shares issuable upon exercise of warrants

(the

"Note

Warrants")

that

were

issued

in

a

Note

Offering

on

May 20, 1997 in which

the

Company

privately

offered

75,000

units,

each

unit

consisting of one 13.50% Senior Secured

Note

due

May

1,

2004 in the principal amount

of

$1,000

(collectively,

the "Notes") and one

Note

Warrant

to purchase 1,280 shares of Common Stock.



o



1,280,512



Shares

issuable upon the exercise of

Warrants

issued

to Jefferies & Co., Inc. ("Jefferies")

an

investment banking fee in connection with

the

Equity and the Note Offerings on May 20, 1997.



of



the



the

Equity

on May 20,



o



2,859,514



Shares

issuable

upon

exercise

of

outstanding

Warrants with exercise

prices

from $.15 per share to $7.50 per share.



o



1,022,000



Shares

issuable

upon

conversion

of

Amended

Series

B,

Cumulative Convertible

Preferred

Stock

("Amended Series B Preferred Stock").



__________

33,592,721



various

ranging



Shares of Common Stock being registered for

resale (including an indeterminable number of

shares issuable in respect of anti-dilution

adjustments applicable to the Amended Series A and

Amended Series B Preferred Stock and the

Warrants).

Terms of the Securities

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



Common Stock

- ------------Common Stock Issued and

Outstanding................. 22,995,804

shares

(See "Description of Capital

- Common Stock")



Stock



-



Amended Series A Preferred Stock

- -------------------------------Amended Series A Preferred Stock

Outstanding........................ 1,181,614 shares

Dividends................. Dividends are cumulative from May 20, 1997

(the

"Issue

Date")

at

the

annual

rate

of

$8.075

per

share.

Dividends are payable on each May

1

and

November

1, when,

as

and

if

declared

by the Board of

Directors.

Dividends

are

payable in

additional

shares

of

Amended

Series

A

Preferred

Stock

(valued

at

$85.00

per

share)

through

November

1,

2000, and thereafter in cash or,

at

the

election

of

the

Company,

in

shares

of

Amended

Series

A

Preferred

Stock

(valued

at

$85.00

per

share).

See

"Description

of

Capital

Stock

-- Preferred Stock

-



as



Amended

Series

-- Dividend Rights."

Liquidation Preference........



A



Preferred



Stock



$85.00

per

share,

plus

accrued

and

unpaid

dividends.

See

"Description

of

Capital

Stock

-Preferred

Stock

-Amended

Series

A

Preferred

Stock

-Liquidation

Rights."



Conversion Rights.............Convertible at any time after May

20,

1998,

at the option of the

holder,

unless

previously

redeemed,

into

shares

of

Common

Stock

at

a

conversion price of $7.50

per

share

of

Common

Stock.

(This

is

equivalent

to a conversion

rate

of

11.333

shares

of Common

Stock

per

share

of

Amended Series A Preferred

Stock.)

Conversion price

is

subject

to

adjustment

upon

the

occurrence

of

certain

events. See

"Description

of

Capital Stock -- Preferred

Stock

--Amended

Series

A

Preferred

Stock -- Conversion Rights."

Mandatory Conversion Right......... The

Company

may,

at

its

election,

require the

conversion

of

all

the

outstanding

shares

of

Amended

Series A Preferred Stock

at

any

time

after

November

20,

1997

that

the

Common

Stock

has

traded

for

20

trading days during any

30

consecutive

trading

days

at

a

Market

Price

(as

defined

below)

equal

to

or greater than

150%

of

the

prevailing

conversion

price.

See

"Description of Capital Stock

Preferred

Stock

-Amended

Series

A

Preferred

Stock

-Mandatory Conversion Rights."

Special Conversion Rights......... The

conversion

price

of

the

Amended

Series

A

Preferred

Stock

will

be

reduced

for

a

limited

period

in

certain circumstances.

In

general,

the

reduction

will

occur

if

a

Change of Control (as defined

below)

or

a Fundamental Change

(as

defined

below)

occurs

at

a

time

when

the Market Value of the Common

Stock

is

below the then

prevailing

conversion

price.

No

adjustment

will

occur

upon

a

Fundamental

Change

if

a

majority

of

the

consideration

received

by

the

holders

of

Common

Stock

consists

solely

of

Marketable

Stock

(as

defined

below)

and

under

certain

other

circumstances.

See

"Description

of

Capital

Stock

-Preferred Stock -- Amended

Series

A

Preferred

Stock

-Special

Conversion Rights."

Optional Redemption.......... Redeemable, in whole or in

part,

at

the

option

of the Company,

on

or

after

May 1, 2002, initially

at

a

redemption

price

of

$90.00

per

share

and,

thereafter,

at

prices

declining

to

$85.00

per

share

on

and

after

May

1, 2006,

plus

all

accrued

and

unpaid

dividends,

if

any,

to

the

redemption

date.

See

"Description

of

Capital

Stock

-Preferred Stock -- Amended

Series

A

Preferred

Stock

-Optional

Redemption."

Mandatory Redemption..........Mandatorily



Redeemable,



in



whole,



on

May

1,

2007, at

a

redemption

price

of

$85.00

per

share,

plus

accrued and unpaid dividends

to

the

redemption

date,

payable

in

cash

or,

at the election of the Company,

in

Common

Stock.

See

"Description

of

Capital Stock -- Preferred

Stock

-Amended Series A Preferred

Stock

-- Mandatory Redemption."

Voting Rights................ In addition to any special voting

rights

granted

by

law,

each

share

of

Amended

Series

A

Preferred

Stock

entitles the holder thereof

to

cast

the

same

number of

votes

as

the

shares

of

Common

Stock

then

issuable

upon conversion

thereof

on

any

matter subject to the

vote

of

the

Common

Stockholders

(currently

11

votes

per share), and

(i)

the

holders

of

the

Amended

Series

A

Preferred

Stock will be entitled

to

vote

as

a separate class to

elect

two

directors

if the equivalent

of

three

semi-annual

dividends

payable

on

the

Amended Series

A

Preferred

Stock

(whether

consecutive

or

not)

are

in

arrears, which

rights

will

continue

until

the

dividend

arrearage

has

been

paid

in

full,

and

(ii)

the

approval

of

the

holders

of

two-thirds of

the

then

outstanding

Amended

Series

A

Preferred

Stock

will

be

required

for

the

issuance of any

class

or

series

of

stock

ranking

prior

to

the

Amended

Series

A

Preferred

Stock

as

to

dividends

or

liquidation

rights

and

for

certain

amendments

to

the Company's

Amended

and

Restated

Certificate

of

Incorporation

that

adversely

affect

the

rights

of

holders

of

the

Amended

Series

A

Preferred

Stock.

See

"Description of Capital Stock

Preferred Stock -- Amended

Series

A

Preferred

Stock

-Voting

Rights."

Priority of Amended Series A

Preferred Stock..........The

Amended

Series

A

Preferred

Stock

has

priority over the

Common

Stock

with

respect to

the

payment

of

dividends

and

upon

liquidation,

dissolution

or

winding

up

of

the

Company.



For



additional information regarding the Common Stock

and

Amended

Series A Preferred Stock, see "Description

of

Capital

Stock -- Common Stock" and "-- Preferred Stock -- Amended Series

A Preferred Stock."

Risk Factors

-----------See



"Risk Factors" for a discussion of

should

be

considered

in

evaluating

an

Securities.



certain factors

investment

in



that

the



Summary Historical Financial Information

---------------------------------------The

following

table

represents

summary

historical

consolidated

financial data of the Company.

The balance

sheet

data

as of the five years ended December 31, 1997, has

been

derived from the audited consolidated financial statements of the

Company.

The balance sheet data as of the six month

periods

ended June 30, 1998 and 1997 has been derived from the unaudited



consolidated

financial

statements

of

the

Company.

The

information

in

this table should be read in conjunction

with

"Management's Discussion and Analysis of Financial Condition

and

Results

of

Operations," "Selected Consolidated Financial

Data,"

the

Consolidated

Financial Statements

and

the

notes

thereto

included elsewhere in this Prospectus.

<TABLE>

<CAPTION>

Six Months

Year Ended December 31

Ended June 30

----------------------------------------------------------------------------------1997(j)

-------



1993(a)



1994(b)



1995(c)



1996(e)



1997(g)(j)



-------



-------



-------



-------



----------



1998(j)

------(In thousands, except per share data)



(Unaudited)

<S>

<C>

<C>

<C>

<C>

<C>

<C>

Statement of Operations Data:

Revenues

$

8,499

$

4,336

$

2,480

-$

-Operating expenses

2,449

1,341

985

-$

-General and administrative expenses

3,840

4,553

4,551

1,562

2,915

Depreciation, depletion and

amortization

5,788

3,292

2,266

--Other, net

---28

72

Operating loss

(12,518)

(33,875)

(85,673)

(1,590)

(2,987)

Net interest expense

1,329

1,831

2,998

1,646

1,852

Interest income

141

508

133

498

718

Net loss

(15,197)

(36,622)

(87,837)

(2,426)

(4,120)

Net loss attributable to common stock

(19,978)

(41,529)

(92,658)

(5,742)

(8,999)

Net loss per common share

Basic

(2.52)

(3.14)

(5.77)

(.29)

(.40)

Diluted

(2.52)

(3.14)

(5.77)

(.29)

(.40)

Weighted average common

shares outstanding - basic

7,933

13,220

16,047

19,511

22,622

Weighted average common

shares outstanding - diluted

7,933

13,220

16,047

19,511

22,622

Deficiency of earnings to combined

fixed charges and preferred

stock dividends

(i)

(i)

(i)

(i)

(i)

Balance Sheet Data (at end of

period):

Total working capital (deficit)

$(15,562)

$ (1,563)

$ (24,239)

(34,468)

$ 5,972

Total assets

157,377

149,803

72,336

151,890

117,204

Long-term debt, net of current

maturities

53,965 (d)

41,607(d)

15,644

-- (f)

62,384(h)

Stockholders' equity

84,609

95,200

16,900

34,824

37,799

____________

(a)

Includes provision for impairment of domestic oil and gas

properties of $8 million.

(b)



Includes provision for impairment of domestic oil and gas

properties of $25.9 million and provision for write-down of



<C>

$



1,136



$



--



342



--



3,487



5,167



579



--



--



2,891



(9,793)



(8,058)



2,415



8,450



8



2,212



(12,074)



(13,994)



(17,430)



(27,722)



(0.98)



(1.36)



(0.98)



(1.36)



17,705



20,451



17,705



20,451



(i)



$ (46,705)

60,864

-- (f)

11,041



$



(i)



$



22,399



$



119,089

61,310(h)

40,825



other assets

$1.7 million.



of



$2.2



million



and



an



extraordinary



loss



of



(c)



Includes provision for impairment of domestic oil and gas

properties of $75.3 million and provision for write-down of

other assets of $4.5 million.



(d)



Includes non-recourse debt of an aggregate $0.7 million

and

$3.7

million

as

of December

31,

1994

and

1993,

respectively,

included

in the Lutcher

Moore

Debt.

(See

"Business -- Domestic Properties -- Lutcher Moore Tract").



(e)



Includes provision for impairment of domestic oil and gas

properties

of

$3.85 million; provision for

write-down

of

investment of $2.4 million; and loss on sale of investments

of $0.7 million.



(f)



All of the Company's debt of $38.02

31, 1996 and $104.3 million at June 30,

as currently due.



(g)



Includes extraordinary

debt of $551,000.



(h)



Long term debt is net of unamortized discount

million and $12.6 million as of December 31, 1997

30,

1998, respectively, associated with the value

to

the

stock purchase warrants issued with the

13.50% Senior Secured Notes due May 1, 2004.



(i)



The

earnings

were inadequate to cover combined

fixed

charges and Preferred Stock dividends.

The dollar amount of

the

coverage deficiency was $21.3 million in

1993;

$43.3

million

in 1994; $95.7 million in 1995; $19.8 million

in

1996; $36.1 million in 1997; $7.4 million for the six months

ended June 30, 1997; and $10.9 million for the six months

ended June 30, 1998.



(j)



Revenues and operating expenses associated with oil and

gas properties held for sale have become insignificant and,

accordingly,

are

recorded

in other

costs

and

operating

expenses

in

the

accompanying

consolidated

statements

of

operations.



loss



for



million at December

1997 was classified



early



extinguishment



of



of $13.7

and June

allocated

Company's



Organizational Chart

-------------------[Organizational Chart]

XCL Ltd. (1)



(Parent Company)



XCL-China Ltd.

(Wholly owned subsidiary)

XCL-China LubeOil, Ltd. (3) (Wholly owned subisiary)

XCL-China Coal Methane, Ltd. (4) (Wholly owned subsidiary)

XCL-Cathay Ltd. (5) (Wholly owned subsidiary)

XCL-Texas, Inc. (Wholly owned subsidiary)

XCL-Acquisitions, Inc. (Wholly owned subsidiary)

The Exploration Company of Louisiana, Inc. (2) (Wholly owned subsidiary)

XCL-Land Ltd. (2) (Wholly owned subsidiary)

L.M. Holding Associates, L.P., a Louisiana Partnership in Commendam (2)

_________________

(1)

XCL holds one-half of the Foreign Contractor's interest under a

Production Sharing Contract covering the Zhao Dong Block; Apache Corporation

holds the other one-half of the Foreign Contractor's interest; CNPC holds an

interest of up to 51% of any fields developed under the Production Sharing

Contract.

(2)

The Exploration Company of Louisiana, Inc. holds a 50% interest and is a

limited partner and XCL-Land Ltd. holds a 50% interest and is a general partner

in L.M. Holding Associates, L.P., a Louisiana Partnership in Commendam.

(3)

XCL-China LubeOil, Ltd. holds a 49% interest in a joint venture with

CNPC United LubeOil Corporation for the production and sale of lubricants.



(4)

XCL-China Coal Methane, Ltd. holds a Memorandum of Understanding with

the China National Administration of Coal Geology (CNACG) regarding the

exploration, evaluation, development and utilization of the coalbed methane

resource in the Hancheng and Tiafa mining areas.

(5)

XCL-Cathay Ltd. holds a Production Sharing Contract covering the Zhang

Dong Block; CNPC holds an interest up to 51% of any fields developed under such

contract.



RISK FACTORS

In

addition

to

the other information in this Prospectus,

the

following

factors

should

be

carefully evaluated

before

buying

any

securities

covered

by

this Prospectus. See also

the

discussion

on

page

[3]

entitled

"Disclosure

Regarding

Forward-Looking

Statements."

High Degree of Leverage

- ----------------------The

Company

is

currently

highly

leveraged.

Future

operations

will

be

significantly

affected

by

its

level

of

indebtedness.

Much

of

its

cash

flow

from

operations

will

be

dedicated

to

interest

payments.

Large

amounts

of

money

will

be

required

to

continue

its

operations in

China.

Covenants

in

the

Indenture

(the

"Indenture")

governing

the

Company's

13.50%

Senior

Secured

Notes

due

May

1, 2004 (the "Notes")

require

the

Company

to

meet

certain

financial

tests and

limit

the

Company's

ability

to

dispose

of

assets

or

to

borrow

additional

funds.

These

covenants

may

affect

the

Company's

business

flexibility,

and

could

possibly

limit

acquisition

activity.

The

Company's

interest

in

the

Zhang

Dong

Block, which

is

held

by

XCL-Cathay

Ltd., may not be subject to all of the foregoing restrictions.

The

Company's

earnings

to fixed charges

ratio

and

preferred

stock

is

insufficient

to

cover

preferred

dividend

payments

and

payments

on

the

Notes.

The Company's ability

to

meet

its

debt

service

obligations

and

to

reduce

its

indebtedness

will

depend

upon

its

future

performance.

This,

in

turn,

will

depend

upon

successful

completion

of

the

activities

called

for

in

the

ODP,

the

Company's

access

to

additional

capital,

general

economic

conditions,

as

well

as on financial, business,

and

other

factors,

many of which are beyond the Company's control.

Restrictions Imposed by Terms of the Company's Indebtedness

- ----------------------------------------------------------The

Indenture

restricts,

among

other

things,

the

Company's

ability

to

incur

additional debt, incur

liens,

pay

dividends,

or

make

certain

other

restricted

payments.

It

also

limits

the

Company's

ability

to

consummate

certain

asset

sales,

enter

into

certain

transactions

with

affiliates,

enter

into

mergers

or

consolidations,

or

dispose

of

substantially

all

the

Company's

assets.

The

Company's

ability

to comply

with

such

covenants

may

be

affected

by

events beyond its control. The

breach

of

any

of

these

covenants

could result in a default.

A

default

could

allow

holders

of

the

Notes

to

declare

all

amounts

outstanding

and

accrued

interest

immediately

due

and

payable.

Absent

such

payment,

the

holders

could

proceed against

any

collateral

granted

to

them

to

secure

such indebtedness, which

includes

all

of

the

stock

of

the

Company's

principal

operating

subsidiary,

XCL-China

Ltd.

("XCL-China"),

which

has guaranteed

such

indebtedness

with

a

full

and

unconditional

guaranty.

A

foreclosure

on

the

stock

of

XCL-China

could

trigger

Apache's right of first

refusal

under

the

Participation

Agreement

to

purchase such

stock

or

its

option

to

purchase

the

Company's interest in the Contract.

There

can

be

no

assurance

that

the

assets

of

the

Company

and

XCL-China

(a

"Subsidiary

Guarantor"),

or

any

other

Subsidiary

Guarantors

(if,

in

the

future,

there

are

others) would

be

sufficient

to

fully

repay

the

Notes

and

the

Company's

other

indebtedness.

See

"Description of Existing Debt."

Oil and Gas Properties; Capital Expenditures

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



The

Company's

total

reserves, as of

December

31,

1997

and

June

30,

1998,

were

all classified as proved and

undeveloped,

on

a

BOE

basis.

Recovery

of

such

reserves

will

require

both

significant

capital

expenditures

and

successful

drilling,

completion

and

production

operations.

The

Company

will

also

have

additional

capital

expenditures

for

exploration

activity

on

the

Zhao Dong Block and for activity on the Zhang Dong Block.

The

Company

plans

to

generate

the

additional

cash

needed

through

the

sale

or

financing of

its

domestic

assets

held

for

sale,

a

financing

involving

the

Lutcher

Moore

Tract,

the

Zhao

Dong

Block

or

the

Zhang

Dong

Block

or

the

completion

of

additional

equity,

debt

or

joint

venture

transactions.

There

is

no

assurance,

however, that the Company will be

able

to

sell

or

finance

such

assets

or

to

complete

other

transactions

in

the

future

on

commercially reasonable terms,

if

at

all,

or

that

it

will

be

able

to

meet

its

future

contractual

obligations.

The

Indenture limits the Company's ability to obtain additional debt financing, and

there can be no assurance that additional debt or equity financing,

or

additional cash from operations, will be available.

If funds are raised on an

equity basis, there may be a dilutive effect to current shareholders.

If production from the oil and gas properties

commences

by

mid-1999,

as

currently

anticipated,

the

Company's

proportionate

share

of

the

related

cash

flow

will

be

available

to

help

satisfy

cash

requirements.

However,

there

is

likewise

no

assurance

that

such

development

will

be

successful

and

production

will

commence,

and

that

such

cash

flow

will

be

available.

See

"Management's

Discussion

and

Analysis

of

Financial

Condition

and

Results

of

Operations

-Liquidity,

Capital

Resources

and

Management's

Plans"

and

"Use

of

Proceeds."

The

Company's

failure

to

meet

certain

financial

obligations

under

the

Joint

Operating

Agreement

between

the

Company

and

Apache

(in

addition

to

certain

other

actions)

may

trigger

Apache's

option

to

purchase

the

Company's

interest

in

the Contract.

See "Business -- Apache Farmout"

and

"- - Domestic Properties -- Lutcher Moore Tract."

Reliance on Estimates of Proved Reserves and Future Net Revenue

- ---------------------------------------------------------------The

reserve

data

included

in

this

Prospectus

are

only

estimates

and

may

not

prove

to

be

correct.

In

addition,

estimates

of

future

net

revenue

from

proved

reserves

are

also

estimates

that

may

not

prove

to

be

correct.

In

particular,

estimates

of

crude

oil

and natural gas reserves,

and

future

net

revenue

from

proved

reserves

described

in

this

Prospectus

are

based

on

the

assumption that the Zhao Dong Block is

developed

in

accordance

with

the

ODP,

modified

to

accelerate

production

and

reduce

costs,

and

that

future

crude

oil

prices

for

production

from

the

Zhao

Dong

Block remain at least at

the

levels

assumed

for

December

31,

1997.

These

assumptions

include

an

assumption

that

the

Company

will

receive a premium for

the

C-D

Field

oil

because

of

its potential for use as a lubricating oil

base

stock,

the

Company's

49%

ownership

in

the

CNPC

lubricating

oil

joint

venture

and

the

Company's right under the joint venture

to

market

both

lubricating

oil

and

lubrication

oil

feed

stock.

These

assumptions

may

prove

to

be

inaccurate.

See

"Management's

Discussion

and

Analysis

of

Financial

Condition

and

Results

of

Operations

-Liquidity,

Capital

Resources

and

Management's

Plans" and "Business -- Oil and Gas Reserves."

Foreign Operations

- -----------------The

Company's

future

operations

and

earnings

will

depend

upon

the

results

of the Company's operations in

China.

If

these

operations

are

not

successful,

the

Company's

financial

position,

results of operations and cash flows will suffer greatly.

The

success

of

the Company's operations is

subject

to

many

matters

beyond

management's

control,

like

general

and

regional

economic

conditions,

prices

for

crude

oil

and

natural

gas,

competition,

and

changes

in

regulation.

Also,

since

the

Company

is

dependent

on

international

operations,

specifically

those

in

China,

it

will

be

subject

to

various

additional

political,

economic

and

other

uncertainties.

The

Company's

operations

will

be

subject

to

the

risks

of restrictions

on

transfer

of

funds;



export

duties,

quotas

customs

and

tariffs;

exchange

restrictions,

regulations.



and

embargoes;

domestic

and

changing

taxation

political

conditions,



and

international

policies,

foreign

and

governmental



The

United

States

government

has

publicly

criticized

China

from

time

to

time

with respect to various

matters.

The

Company

cannot

predict

whether

political

developments

like

these

will

adversely

affect

the

Company's

Chinese

operations.

The

Company

believes

that

neither

the

Chinese nor

the

U.S.

government

wants

to

impair

U.S.-Chinese

commercial

relations.

The

Company

has

excellent

relations

with

Chinese

governmental

authorities

in

charge of the development of China's energy resources.

In



recent

months

there

have been substantial

disruptions

in

several

Asian

financial

markets

and

many

Asian

currencies

have

undergone

significant

devaluations.

These

events

can

be

expected

to

have

negative

near,

and possibly

long

term,

effects

on

the

flow

of

investment

capital

into

and

out

of

Asian

currency

denominated

assets.

It

is

impossible

to

predict

the

ultimate

outcome

of

these events and their possible negative

effect

on

the

Company's investments in China.

First Onshore Production Sharing Agreement Between CNODC and a

Foreign Company

- --------------------------------------------------------------In early 1993 the Company became the first foreign company

to enter into an onshore production agreement with CNODC

(although since that time a number of other foreign companies

have also done so). Because XCL was the first foreign company

to enter into such a contract, there was some uncertainty as to

how it would be administered.

Currency/Exchange Rate Fluctuations

- ----------------------------------For the foreseeable future the Company's only material

revenues will be from its oil and gas activities.

These

revenues will be in U.S. dollars. To the extent that at some

future time revenues are paid to the Company in Chinese Renminbi

rather than in dollars, the Company's earnings, operations and

cash flows would then be subject to currency and exchange rate

fluctuations and to restrictions imposed by

the

Chinese

government on the transfer and exchange of funds.

If that

occurs the Company will evaluate the currency requirements of

each venture and, if possible, enter into forward exchange

contracts to hedge foreign currency transactions. There can be

no assurance, however, that such forward exchange contracts will

be available at the time of any such occurrence.

The Company

does not intend to engage in currency speculation.

Renminbi

earnings, if any, must be converted to pay dividends or to make

other payments to the Company in U.S. dollars or other freely

convertible currencies. As of December 1, 1996, as to foreign

investment enterprises, the Renminbi became fully convertible

for current account items, including profit distributions,

interest payments and receipts and expenditures from trade.

Conversion into U.S. dollars is based on the rate set by The

People's Bank of China (which is based on the previous day's PRC

interbank foreign exchange market rate and with reference to

currency exchange rates on the world financial markets). Certain

ministerial approvals are needed to acquire foreign exchange for

a current account transaction. Strict foreign exchange controls

continue for capital account transactions (including repayment

of loan principal and return of direct capital investments and

transactions in investments in negotiable securities).

In the

past, there have been shortages of U.S. dollars or other foreign

currency available for conversion of Renminbi, and it is

possible such shortages could recur, or that restrictions on

conversion could be reimposed in the future at times when the

Company is seeking to convert Renminbi. Prior to 1994, the

Renminbi experienced a significant net devaluation against most

major

currencies, and during certain periods, significant

volatility in the market-based exchange rate.

Since

the

beginning of 1994, the Renminbi to U.S. dollar exchange rate has

largely stabilized. However, there can be no assurance that the

Chinese government will not devalue the Renminbi, that such

exchange rate will otherwise remain stable (particularly in



light of the recent currency crisis experienced by a number of

other Asian countries), that the Company will continue to be

able to remit foreign currency abroad or that the Company will

be able to convert sufficient amounts of Renminbi in China's

foreign exchange markets to meet its future needs. Additionally,

there

can

be no assurance that approvals for

exchange

transactions will be available in the future or, if available,

will be granted to the Company. The Chinese government has

issued certain international loan procedures (the "Procedures")

that apply to foreign invested enterprises, including Chineseforeign equity and cooperative joint ventures. The Procedures

may require the approval of China's State Administration of

Exchange ("SAFE") for certain international loans to foreign

invested enterprises extended in connection with project finance

transactions, as well as the terms of such transactions.

The

Company plans to obtain funds for certain development projects

through project finance transactions. There can be no assurance

that SAFE approval for such transactions, if necessary, can be

obtained at all or on terms advantageous to the Company.

The

failure of the Company to obtain SAFE approval for such

transactions, if required, could adversely affect the Company's

ability to fund its operations.

History of Losses

- ----------------The Company has experienced recurring losses. For the years

ended December 31, 1993, 1994, 1995, 1996 and 1997, the Company

recorded net losses of approximately $15.2 million,

$36.6

million,

$87.8

million, $12.1 million and

$14

million,

respectively. See "Selected Consolidated Financial Data." There

can be no assurance that the Company will be profitable in the

future.

See "Management's Discussion and Analysis of Financial

Condition

and

Results of Operations" and

the

Company's

Consolidated Financial Statements and the notes thereto included

elsewhere in this report.

Qualified Accountants' Report

- ----------------------------In

reporting on the Company's audited consolidated

financial

statements

and

XCL-China's

audited

financial

statements as of and for the fiscal years ended December 31,

1997 and 1996, the

report of the Company's

independent

1998 accountants

contained

an

explanatory

paragraph

indicating factors which create substantial doubt about the

Company's and XCL-China's ability to continue as a going concern.

Such factors include the Company's ability to generate additional

cash flows to satisfy its development and exploratory

obligations with respect to its China properties.

Volatility

of

Oil and Gas Prices; Impact

on

Company's

Profitability

- ----------------------------------------------------------------The Company's revenue, profitability and future rate of

growth are substantially dependent upon prevailing prices for

crude oil and natural gas. Crude oil and natural gas prices can

be extremely volatile and in prior years have been depressed by

excess total supplies. Prices are also affected by actions of

the United States and foreign governments and international

cartels.

Further, prices are often seasonal. There can be no

assurance that current levels for crude oil and natural gas

prices can be sustained. Any substantial or extended decline in

such prices would have a material adverse effect on the Company's

financial condition and results of operations, including reduced

cash flow and borrowing capacity.

Operating Hazards; Uninsured Risks

- ---------------------------------The nature of the crude oil and natural gas business

involves many operating hazards such as crude oil and natural gas

blowouts, explosions, encountering formations with

abnormal

pressures, cratering and crude oil spills and fires,

and

inclement weather. Any of these could result in damage to or

destruction of crude oil and natural gas wells, destruction of

producing facilities, damage to life or property, suspension of



operations, environmental damage and possible liability to the

Company.

In accordance with customary industry practices, the

Company maintains insurance against some, but not all, of such

risks and losses. The Company does not maintain any insurance

against the risks of expropriation and nationalization of its

business interests in China. The occurrence of such an event not

fully covered by insurance could have a material adverse effect

on the financial condition and results of operations of the

Company.

Competition

- ----------The oil and gas industry is marked by strong competition

from major oil companies and independent operators in acquiring

properties and leases for the exploration for, and production of,

crude oil and natural gas. Competition is particularly intense

with respect to the acquisition of desirable undeveloped crude

oil and natural gas properties. The Company anticipates such

competition in connection with any expansion of its activities in

China.

The principal competitive factors in the acquisition of

such undeveloped crude oil and natural gas properties include the

staff and data necessary to identify, investigate and acquire

interests in such properties, close working relationships with

governmental authorities who control acquisition, exploration,

production and marketing activities in China, and the financial

resources necessary to acquire and develop such properties. Many

of the Company's competitors have substantially greater financial

resources, staff and facilities.

The principal raw materials and resources necessary for the

exploration and production of crude oil and natural gas are

interests in prospective properties, drilling rigs and related

equipment

to

explore for such reserves and knowledgeable

personnel to conduct all phases of crude oil and natural gas

operations. The Company must compete for such raw materials and

resources with both major integrated energy companies

and

independent operators. Although the Company believes that its

current operating and financial resources are adequate

to

preclude any significant disruption of its operations in the

immediate future, the continued availability of such materials

and resources to the Company cannot be assured.

Depletion of Reserves

- --------------------The rate of production from crude oil and natural gas

properties declines as reserves are depleted.

Except to the

extent the Company acquires additional properties containing

proved reserves, conducts successful exploration and development

activities or, through engineering studies, identifies additional

behind-pipe zones or secondary recovery reserves, the proved

reserves of the Company will decline as reserves are produced.

Future crude oil and natural gas production is therefore highly

dependent upon the Company's level of success in acquiring or

finding additional reserves.

Government Regulation

- --------------------The Company's business is subject to certain Chinese and

United States federal, state, and local laws and regulations

relating to the exploration for and development, production and

marketing of crude oil and natural gas, as well as environmental

and

safety

matters.

In addition, the Chinese government

regulates various aspects of foreign company operations in China.

Such laws and regulations have generally become more stringent in

recent years in the United States, often imposing greater

liability on a larger number of potentially responsible parties.

It is not unreasonable to expect that the same trend will be

encountered in China. Because the requirements imposed by such

laws and regulations are frequently changed, the Company is

unable to predict the ultimate cost of compliance. There is no

assurance that laws and regulations enacted in the future will

not adversely affect the Company's financial condition and

results of operations.

Dependence on Key Personnel

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



The Company depends to a large extent on Marsden W. Miller,

Jr., its Chairman of the Board and Chief Executive Officer, for

its management and business and financial contacts in China and

its relationship with Chinese authorities. The Company does not

have an employment contract with Mr. Miller or with any other

officer or employee, other than employment agreements or similar

arrangements with certain operational employees of the Company's

subsidiaries. See "Management." The unavailability of Mr. Miller

would have a material adverse effect on the Company's business.

The Company's success is also dependent upon its ability to

retain skilled technical personnel. While the Company has not to

date experienced difficulties in employing or retaining such

personnel, its failure to do so in the future could adversely

affect its business. The Company does not maintain key man life

insurance on any of its executives or other personnel.

Limitations on the Availability of the Company's Net Operating

Loss Carryforwards

- ---------------------------------------------------------------The Company has incurred net operating loss ("NOL")

carryforwards as at December 31, 1997 of $183 million.

Use of

the NOLs by the Company are subject to limitations under Section

382 of the Internal Revenue Code of 1986 relating to ownership

changes. The various stock offerings made by the Company may have

triggered those limits. Also uncertainties as to the future use

of the NOLs exist under the criteria set forth in Financial

Accounting

Standards

Board ("FASB")

Statement

No.

109,

"Accounting for Income Taxes."

The Company established

a

valuation allowance of $81.1 million and $83.6 million for

deferred tax assets at December 31, 1996 and 1997, respectively.

Lack of Public Market

- --------------------There is no current public market for the Amended Series A

Preferred Stock other than the limited trading through the

Private Offering, Resales and Trading through Automated Linkage

("PORTAL") Market of the National Association of Securities

Dealers, Inc. and none is expected to develop.

Possible Volatility of Price of the Common Stock

- -----------------------------------------------The market price of the Common Stock and Amended Series A

Preferred Stock could be subject to wide fluctuations in response

to quarterly variations in the Company's results of operations,

changes in earnings estimates by analysts, conditions in the oil

and gas industry or general market or economic conditions.

No Cash Dividends

- ----------------The Company has not paid any cash dividends to date on the

Common Stock and there are no plans for cash dividend payments on

its Preferred Stock or Common Stock in the foreseeable future.

The Indenture also limits cash dividends on the Company's equity

securities. Dividends on the Company's Preferred Stock have been

paid in kind.

In the event of dividend defaults on the

outstanding shares of Preferred Stock, under the terms of such

Stock the Company would be restricted from paying cash dividends

on the Common Stock for so long as such dividend defaults

continued. See "Price Range of Common Stock," "Dividend Policy,"

"Description of Existing Debt" and "Description of Capital Stock

- -- Preferred Stock."

Possible Delisting of Common Stock

- ---------------------------------The AMEX has, since November 1996, continued to review the

Company's listing eligibility since the Company has not met

certain financial requirements for continued listing. The Company

intends to try to satisfy the Exchange's concerns. In the event

the Common Stock is delisted from the AMEX, the liquidity of the

Securities and the Company's ability to continue funding its

activities through the sale of securities may be significantly



impaired.

Certain Anti-takeover Provisions

- -------------------------------A Change of Control or other Fundamental Change gives

holders of Amended Series A Preferred Stock special conversion

rights for 45 days. These rights are intended to provide those

holders with limited loss protection in certain circumstances.

The rights may also render more costly or otherwise discourage

certain

takeovers

or

other

business

combinations.

See

"Description of Capital Stock -- Preferred Stock -- Amended

Series A Preferred Stock -- Special Conversion Rights."

The

Company's

Amended and Restated Certificate

of

Incorporation contains provisions that the Board of Directors

believes may impede or discourage a takeover of the Company

without the support of the incumbent Board. See "Description of

Capital Stock -- Common Stock -- Special Charter and By-Law

Provisions."

Year 2000 Compliance

- -------------------The Company has conducted a review of its computer systems

to identify the systems that could be affected by the "Year 2000"

issue and has upgraded certain of its software to software that

purports to be Year 2000 compliant. The Year 2000 problem is the

result of computer programs being written using two digits

(rather than four) to define the applicable year and equipment

with time-sensitive embedded components. Any of the Company's

programs that have time-sensitive software or equipment that has

time-sensitive embedded components may recognize a date using

"00" as the year 1900 rather than the year 2000.

This could

result in a major system failure or miscalculations. Although no

assurance can be given because of the potential wide scale

manifestations of this problem which may affect the Company's

business, the Company presently believes that the Year 2000

problem will not pose significant operational problems for its

computer systems. The Company is not able to estimate the total

costs of undertaking Year 2000 remedial activities, if they will

be required. However, based upon information developed to date,

it believes that the total cost of Year 2000 remediation will not

be material to the Company's cash flow, results of operation or

financial condition. The Company also may be vulnerable to other

companies' Year 2000 issues. The Company's current estimates of

the impact of the Year 2000 problem on its operations and

financial results do not include costs that may be incurred as a

result of any vendors' or customers' failure to become Year 2000

compliant on a timely basis. The Company intends to initiate

formal communications with all of its significant vendors and

customers with respect to such persons' Year 2000 compliance

programs and status in the fourth quarter of 1998. The Company

expects to complete its Year 2000 review and, if required,

remediation efforts within a time frame that will enable its

computer-based and embedded chip systems to function without

significant disruption in the Year 2000. However, there can be

no assurance that such other companies will achieve Year 2000

compliance or that any conversions by such companies to become

Year 2000 compliant will be compatible with the Company's

computer system. The inability of the Company or any of its

principal vendors or customers to become Year 2000 compliant in a

timely manner could have a material adverse effect on the

Company's financial condition or results of operations.

FINANCIAL RESTRUCTURING

The Company has recently taken steps to simplify its capital

structure. Effective November 10, 1997, the Company recapitalized

and combined the Series A and E Preferred Stock into an aggregate

of 790,613 shares of Amended Series A Preferred Stock (including

accrued and unpaid dividends paid in kind). As of September 30,

1998 there were 1,181,614 shares of Amended Series A Preferred

Stock issued and outstanding with an aggregate liquidation

preference of approximately $100 million. Effective January 16,

1998, the Series F Preferred Stock was mandatorily converted into

an aggregate of 633,893 shares of Common Stock. On March 3, 1998,

the Company settled litigation instituted by the holder of its

Series B, Cumulative Preferred Stock (the "Series B Preferred



Stock").

The holder revoked and withdrew its redemption notice

and sold its shares of Series B Preferred Stock and accompanying

warrants. The purchasers exchanged the stock and warrants for

44,465

shares of Amended Series B, Cumulative Convertible

Preferred Stock ("Amended Series B Preferred Stock") and warrants

to

purchase 250,000 shares of Common Stock,

subject

to

adjustment, and received 2,620 shares of Amended Series B

Preferred Stock in payment of all accrued and unpaid dividends on

the Series B Preferred Stock. See "Business -- Litigation."

As

of September 30, 1998, there were 48,405 shares of Amended Series

B Preferred Stock issued and outstanding with an aggregate

liquidation preference of approximately $4.8 million.

For a

description of the material terms of the Amended Series A

Preferred Stock and the Amended Series B Preferred Stock, see

"Description of Capital Stock -- Preferred Stock -- Amended

Series A Preferred Stock" and "--Amended Series B Preferred

Stock."

USE OF PROCEEDS

Each Selling Security Holder will receive all of the net

proceeds from the sale of the Securities owned by such Selling

Security Holder. The Company will not receive any proceeds from

the sale of any Securities, although the Company will receive the

proceeds from any exercise of the Warrants. However, there can

be no assurance that the Warrants will be exercised.

Assuming

all of the Warrants are exercised, the net proceeds to the

Company would be approximately $63 million. The proceeds from

such Warrant exercises, if any, will be used by the Company to

fund its China projects and for general working capital purposes.

CAPITALIZATION

The following table sets forth the total consolidated

capitalization of the Company at June 30, 1998.

This table

should be read in conjunction with the Consolidated Financial

Statements of the Company and the notes thereto and the other

financial information included elsewhere in this Prospectus.

(in thousands)

Lutcher Moore Group limited recourse debt



$



2,074



Total debt, including current maturities:

13.50% Senior Secured Notes due May 1, 2004,

net of unamortized discount

Total debt



62,384

------64,458

-------



$



Shareholders' equity:

Preferred stock

Amended Series A Preferred Stock

Amended Series B Preferred Stock

Common Stock (1)

Treasury stock (69,470 shares)

Unearned compensation (2)

Additional paid-in capital

Accumulated deficit



$



Total shareholders' equity



$



Total capitalization



$



1,182

48

230

(1)

(11,702)

304,195

(256,153)

------37,799

------102,257

=======



_______________________

(1)

Excludes shares of Common Stock issuable upon conversion

of Preferred Stock or exercise of outstanding options and

warrants at June 30, 1998.

See "Description of Capital

Stock."

(2)



Represents unearned compensation related to employee

stock option awards and is being amortized over the period

earned.

(See Note 9 to the Consolidated Financial Statements

for the year ended December 31, 1997.)

PRICE RANGE OF COMMON STOCK



The Common Stock trades on the AMEX under the symbol "XCL"

and on the London Stock Exchange. The following table shows the

range of the quarterly high and low sales prices on the AMEX to

date during 1998 and for each quarter during 1997 and 1996.

On

December 17, 1997 the Company effected a one-for-fifteen reverse

stock split of its Common Stock (the "Reverse Stock Split"). The

high and low prices for the periods shown have been adjusted to

reflect that Reverse Stock Split.

1998

- ----



High

----



First Quarter



Low

----



$ 6.50



$ 3.50



Second Quarter

Third Quarter



5.00

4.13



3.31

2.75



1997

- ---First Quarter

Second Quarter

Third Quarter

Fourth Quarter



$ 5.63

4.69

6.56

13.13



$ 2.81

2.81

2.81

3.85



1996

- ---First Quarter

Second Quarter

Third Quarter

Fourth Quarter



$ 6.60

7.50

5.70

3.75



$ 2.85

2.85

1.95

1.95



On September 30, 1998, the closing price for the Common

Stock on the AMEX was $3.00. As of September 30, 1998, the

Company had approximately 3,480 shareholders of record with

respect to its Common Stock.

DIVIDEND POLICY

XCL has not paid any cash dividends on the Common Stock to

date and has no plans for Common Stock cash dividend payments in

the foreseeable future. The payment of future dividends will

depend on the Company's future earnings and financial condition.

The Company is restricted from paying cash dividends on its

equity securities under the terms of the Indenture. Dividends on

the Company's Preferred Stock have been paid in kind.

In the

event of dividend defaults on the outstanding shares of Preferred

Stock, under the terms of such Stock the Company would be

restricted from paying cash dividends on the Common Stock for so

long as such dividend defaults continued. See "Risk Factors -No Cash Dividends," "Description of the Existing Debt" and

"Description of Capital Stock -- Preferred Stock" herein.



OIL AND GAS EXPLORATION

AND PRODUCTION PROPERTIES AND RESERVES

Production, Sales and Cost Data

- ------------------------------The following table sets forth certain information regarding

the production volumes, revenues, average prices received and

average production costs associated with the Company's sale of

oil and gas from properties held for sale for the periods

indicated.

Year Ended December 31,

------------------------1997

1996

1995

---------------Net Production: (a)

Gas (MMcf)

Oil (MBbl)

Gas equivalent (MMcfe)



72

4

95



467

9

522



1,474

19

1,588



Oil and gas sales ($ in 000's)(b)

Gas

Oil and other



$



166

70

---$ 236

=====



Total oil and gas sales

Average sales price:

Gas ($ per Mcf)

Oil ($ per Bbl)

Gas equivalent ($ per Mcfe)



$



2.28

18.34

2.47



955

181

----$ 1,136

======



$ 1,953

527

-----$ 2,480

=====



1.84

19.80

2.18



1.33

19.58

1.56



Oil and gas costs ($ per Mcfe):

Production expenses and taxes

2.41

0.74

0.71

Depreciation, depletion and

amortization of oil and gas

properties

0.81

0.96

1.23

________________

(a)

Excludes gas consumed in operations.

(b)

Includes plant products recovered from treating and

processing operations.

The following table shows the 1997 production of oil and

natural gas liquids and natural gas by major fields. All of the

Company's net production was attributable to the Cox Field and

the Frenier Field located on the Lutcher Moore Tract.

(See

"Business -- Domestic Properties").

1997 Net Production

-------------------------(MBbls)

(MMcf)

--------------------Oil

%

Gas

%

----- -----------72

100

4

100

---



Field

- -----Cox Field

Frenier Field

Oil and Gas Acreage

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



The oil and gas acreage in which the Company has leasehold

or other contractual interests at December 31, 1997, and which

are not classified as assets held for sale are summarized in the

following table. "Gross" acres are the total number of acres

subject to the Contract. "Net" acres are gross acres multiplied

by the Company's fractional share of the costs of production

after taking into account CNODC's 51% reversionary interest with

respect to the 5,911 acres in the C-D Initial Development Area

(in which CNODC has elected to participate) and before CNODC's

51% reversionary interest in the remaining gross acres (in which

CNODC has not yet elected to participate).

Undeveloped

----------------Gross

Net (a)

----------48,677

22,831



The People's Republic of China

_________________

(a)

Net undeveloped acreage would be 11,926 acres if CNODC

elects to participate for its 51% reversionary interest in

the entire Zhao Dong Block.

Drilling Activity

- ----------------The following tables set forth wells drilled by the Company

in the periods indicated.



United States

- ------------Exploratory:

Productive

Nonproductive



Year Ended December 31,

------------------------------------------------1997

1996

1995

-----------------------------------Gross

Net

Gross

Net

Gross

Net

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



---



---



---



---



---



Total

Development:

Productive

Nonproductive

Total



-----



-----



-----



-----



-----



-----



-------



-------



-------



-------



1

----1



.2

----.2



Year Ended December 31,

---------------------------------------------------1997

1996

1995 (a)

--------------------------------------The People's

Republic of China

Gross

- ----------------------Exploratory:

Productive

2

Nonproductive

1

---Total

3

Development:

Productive

Nonproductive

Total

____________

(a)



-------



Net

---



Gross

-----



Net

---



Gross

-----



1.0

0.5

---1.5



1

-----1



.5

----.5



2

1

---3



1.0

.5

---1.5



-------



-------



-------



-------



-------



Pursuant to the Second Participation Agreement dated May

10, 1995, between XCL and Apache, Apache's interest in the

Zhao Dong Block was increased from 33% to 50% of the Foreign

Contractor's interest.



Producing Well Data

- ------------------At December 31, 1997, the Company had interests in 4

producing gas wells (3.45 net) in the Cox Field, which are

included in assets held for sale.

Summary of Oil and Gas Reserve Data

- ----------------------------------The following table sets forth summary information with

respect to the Company's estimated proved undeveloped

oil

reserves and the estimated future net cash flows attributable

thereto.

Unless otherwise noted, all information in

this

Prospectus relating to oil reserves and the estimated future net

cash flows attributable thereto are based on estimates prepared

by the Company's independent petroleum engineers and are shown

net to the Company's interest. The estimated future undiscounted

net cash flows and the present value of estimated future net cash

flows were prepared using constant prices as of the calculation

dates. The present value of estimated future net cash flows were

discounted at 10% per annum on a pre-tax basis. The following

table also sets forth, for comparison purposes, the standardized

measure of discounted future net cash flows determined in

accordance with the rules prescribed by FASB No. 69.See "Risk

Factors -- Reliance on Estimates of Proved Reserves and Future

Net Revenue" and "Supplemental Oil and Gas Information" in the

Notes to the Consolidated Financial Statements.



Oil and Condensate

Estimated future pre-tax net

revenues (in thousands)

Present value of estimated

future net pre-tax revenues

(in thousands)

Standardized measure of

discounted future net cash

flows (in thousands)



Crude Oil (MBLs)

--------------------------------1997(1)

1996 (1)

1995 (1)

--------------------11,762

10,579

58

=======

=======

======

$119,049

========



$142,860

=======



$46,835

======



$ 64,821

=======



$ 79,062

========



$26,040

======



$ 53,848



$ 62,606



$26,040



Net

---



=======



=======



======



_________________

(1)



1997 and 1996 represent China properties only.

represents U.S. properties being held for sale only.



1995



SELECTED CONSOLIDATED FINANCIAL DATA

The following table sets forth selected consolidated

financial data of the Company for and at the end of each of the

five years ended December 31, 1997 derived from the audited

financial statements of the Company included elsewhere in this

Prospectus (except for 1994 and 1993 which are not included

herein) and from the unaudited financial statements for the six

months ended June 30, 1998 and 1997, which have been prepared on

the same basis as the audited statements and, in the opinion of

Management, reflect all adjustments, consisting

of

normal

recurring adjustments, necessary for a fair presentation of that

information.

The following table should also be read

in

conjunction

with "Management's Discussion and Analysis

of

Financial

Condition

and Results of Operations"

and

the

Consolidated Financial Statements and notes thereto included

elsewhere herein.

</TABLE>

<TABLE>

<CAPTION>

Six Months

Year Ended December 31

Ended June 30

-----------------------------------------------------------------------------------1997(j)

-------



1993(a)



1994(b)



1995(c)



1996(e)



1997(g)(j)



-------



-------



-------



-------



----------



1998(j)

------(In thousands, except per share data)



<S>

<C>

<C>

<C>

<C>

<C>

<C>

Statement of Operations Data:

Revenues

$

8,499

$

4,336

$

2,480

$

-$

-Operating expenses

2,449

1,341

985

--General and administrative expenses

3,840

4,553

4,551

1,562

2,915

Depreciation, depletion and

amortization

5,788

3,292

2,266

--Other, net

---28

72

Operating loss

(12,518)

(33,875)

(85,673)

(1,590)

(2,987)

Net interest expense

1,329

1,831

2,998

1,646

1,852

Interest income

141

508

133

498

718

Net loss

(15,197)

(36,622)

(87,837)

(2,426)

(4,120)

Net loss attributable to common stock

(19,978)

(41,529)

(92,658)

(5,742)

(8,999)

Net loss per common share

Basic

(2.52)

(3.14)

(5.77)

(.29)

(.40)

Diluted

(2.52)

(3.14)

(5.77)

(.29)

(.40)

Weighted average common

shares outstanding - basic

7,933

13,220

16,047

19,511

22,622

Weighted average common

shares outstanding - diluted

7,933

13,220

16,047

19,511

22,622



(Unaudited)

<C>

$



1,136



$



--



342



--



3,487



5,167



579



--



--



2,891



(9,793)



(8,058)



2,415



8,450



8



2,212



(12,074)



(13,994)



(17,430)



(27,722)



(0.98)



(1.36)



(0.98)



(1.36)



17,705



20,451



17,705



20,451



Deficiency of earnings to combined

fixed charges and preferred

stock dividends

(i)

(i)

Balance Sheet Data (at end of

period):

Total working capital (deficit)

(34,468)

$ 5,972

Total assets

151,890

117,204

Long-term debt, net of current

maturities

-- (f)

62,384(h)

Stockholders' equity

34,824

37,799

___________



(i)



(i)



$(15,562)



$ (1,563)



157,377



149,803



(i)



$ (24,239)

72,336



53,965 (d)



41,607(d)



15,644



84,609



95,200



16,900



(a)



Includes provision for impairment of domestic oil and gas

properties of $8 million.



(b)



Includes provision for impairment of domestic oil and gas

properties of $25.9 million and provision for write-down of

other assets of $2.2 million and an extraordinary loss of

$1.7 million.



(c)



Includes provision for impairment of domestic oil and gas

properties of $75.3 million and provision for write-down of

other assets of $4.5 million.



(d)



Includes non-recourse debt of an aggregate $0.7 million

and

$3.7 million as of December 31, 1994 and 1993,

respectively, included in the Lutcher Moore Debt.



(e)



Includes provision for impairment of domestic oil and gas

properties of $3.85 million; provision for write-down of

investment of $2.4 million; and loss on sale of investments

of $0.7 million.



(f)



All of the Company's debt of $38.02 million at December 31,

1996 and $104.3 million at June 30, 1997 was classified as

currently due.



(g)



Includes extraordinary loss for early extinguishment

debt of $551,000.



(h)



Long term debt is net of unamortized discount of $13.7

million and $12.6 million as of December 31, 1997 and June

30, 1998, respectively, associated with the value allocated

to the stock purchase warrants issued with the Notes.



(i)



(j)



of



The earnings were inadequate to cover fixed charges.

The dollar amount of the coverage deficiency was $16.5

million in 1993; $38.5 million in 1994; $90.8 million in

1995; $14.5 million in 1996; and $22.4 million in 1997; $4.1

million for the six months ended June 30, 1997; and $6.0

million for the six months. ended June 30, 1998.

Revenues and operating expenses associated with oil and

gas properties held for sale have become insignificant and,

accordingly, are recorded in other costs and operating

expenses in the accompanying consolidated statements of

operations.



</TABLE>

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

The following discussion and analysis should be read

together with the Consolidated Financial Statements, the notes

thereto and the supplemental data included in this Prospectus.

References to Notes in this section of the Prospectus are to the

notes to the audited Consolidated Financial Statements. See also

the discussion on page [3] entitled "Disclosure Regarding ForwardLooking Statements."

Liquidity, Capital Resources and Management's Plans

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



(i)



(i)



$ (46,705)

60,864

-- (f)

11,041



$



22,399

119,089

61,310(h)

40,825



$



Background

---------The Company's management decided in the fourth quarter of

1995 to focus on the Company's operations in China and to sell

its other assets. The excellent well test results on the Zhao

Dong Block and the Company's reserve assessments support this

decision. The Company has focused on (i) raising funds to meet

capital requirements for Chinese operations, (ii) selling its

other properties and (iii) simplifying its capital structure to

make it easier to raise capital. The Company intends to continue

these activities and to work with Apache and CNODC to refine the

ODP

to reduce expenditures and accelerate production. The

Company's only historic revenues have been from the Company's

financing activities and from properties previously sold and

those currently held for sale or investment. The Company is in

the development stage with respect to its operations in China and

has not generated any revenues from operations related to its

properties and interests in China.

The Company has made significant capital expenditures since

acquiring its interest in the Zhao Dong Block in 1992.

Despite

incurring losses since 1992, the Company, because of the high

quality of the Zhao Dong Block, has been able to obtain all

required funds for the exploration and development of the Zhao

Dong Block.



On August 20, 1998, the Company entered into a production

sharing contract with CNODC for the 12,000-acre Zhang Dong Block

and on September 15, 1998, the contract was approved by the

Ministry of Foreign Trade and Economic Cooperation of China,

effective October 1, 1998.

Liquidity and Capital Resources

------------------------------The Company offered and sold $75 million of Notes and $25

million of equity on May 20, 1997. During 1997 such funds were

used to pay costs of the offering, the Company's 1997 exploration

and development costs and $38 million of debt. At June 30, 1998,

the Company had an unrestricted operating cash balance of $11.4

million and restricted cash held in escrow for the payment of

interest on the Notes of $5.2 million. The Company had net

working capital of $6.0 million. These cash balances are not

sufficient to cover the Company's working capital requirements

and capital expenditure obligations on the Zhao Dong Block during

the remainder of 1998 and through 1999.

As a result of the Company's decision to focus on China and

sell its U.S. assets, the Company presently has no source of

material revenues. Revenues for 1997 were $0.2 million versus

$1.1 million in 1996. The Company incurred a loss for fiscal

1997 of $14.0 million and expects to incur a loss in 1998 as well

because production and related cash flow from the Zhao Dong and

Zhang Dong Blocks are not expected until 1999.

For the six

months ended June 30, 1998, the Company had a net loss of $4.1

million.

Management's Plan

----------------The Company's unrestricted cash will be required for working

capital and exploration, development and production expenditures

on the Zhao Dong and Zhang Dong Blocks.

With respect to the Zhao Dong Block, CNODC has given written

notice that it will participate as to its full 51% share of the CD Field and has urged that production begin as soon as reasonably

practicable.

Except for certain exploratory wells on which

Apache has an obligation to pay for the Company's costs, the

Company is required to fund 50% of all exploration expenditures

and 24.5% of all development and production expenditures.

The

Company

estimates

that its share of

actual

development

expenditures for the C-D Field for the remainder of 1998 will be



approximately $2.0 million. The Company estimates that its share

of unpaid exploration expenses for the remainder of 1998 will be

approximately $5.0 million. The Company estimates that its share

of development expenses for 1999 will be approximately $22

million. The Company estimates its share of exploration expenses

of the remaining two obligatory wells to be drilled in 1999 is

approximately $6.0 million. The Company anticipates that in

addition to the two obligatory exploration wells to be drilled in

1999, additional exploration wells may be drilled during 1999.

The Company presently projects and plans that these funds will be

available from the sale or refinancing of domestic oil and gas

properties held for sale and/or investment in land, project

financing, increasing the amount of senior secured

notes,

supplier financing, additional equity, including the exercise of

currently outstanding warrants to buy common stock,

joint

ventures with other oil companies and proceeds from production.

Based

on

continuing discussions with major

stockholders,

investment bankers, potential purchasers and other oil companies,

the Company believes that such required funds will be available.

However, there is no assurance that such funds will be available

and, if available, on commercially reasonable terms.

Any new

debt could require approval of the holders of the Company's Notes

and there is no assurance that such approval could be obtained.

See "Risk Factors."

Due to the successful results of the D-3 and C-4 Wells, the

1998 work program and budget exceed the Company's initial

preliminary projections earlier in 1997. This results from the

necessity of drilling at least one appraisal well offsetting the

C-4 exploratory well and the decision to extend the Contract into

its third exploratory period because of the successful drilling

of the D-3 and C-4 wells. XCL, Apache, and CNODC are working

together to reduce capital costs for the Zhao Dong Block and to

determine whether the commencement of production from the C-4

Well area can be accelerated into the first half of 1999.

This

work has already resulted in reductions of estimated capital

costs of approximately $35 million based on a change in the

conceptual design, and a determination that it is possible to

commence production from the C-4 well area in the first half of

1999. It is the Company's understanding that the Company, Apache

and CNODC have now all agreed to make every effort to achieve

initial production in the first half of 1999. The $28 million

estimated to be necessary for exploration and development in 1999

does not include the entire cost of accelerating production from

the C-4 Well area into the first part of 1999. The Company

estimates

this

would require additional

expenditures

of

approximately $960,000, which the Company believes it can obtain

from the sources described above.

The Company is the operator of the Zhang Dong Block and, as

such, is required to cover the costs of initial appraisal

drilling, upgrading production facilities and additional studies

of seismic data. The contract commits the Company to drill at

least one well during the first year. Under the contract, the

Company is entitled to 49% of the production. The Company

estimates that its minimum capital requirements over the next

year to satisfy the terms of the Zhang Dong contract are

approximately $8 million. Funds are expected to come from the

previously mentioned sources.

Longer term liquidity is dependent upon the Company's future

performance, including commencement of production in China, as

well as continued access to capital markets. In addition, the

Company's efforts to secure additional financing could

be

impaired if its Common Stock is delisted from the AMEX.

If funds for the purposes described above are not available,

the

Company may be required substantially to curtail its

operations or to sell or surrender all or part of its interest in

the Zhao Dong or the Zhang Dong Blocks and/or its other interests

in China in order to meet its obligations and continue as a going

concern.

The Company is not obligated

capital payments to its lubricating



to make any additional

oil and coalbed methane



projects.

The Company is in discussions with the Chinese about

expansion of their lube oil venture. If these discussions are

successfully concluded, additional capital investments will be

required by the Company; however, at this time it is not known

what the extent or timing for such investments might be.

Similarly, if the Company's coalbed methane project becomes

active and is successful, the Company may make additional

investments in that business. Again, the extent and timing of

such investment, if any, is unknown at this time.

Other General Considerations

- ---------------------------Pursuant to the Company's December 17, 1997 shareholders'

meeting, whereby several compensation plans were approved, the

Company recorded unearned compensation of approximately $12.8

million.

This amount will be amortized ratably over future

periods of up to five years and is recorded as a non-cash expense

in the Statement of Operations. Because certain of these awards

are based on market capitalization there may be additional

amounts which may become payable. Approximately $0.9 million of

compensation expense was recorded in connection with these awards

during 1997. An additional $0.7 million of compensation expense

was recorded in the first six months of 1998.

The Company believes that inflation has had no material

impact on its sales, revenues or income during the reporting

periods. In light of increased oil and gas exploration activity

worldwide, and in the Bohai Bay in particular, increased rates

for equipment and services, and limited rig availability may have

an impact in the future.

The Company is subject to existing domestic and Chinese

federal,

state

and local laws and regulations

governing

environmental quality and pollution control. Although management

believes that such operations are in general compliance with

applicable environmental regulations, risks of substantial costs

and liabilities are inherent in oil and gas operations, and there

can be no assurance that significant costs and liabilities will

not be incurred.

New Accounting Pronouncements

- ----------------------------In June 1997, the FASB issued SFAS No. 130, "Reporting

Comprehensive Income," which is effective for the Company's year

ending December 31, 1998. SFAS No. 130 establishes standards for

the reporting and displaying of comprehensive income and its

components.

The Company will be analyzing SFAS No. 130 during

1998 to determine what, if any, additional disclosures will be

required.

In June 1997, the FASB Issued SFAS No. 131, "Disclosures

about Segments of an Enterprise and Related Information," which

is effective for the Company's year ended December 31, 1998.

This statement establishes standards for reporting of information

about operating segments. The Company will be analyzing SFAS No.

131 during 1998 to determine what, if any, additional disclosures

will be required.

Results of Operations

- --------------------The six month period ended June 30, 1998 compared to the six

month period ended June 30, 1997

- -----------------------------------------------------------------During the six months ended June 30, 1998 and June 30, 1997,

the Company incurred net losses of $4.1 million and $2.4 million,

respectively.

Revenues and operating expenses associated with oil and gas

properties

held

for sale have become

insignificant

and

accordingly, are recorded in other costs and operating expenses

in the accompanying consolidated statement of operations.

Interest expense increased during the six months ended June

30, 1998, when compared with the same period in 1997, because of

increased debt and interest rates. Also included in interest

expense was amortization of warrant costs and debt issue costs on



the

Senior

Secured Notes issued in May 1997.

Interest

capitalized for the comparable periods in 1998 and 1997 increased

because the oil and gas property base was larger, thus, reducing

net interest expense for the periods.

Preferred Stock

months ended June 30,

same period in 1997.

of additional shares

1997. These dividends

Stock at the option of



dividends were $4.9 million for the six

1998, as compared to $3.3 million for the

The increase is the result of the issuance

in the equity offering concluded in May

are paid in additional shares of Preferred

the Company.



Interest income for the six months ended June 30, 1998 and

1997 was $0.7 million and $0.5 million, respectively.

The

increase of $0.2 million in 1998 resulted from the short-term

investment of cash still available from the May 1997 debt and

equity offerings.

General and administrative expenses were $2.9 million for

the six months ended June 30, 1998, as compared to $1.6 million

for the same period in 1997. The increase of $1.3 million during

the six month period ended June 30, 1998, was primarily due to

increases in non-cash compensation charges related to stock and

appreciation options of $0.7 million (approved by shareholders in

December 1997), $0.4 million in legal and professional fees, and

$0.2 million in public company expenses. Legal and professional

fees increased because of additional services and public company

expenses associated with holding two shareholder meetings.

1997 compared to 1996

- --------------------The Company incurred a loss of $14 million in 1997, as

compared with a loss of $12 million in 1996. Included in the

loss

for 1997 is a charge of $0.9 million for non-cash

compensation charges, related to stock and appreciation options,

which are classified in general and administrative expenses.

In

addition, 1997 includes a $2.8 million provision for estimated

settlements in connection with various disputes and litigation

matters.

Such amount is reflected in Other in the Statement of

Operations. In addition, $0.6 million of non-cash charges relate

to early extinguishment of debt.

Interest expense, net of amounts capitalized, increased $6.0

million in 1997 primarily as a result of increased borrowings and

higher interest rates on the new debt. In addition, interest

expense includes amortization of $1.3 million relating to the

value assigned to warrants issued with the $75 million debt

offering completed in May 1997.

The net loss for 1996 includes a $3.85 million noncash

charge for the provision of impairment of domestic oil and gas

properties classified as held for sale. The loss in 1996 also

reflects the effect of a $2.4 million write-down and $0.7 million

loss on sale of the Company's investments.

Oil and gas revenues from properties held for sale for the

year ended December 31, 1997 were approximately $0.2 million,

compared to approximately $1.1 million during 1996. Revenues will

continue to decline as the Company completes its announced program

of selling substantially all of its U.S. producing properties.

Interest income increased $2.2 million during the year ended

December 31, 1997, compared with 1996. The primary reason for

this increase was the interest earned on the $75 million held

in escrow from the Note Offering.

As the Company continues to focus its resources on

exploration and development of the Zhao Dong and Zhang Dong

Blocks, future oil and gas revenues will initially be directly

related to the degree of drilling success experienced.

The

Company does not anticipate significant increases in its oil and

gas production in the short-term and expects to incur operating

losses until such time as net revenues from the China projects

are realized.

General and administrative expenses increased $1.4 million

during 1997 as compared with 1996, as reflected in the following

table.



Payroll, benefits and travel

Non-cash compensation cost

Legal and professional

Public company and corporate expenses

Lafayette office expense

Corporate insurance



1997

1996

------(thousands)

$ 1,554

$ 1,683

853

-1,284

510

574

539

304

374

341

381

----------$ 4,910

$ 3,487

======

======



The increase in legal and professional fees of approximately

$0.8 million were principally related to fees of approximately

$0.2 million on one lawsuit, an increase of approximately $0.3

million for outside consulting and the remainder of the increase

for general and corporate legal and accounting services.

1996 compared to 1995

--------------------The Company reported a net loss for fiscal 1996 of $12.1

million before preferred dividends of $5.4 million, or a total of

$0.98 per share, compared to a net loss for fiscal 1995 of $87.8

million before preferred dividends of $4.8 million, or $5.77 per

share (as adjusted for the Reverse Stock Split). The net loss

for 1996 includes a $3.85 million noncash charge for impairment

of domestic oil and gas properties, classified as assets held for

sale.

The loss in 1996 also reflects a $2.4 million write-down

and $0.7 million loss on the sale of the Company's investments.

The net loss for 1995 includes a $75.3 million noncash

charge for the provision of impairment of domestic oil and gas

properties. The carrying amounts of the Company's properties in

Texas were written down by $16.5 million during 1995, in order to

comply with the ceiling limitation prescribed by the Commission.

This was principally due to downward revisions in estimated

reserves in the second quarter and reduced present values of

reserves attributable to delays in development drilling scheduled

in the third quarter. During the fourth quarter, to reflect the

expected results of its announced program to divest itself of its

U.S. oil and gas properties, the Company recorded an additional

$58.8 million noncash write-down, reducing the recorded value of

its domestic oil and gas properties to their estimated fair

market value. The loss in 1995 also reflects the effects of a

$4.5 million write-down of the Company's other assets and

investments.



Oil and gas revenues from properties held for sale in 1996

were $1.1 million as compared to $2.5 million in 1995, primarily

due to continued reduction in volume sold. The Company does not

anticipate material revenues until mid-1999 at the earliest when

production in China may commence.

General and administrative expenses for 1996 were $3.5

million as compared to $4.6 million in 1995.

General and

administrative costs are expected to remain relatively unchanged

during the upcoming year. Operating costs are expected to

decline due to the further disposition of domestic oil and gas

properties.

Interest expense decreased in 1996, due primarily

Company's principal payments on its institutional debt

first quarter of 1996.



to

in



the

the



Subsequent Events

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



Since June 30, 1998, the Company entered into a production

sharing contract with CNODC for the 12,000-acre Zhang Dong Block.

See "Management's Plans" above. In addition, on August 26, 1998,

the Company, Apache and CNODC began drilling the C-5 exploration



well on the Zhao Dong Block and on August 26, 1998, they

drilling the C-4-2 appraisal well on the Zhao Dong Block.



began



In September 1998, the Company exchanged (i) 15,000 Equity

Warrants from the May 20, 1997 Equity Offering, exercisable on or

after May 20, 1998 and before May 20, 2004, and entitling the

holder to purchase 351,015 shares of Common Stock at a price of

$3.09 per share and (ii) 24,015 Warrants issued on May 20, 1997,

in connection with interest payable on the Secured Subordinated

Notes due April 15, 2000, exercisable between May 20, 1998 and

November 1, 2000, at an exercise price of $3.09 per share, held

by an institutional holder, for new Warrants exercisable on or

before September 30, 1998 and entitling the holder to purchase

351,015 shares of restricted Common Stock at a price of $2.50 per

share.

On September 17, 1998, the new Warrants were exercised,

as a result of which the Company received approximately $0.9

million and is to issue 351,015 shares of its restricted Common

Stock in an exempt private placement. The Warrant Exchange

Agreement provides that if at any time on or before March 15,

1999, any other holder of Equity Warrants from the May 20, 1997

Equity Offering is offered an exchange of such Warrants or an

amendment to such Warrants to provide for a more favorable

exercise

provision than offered in the

Warrant

Exchange

Agreement, the party to the Warrant Exchange Agreement shall be

entitled to purchase additional shares of Common Stock at a price

of $0.01 per share in an amount that will make its effective

exercise price under the Warrant Exchange Agreement equivalent to

that provided to such other Warrant holder.

Year 2000 Compliance

- -------------------The Company has conducted a review of its computer systems

to identify the systems that could be affected by the "Year 2000"

issue and has upgraded certain of its software to software that

purports to be Year 2000 compliant. The Year 2000 problem is the

result of computer programs being written using two digits

(rather than four) to define the applicable year and equipment

with time-sensitive embedded components. Any of the Company's

programs that have time-sensitive software or equipment that has

time-sensitive embedded components may recognize a date using

"00" as the year 1900 rather than the year 2000.

This could

result in a major system failure or miscalculations. Although no

assurance can be given because of the potential wide scale

manifestations of this problem which may affect the Company's

business, the Company presently believes that the Year 2000

problem will not pose significant operational problems for its

computer systems. The Company is not able to estimate the total

costs of undertaking Year 2000 remedial activities, if they will

be required. However, based upon information developed to date,

it believes that the total cost of Year 2000 remediation will not

be material to the Company's cash flow, results of operations or

financial condition.

The Company also may be vulnerable to other companies' Year

2000 issues. The Company's current estimates of the impact of

the Year 2000 problem on its operations and financial results do

not include costs that may be incurred

as a

result of

any vendors' or customers' failure to become Year 2000 compliant

on a timely basis.

The Company intends to initiate formal

communications with all of its significant vendors and customers

with respect to such persons' Year 2000 compliance programs and

status in the fourth quarter of 1998. The Company expects to

complete its Year 2000 review and, if required, remediation

efforts within a time frame that will enable its computer-based

and

embedded chip systems to function without significant

disruption in the Year 2000. However, there can be no assurance

that such other companies will achieve Year 2000 compliance or

that any conversions by such companies to become Year 2000

compliant will be compatible with the Company's computer system.

The inability of the Company or any of its principal vendors or

customers to become Year 2000 compliant in a timely manner could

have a material adverse effect on the Company's financial

condition or results of operations.



BUSINESS

The Company's principal business is the exploration for and

development and production of crude oil and natural gas. Building

on the success of its first such project in China, the joint

venture on the Zhao Dong Block (see "Prospectus Summary -- The

Company"), the Company's strategy is to expand those operations

and, selectively, to enter into additional energy-related joint

ventures.

Published information shows that the undeveloped

energy resources of China are extensive and that China's energy

needs are growing at a high rate. The Chinese government,

further, has recently encouraged foreign participation in the

development of its energy resources, and has demonstrated a

willingness to include independent oil and gas exploration

companies such as the Company in additional energy-related joint

ventures. The Company's excellent relationship with the Chinese

energy-related industry representatives should assist it in

remaining competitive in that country. See "The Zhao Dong Block,"

below. On August 20, 1998, the Company entered into a production

sharing contract with CNODC, effective October 1, 1998, for the

12,000-acre Zhang Dong Block. See "Zhang Dong Block," below.

To expand its energy-related activities in China, on July

17, 1995 the Company signed a contract with CNPC United Lube Oil

Corporation to engage in the manufacturing, distribution, and

marketing of lubricating oil in China and in southeast Asian

markets. See "United/XCL Lube Oil Joint Venture," below. And on

December

14,

1995, the Company signed a

Memorandum

of

Understanding with the China National Administration of Coal

Geology ("CNACG"), pursuant to which the parties have begun

cooperative exploration and development of coalbed methane in two

areas of China. See "Coalbed Methane Project," below.

Corporate History; Address; Employees

- ------------------------------------Before 1993, the Company operated primarily in the Gulf

Coast area of the United States. Formerly The Exploration Company

of Louisiana, Inc., XCL Ltd. was incorporated in Delaware in

1987. It is the successor to a Louisiana corporation of the same

name, incorporated in 1981. The Company's principal executive

offices are at 110 Rue Jean Lafitte, 2nd Floor, Lafayette,

Louisiana 70508. Its telephone number is (318) 237-0325.

As of June 30, 1998, the Company's employees totaled 26. No

employees are subject to any union contracts. The Company

believes it maintains good relations with its employees.

The Zhao Dong Block

- ------------------Geology

------The Zhao Dong Block extends from the shoreline of the Dagang

oil field complex on Bohai Bay to water depths of approximately 5

meters. It encompasses approximately 197 square km (roughly

50,000 gross acres). Geologic information suggests that a portion

of the Zhao Dong Block is a seaward extension of the Dagang oil

field complex which is one of China's largest.

According to

statistics published by Wood McKenzie in the Southeast Asia

Report, Dagang has produced over 700 million barrels of oil and

has an estimated ultimate recovery of substantially more.

The

Company has not verified this published information.

Tertiary formations constitute a major portion of the Zhao

Dong Block's production, its geology being in many respects

similar to the U.S. Gulf Coast. Bohai Bay sediments are however

non-marine and oil prone, while the U.S. Gulf Coast sediments are

open-marine and gas and condensate prone. Seismic and subsurface

data appear to indicate a thick, structured sedimentary section

in the contract area. Proximity to producing fields and highly

productive test results from the wells which have been drilled

suggest excellent source rock.

Seismic

-------



Seismic data were acquired in and around the Zhao Dong Block

by shallow water and transition zone seismic crews from 1986 to

1988. While the original processing of the data was fair in

reflection continuity, the Company's initial evaluation involved

reprocessing 721 km, resulting in dramatic improvement for both

structural and stratigraphic interpretation. This reprocessing,

plus 390 km of new seismic data (outlined below), make available

a current total of 1,111 km of 2D seismic data in and around the

Zhao Dong Block.

From 1993 through 1995 the Company acquired an additional

390 km of 2D seismic data shot by Dagang Geophysical, a Chinese

firm, all of which assisted the Company in assessing the Zhao

Dong Block's potential.

A 1997 3-D seismic program was designed to delineate

development well locations in the C-D Field and to better define

exploration prospects on the remainder of the Zhao Dong Block.

The

program covered approximately 100 square km and cost

approximately $5.5 million; the Company's share was approximately

$2.75 million. A similar program (at a comparable cost) will be

undertaken in 1998 to cover most of the rest of the Zhao Dong

Block.

Drilling Results

---------------Mapping of seismic events on shallow, medium, and deep

reflections delineated possibly productive lead areas. Subsequent

exploratory drilling resulted in three successful discoveries

along

the

Zhao Bei fault system. Appraisal

tests

have

structurally and stratigraphically delineated the aerial extent

of both the "C" and the "D" segments of the C-D Field.

Hydrocarbons have been found in the Lower Minghuazhen (Pliocene),

the Guantao (Miocene), and the Shahejie (Oligocene) formations.

Appraisal drilling commenced in 1998 to delineate the extent of

the 1997 C-4 discovery located northeast of the C-D Field. The C4

well

is

productive from the Shahejie Formation

and,

additionally, from Jurassic and Permian Age sediments.

The Company's drilling programs, year by year, have been as

follows:

1994 Drilling

------------Zhao Dong C-1. The first of three Phase 1 exploratory

wells, C-1 was spudded in April 1994, and drilled to a depth

of 9,843 feet. Oil was tested in two Pliocene sands of the

Lower Minghuazhen Formation, from perforations shot between

4,278 and 4,462 feet, and yielded a combined test rate of

2,160 BOPD with no water. Total net pay for the zones tested

was 97 feet.

Zhao Dong C-2. Spudded and drilled in October 1994, the

C-2 appraisal well was drilled to a depth of 7,134 feet and

confirmed the C-1 discovery. Tested from four intervals,

between 4,267 and 4,481 feet, the combined rate of three of

the zones was 3,640 BOPD with no water. Total net pay for

the zones tested was 47 feet.

1995 Drilling

------------Zhao Dong C-2-2. Drilled directionally in April 1995 to

a measured depth of 5,625 feet (5,034 feet true vertical

depth), the C-2-2 appraisal was shaled out for prospective

sands

in the Minghuazhen and then plugged back

and

sidetracked as C-2-2A.

Zhao Dong C-2-2A. After plugging and abandoning the

bottom section of the C-2-2 well, the C-2-2A sidetrack well

was drilled structurally updip of the original wellbore to a

measured depth of 5,084 feet (4,956 true vertical depth).

Although Minghuazhen prospective sands were present and not

shaled out, the objective sands were water wet. Accordingly,

the well was plugged and abandoned.



Zhao Dong D-1. Designed to test the Ordovician

Carbonate section, the D-1 exploratory well reached a depth

of

8,784 feet in June 1995. Although no hydrocarbon

potential was found in the Ordovician Carbonates, oil was

found in the Lower Minghuazhen, proving this shallower

section to be productive upthrown to the Zhao Bei fault

system. Drill-stem testing, with perforations at 4,185 to

4,205 feet, confirmed hydrocarbons with an initial rate of

1,330 BOPD. The net pay for this zone was 20 feet.

Although the D-1 was designed primarily to test deeper

Paleozoic objectives, from 3,523 to 6,268 feet it yielded

another 15 sands ranging in age from Pliocene Minghuazhen to

Permian with hydrocarbon shows in mudlogs and/or sidewall

cores. One Permian sand tested water with a trace of 30

gravity oil; one Minghuazhen sand tested water with 2% oil.

Located on the eastern edge of the C-D structural

complex, the D-1 was not optimally placed to explore the

shallower hydrocarbon-containing sands. But the fact that it

tested 1,330 BOPD from one sand, tested water with smaller

amounts of oil from two other sands, and had shows in

numerous additional sands, suggests proximity to the limits

of a significant oil accumulation. Accordingly, the D-2

well, discussed under 1996 Drilling, below, was designed to

appraise the D-1 discovery at a much higher structural

position. See also the discussion, immediately below, of a

parallel relationship between and among the C-3, C-2, and C1 wells.

Zhao Dong C-3. Although scheduled to be drilled to

5,004 feet,

this appraisal well, drilled in July 1995,

reached a total depth of 6,773 feet. Analysis of geological

information during drilling had shown that the C-3 was

structurally higher than both the C-1 and C-2, and so

drilling continued to test the Shahejie Formation until, at

approximately 6,595 feet, the Zhao Bei fault was crossed.

Eight different sands had drill-stem tests; seven were found

to be productive, as compared to only three and two for the

C-2 and C-1. (The C-1 and C-2 did however have oil shows in

several sands found to be productive in the C-3.) Cumulative

rate potential was 5,830 BOPD and 460 Mcfpd; one Shahejie

sand tested oil at 1,356 BOPD until water production began.

(Initial analysis indicates the water was coned due to

pressure draw-down during testing.) Total net pay for the

zones tested was 143 feet.

The C-3 thus indicates that Shahejie Formation sands

are

oil

productive

with significant

appraisal

and

exploration potential, both in the C-D Field and over much

of the as yet undrilled portion of the Zhao Dong Block.

Initial seismic stratigraphic analysis indicates additional

lacustrine fan systems could be present downdip.

1996 Drilling

------------Zhao Dong D-2. Spudded in November 1996, the D-2

appraisal

well was designed to test the

Minghuazhen

(Pliocene) and Guantao (Miocene) sands upthrown to the Zhao

Bei fault system, as well as the Shahejie (Oligocene)

Formation downthrown to a bifurcated fault of the same fault

system. It was drilled to a measured depth of 7,501 feet

(6,180 feet true vertical depth), on an upthrown fault

closure approximately 1.5 km west of and structurally higher

than the D-1 discovery well.

Five intervals (six drill-stem tests) from perforations

at 3,285 to 5,445 feet (3,277 to 4,950 feet true vertical

depth) tested at a combined rate of 11,571 BOPD, confirming

the lateral productivity of several sands previously seen

productive and, in the Guantao Formation, establishing

production in several new sands. This well also demonstrated

much higher initial flow rates without the need

for

artificial lift, one zone flowing 4,370 BOPD with 774 Mcfpd

of gas, and a second zone flowing 2,471 BOPD with 168 Mcfpd

of gas.

Sands seen productive in this well appear to be present

over the entire area, adding significantly to the overall



potential of the C-D Field as well as the rest of the Zhao

Dong Block.

Total net pay for the zones tested was 243

feet.

1997 Drilling

------------Zhao Dong F-1. Planned as an exploratory well to

fulfill Phase I drilling commitments, the F-1 was designed

to test an 1,800+ foot thick section of the Shahejie

Formation on a four-way dip structural closure.

This

exploratory

well

was spudded in

October

1996

and

directionally drilled, from a drill pad built at the

shoreline, to a measured depth of 14,501 feet (10,968 true

vertical depth). Severe mechanical problems prevented the

well from being fully evaluated, and two sidetrack attempts

were unsuccessful. Drilling operations under a turnkey

contract have been abandoned. A number of Shahejie sands

were encountered, with some apparent oil shows.

Zhao Dong D-3. The second appraisal well for the D-1

discovery, and located approximately 1 km north of the D-1,

the D-3 was spudded in June 1997 and drilled to a depth of

5,740 feet. Although no drill-stem tests were performed

(since the data collected were sufficient to confirm the

productive nature of the reservoirs and since the rig was

needed to drill the C-4 Well), using wireline tools, oil was

recovered from several sands, most of which had tested oil

in the D-2 and D-1 wells, as well as from three new

productive sands for the "D" segment. Total net pay for the

productive zone was 89 feet. The D-3 Well thus solidified

structural interpretation and confirmed productive areas.

Zhao Dong C-4. An exploratory well designed to test PreTertiary and Shahejie Formations, the C-4 was spudded in

July 1997, on a separate structure approximately 2 km

northeast of the C-1, and was drilled to a depth of 8,993

feet. Eight zones tested at a combined rate of 15,349 BOPD,

6,107 Mcfpd of gas, and 14 barrels of condensate per day.

Total net pay for the zones tested was 209 feet.

The C-4 proved the presence and productivity of

multiple Oligocene Age Shahejie sands on the Zhao Dong

Block's northern portion. The C-4 also found multiple highquality Cretaceous and Jurassic sands, not encountered in

previous drilling, present and productive, indicating that

such

sands may be present and prospective elsewhere.

Significantly, the Shahejie, Cretaceous and Jurassic sands

contained higher gravity oil (28 to 38 degree API) and more

gas, indicating higher reservoir energy than previously

encountered. All zones tested exhibited natural flow.

1998 Drilling

------------Zhao Dong C-4-2. An appraisal well for the C-4 (the C4-2), located approximately 1.3 km south of the C-4, was

spudded in August 1998. The C-4-2 well is being drilled to

delineate the size of the reservoir encountered in the C-4

well.

The well is expected to be drilled to a depth of

approximately 9,700 feet to test the Shahejie, Cretaceous

and Jurassic Sands encountered in the C-4 well.

Zhao Dong C-5.

Also in August 1998, the

C-5

exploration well located approximately 3 km southwest of the

D-2 well commenced drilling. The C-5 well was drilled to a

depth of 7,646 feet.

No commercial oil and gas was

encountered and the well was plugged and abandoned.

Exploration Potential

- --------------------Reconnaissance seismic surveys on the Zhao Dong Block have

led the Company's independent petroleum engineers to identify, in

addition to the C-D Field and the C-4 discovery, twenty-six

prospective areas with exploratory potential. Seismic data over

these prospective areas have been analyzed and the potential

reserves are being evaluated.



Future Drilling Plans

- --------------------The Company, Apache, and CNODC have approved a five-well

drilling program for 1998, which will include an appraisal well

(the Zhao Dong C-4-2, referred to above, which commenced drilling

in

August 1998) to appraise the C-4 discovery and

four

exploratory wells, at least two of which will be in the "C" and

"D" segments (and one of which was the Zhao Dong C-5, referred to

above.

At least two of these wells are expected to be drilled

during the 1999 drilling season.

The Contract

- -----------The Company acquired the rights to the exploration,

development and production of the Zhao Dong Block by executing a

Production

Sharing Agreement with CNODC, a Chinese

state

enterprise, effective May 1, 1993 (the "Contract"). The Contract

includes the following terms:

The Foreign Contractor (the Company and Apache as a group,

working through a participation agreement) must pay for all

exploration costs. If a commercial discovery is made and if

CNODC exercises its option to participate, development and

operating costs and allocable remainder oil and gas production

are shared up to 51% by CNODC and the remainder by the Foreign

Contractor.

The

work under the Contract is divided into three

categories,

Exploration,

Development

and

Production.

Exploration, Development and Production operations can occur

concurrently on different areas of the Zhao Dong Block.

The

Contract is not to continue beyond 30 consecutive years.

All

exploration work must be completed during the Exploration Period

(which expires April 30, 2000). The Production Period for each

oil field covered by the Contract is 15 years, starting with the

date of first production for that field.

Exploration Period

-----------------Work performed and expenses incurred during this period,

consisting of three phases totaling seven contract years and

beginning as of May 1, 1993, are the exclusive responsibility of

the Foreign Contractor. The Contract mandates certain minimal

requirements for drilling, seismic and expenditures during each

phase of the Exploration Period. The Foreign Contractor has

elected to enter the third exploration phase (expiring April 30,

2000). The minimum work requirements for seismic and the minimum

expenditures for the balance of the Contract have been met. This

leaves only the drilling requirements left to be satisfied.

The

Foreign Contractor is required to drill three exploratory wells

prior to the expiration of the Exploration Period.

This will

complete its requirements in the Exploration Period. These three

wells are approved in the 1998 work program and budget and,

subject to rig availability (and, as to one of the wells,

location approval), are expected to be drilled in 1998 or 1999.

Development Period

------------------The Development Period for any field discovered during the

Exploration Period commences on the date the requisite Chinese

governmental authority approves the development plan for an oil

and/or gas field.

The C-D Field is now in the Development

Period.

Production Period

----------------The Production Period for any oil and/or gas field covered

by the Contract (the "Contract Area") will be 15 consecutive

years (each of 12 months), commencing for each such field on the

date of commencement of commercial production (as determined

under the terms of the Contract). However, prior to

the

Production Period, and during the Development Period, oil and/or

gas may be produced and sold during a long-term testing period.



Relinquishment

-------------The Company expects that no relinquishment will be required

until Exploration Phase 3 has been concluded. After April 30,

2000, the portions of the Contract area, not including areas in

which

development and/or production activities

have

been

undertaken, must be relinquished.

Termination of the Contract

--------------------------The Contract may be terminated by the Foreign Contractor at

the end of each phase of the Exploration Period, without further

obligation. The parties have elected to go into the third phase

of the Exploration Period.

Post-Production Operating and Exploration Costs

----------------------------------------------After commercial production has begun, the operating costs

incurred in any given calendar year for an oil field shall be

recovered in kind from 60% of that year's oil production. After

recovery of operating costs, the 60% is applied to exploration

costs. Unrecovered operating costs shall be carried forward.

After recovery of operating and exploration costs for any

field, development costs shall be recovered by the Foreign

Contractor and CNODC from 60% of the remaining oil production,

plus deemed interest at 9%.

Natural gas shall be allocated according to the same general

principles, but in order to ensure reasonable benefit for the

Foreign Contractor the allocation percentages shall be adjusted

in the light of actual economic conditions.

Annual gross production ("AGP") of each oil and gas field

shall be allocated in kind in the following sequences and

percentages:

(1)

taxes.



5 percent of AGP shall be allocated to pay Chinese



(2)

The Chinese government shall receive a sliding

scale royalty, determined on a field by field basis, calculated

as follows (as amended by the Ministry and State Taxation Bureau,

effective January 1, 1995):

METRIC TONS OF ANNUAL

CRUDE OIL PRODUCTION

ROYALTY RATE

(One metric ton is roughly equivalent to seven

barrels of crude oil)

Up to and including 1,000,000..................

1,000,000 to 1,500,000 ........................

1,500,000 to 2,000,000 ........................

2,000,000 to 3,000,000 ........................

3,000,000 to 4,000,000 ........................

Over 4,000,000.................................



Zero

4%

6%

8%

10%

12.5%



(3)

60% of AGP shall be deemed "cost recovery oil" and

used for cost recovery, first of operating costs, and second for

exploration and development costs (including deemed interest).

Cost recovery oil shall not be reduced by any royalty due the

Chinese government.

(4)

After recovery of operating, exploration, and

development costs (including deemed interest), the remainder of

AGP shall be considered "remainder oil," which shall then be

further divided into "allocable remainder oil" and "Chinese share

oil." Allocable remainder oil shall be calculated for each field,

based upon a sliding scale formula applied to each such field's

annual production, and shall be shared by the parties in

proportion to their respective interests under the Contract. All

oil remaining after the above allocations shall be designated

Chinese share oil and allocated to CNODC or other Chinese

government designee.

Administration of the Contract; Arbitration



- ------------------------------------------The Contract is administered by the JMC, consisting of an

equal number of representatives designated by CNODC and by the

Foreign Contractor. Disputes must be resolved, first through

negotiation, and then arbitration (though CNODC may have the

right to seek resolution in Chinese courts). CNODC has not waived

sovereign immunity in any proceedings commenced in China.

If accepted by the parties, arbitration will be conducted by

the China International Economic and Trade Commission under its

provisional rules. If that is not accepted by the parties,

disputes may be arbitrated by a panel of three arbitrators, each

party to appoint one and the third appointed by the two thus

chosen or, failing such appointment, by the Arbitration Institute

of the Stockholm (Sweden) Chamber of Commerce. Arbitration shall

be

conducted

under the rules of the UN

Commission

on

International Trade Law of 1976 (subject however to such rules as

expressly provided in the Contract). Awards shall be final and

binding on the parties. The Contract is governed by Chinese law.

Apache Farmout

- -------------In March 1994, by means of a participation agreement

("Participation Agreement"), the Company farmed out a one-third

interest in the Foreign Contractor's interest in the Zhao Dong

Block to Apache in exchange for certain cash payments and

Apache's agreement to assume its pro rata share of expenditures

and liabilities with respect to exploration and development.

As

required by the Participation Agreement, in June 1994, Apache and

the Company entered into a Joint Operating Agreement (the

"Operating

Agreement').

To further reduce

the

Company's

exploration capital requirements and accelerate the development

of the Zhao Dong Block, the Company and Apache entered into an

agreement on May 10, 1995 (the "Second Participation Agreement")

pursuant to which Apache increased its interest in the Contract

to

50%

of the Foreign Contractor's interest and assumed

operatorship, obligating itself to pay 100% of the costs of

drilling and testing four exploratory wells (the "Carried Wells")

on the Zhao Dong Block. The drilling and testing of the C-3, D1, D-2 and F-1 wells will satisfy the obligations regarding the

four Carried Wells. All of these wells have been drilled and

tested with the exception of the F-1 Well, drilling operations on

which have been abandoned. The Company does not believe that such

operations on the F-1 Well to date satisfy Apache's obligations

to deliver a fourth Carried Well. The amounts advanced by Apache

for the Company's share of the Carried Wells are recoverable from

a portion of the Company's share of cost recovery revenues from

the Zhao Dong Block. In addition, Apache obligated itself to pay

the Company 16.667% of the value of the recoverable proved

reserves attributable to the portion of the Zhao Dong Block

delineated by the drilling of the C-1 and C-2 and C-3 wells, the

combined area designated in the agreement as the "C Field," all

as

agreed

to by the Company and Apache in the

Second

Participation Agreement. Payment for this purchase will be

computed in accordance with evaluation methodology as set forth

in the Second Participation Agreement and made to the Company

from time to time as each segment of the field is placed on

production.

In consideration of the above described payments, Apache

assumed operatorship of the Zhao Dong Block and increased its

interest from 33.33% to 50% of the Foreign Contractor's share.

All future exploration expenditures in excess of the Carried

Wells will be borne 50% each by the Company and Apache.

Under

the

Operating Agreement, approval of a successor operator

requires

the vote of not less than 55% of the

Foreign

Contractor's interest; if the operator reduces its participating

interest to less than 25%, a committee established under the

Operating Agreement comprised of Apache and XCL (the "Operating

Committee") shall vote on whether a successor operator should be

named.

The appointment of a successor or replacement operator

requires government approval. CNODC has the right to become

operator

of production operations in certain circumstances

described in the Contract.

All work under the Contract must be pursuant to a work

program and budget approved by the JMC. Each year, the Operating



Committee must submit a proposed work program and budget to the

JMC.

Operating Committee approval of this work program and

budget requires the vote of not less than 55% of the Foreign

Contractor's interest.

If 55% of the Foreign Contractor's

interest does not vote in favor of a proposed work program and

budget, the operator must submit the minimum work program and

budget necessary to meet the contractual obligations of the

Foreign Contractor under the Contract.

Under

the Participation Agreement and the Operating

Agreement, Apache and the Company each has a right of first

refusal with respect to any sale or transfer of interest in the

Foreign Contractor's share of the Contract. In addition, under

the Participation Agreement Apache and the Company each has a

right of first refusal with respect to the sale of 50% or more of

outstanding voting capital stock of their respective subsidiaries

party to the Contract and the Participation Agreement. In

addition, each party has the option to purchase the other party's

interest in the Contract upon the occurrence of certain "option

events." Option events include the failure more than twice in one

year to pay sums due under the Operating Agreement, after

receiving written notice of default and failing to cure within

any applicable cure period provided by the Operating Agreement

(if nonpayment is the subject of dispute and arbitration under

the Operating Agreement, it does not constitute a "failure to

pay"

until an arbitral decision is rendered against

the

nonpayor), the inability of a party to pay its debts as they fall

due or a final unappealable order by a court of competent

jurisdiction liquidating the party or appointing a receiver to

take possession of all of the party's assets, the transfer of

more than 49% of the voting shares of the Apache subsidiary

holding Apache's interest in the Zhao Dong Block or XCL-China

Ltd. ("XCL-China"), the XCL subsidiary holding XCL's interest in

the Zhao Dong Block, by their respective parents, or certain

other defaults under the Operating Agreement or the Contract.

The consideration to be paid on the exercise of the option to

purchase is the fair market value of the interest assigned.

If

the parties cannot agree on the fair market value of the

interest, it is to be determined by arbitration.

This option

runs only to the benefit of Apache and XCL-China and may not be

transferred by either of them to any third party.

United/XCL Lube Oil Joint Venture

- --------------------------------On



July 17, 1995, the Company signed a contract with CNPC

United Lube Oil Corporation to form a joint venture company to

engage in the manufacturing, distribution and marketing of

lubricating oil in China and southeast Asian markets. The joint

venture has a 30-year life unless extended.

The registered

capital of the joint venture is $4.9 million, with the Company to

contribute

$2.4 million for its 49% interest,

the

last

installment of which was paid in late 1997. As its investment

for 51% of the stock, the Chinese contributed an existing

lubricating oil blending plant in Langfang, China, with a Chinese

government appraised value of $2.5 million. The registration of

the joint venture was approved by Chinese authorities and the

effective date of the joint venture is January 1, 1998. In a

letter of intent executed contemporaneously with the contract,

the parties have agreed to consider the feasibility of (i)

contributing to the joint venture a second existing plant in

southwest China and (ii) other projects, including constructing

oil terminals on the north and south coasts of China and engaging

in upgrading certain existing refineries within China.

The Langfang plant is located 50 km southeast of Beijing.

The facility is built on a 10-acre site and has been evaluated on

the basis of U.S. Gulf Coast costs at a replacement value of $7.0

million, without taking into account the land value. The plant

currently produces and markets approximately 5,000 metric tons of

lube oil per year. Approximately $1.5 million of the Company's

investment has been allocated to the physical upgrading of the

facility, including the installation of automated filling lines

and packaging systems. Upon completion of the upgrading, the

plant's production capacity will be approximately 20,000 metric

tons per year, assuming one eight hour shift, five days per week.

Additional capacity will be available by adding shifts and

expanding the work week. Further capital improvements estimated

to cost $15 million could increase capacity to approximately



100,000 metric tons per year.

It is the Company's opinion that an essential element to the

success of the lube oil business in China will be the ability to

distribute the product. In order to assure adequate distribution

of the joint venture's products, the Company has entered into a

memorandum of understanding with the Coal Ministry in China which

is expected to be reduced to a formal distribution contract. The

Coal Ministry operates 125 major integrated distribution centers

throughout China and the Company expects to market the joint

venture's products through this system.

Coalbed Methane Project

- ----------------------On March 31, 1995, the Company signed an agreement with the

CNACG, pursuant to which the parties will commence cooperation

for the exploration and development of coalbed methane in two

areas in China.

During the study period contemplated by the

agreement, the Company will evaluate the properties, after which

the parties are expected to enter into a comprehensive agreement

as to the specifically designated areas, which may provide the

basis for coalbed methane development in other areas of China.

On December 14, 1995, the Company signed a Memo of Understanding

with CNACG to develop a contract for exploration, development and

utilization of coalbed methane in the two areas. The March 31,

1995 agreement expired by its terms on December 31, 1996;

however, the Company has been informally advised that CNACG will

extend the term of the agreement.

Zhang Dong Block

- ---------------On August 20, 1998, XCL (through its subsidiary XCL-Cathay

Ltd.) signed a production sharing contract with CNODC for the

12,000-acre Zhang Dong Block. On September 15, 1998, the contract

was approved by the Ministry of Foreign Trade and Economic

Cooperation of China, effective October 1, 1998. The Zhang Dong

Block is located North and adjacent to the Zhao Dong Block in the

offshore area of Bohai Bay. Dagang Petroleum (the subsidiary of

CNPC that operates onshore fields in this area) has drilled and

tested nine wells in the offshore block. All but one of these

wells have been drilled from an artificial island or a causeway

extending into the bay. All nine wells were tested with five

having commercial oil production rates, one well with gas

production, two wells with low oil production rates and one well

which

produced water.

The Company's review of production

information suggests that the wells were drilled with mud weights

that were considerably higher than necessary, which damaged the

producing formation and restricted the flow rates.

Under the

contract, the Company is required in the next year at its expense

to drill one well, upgrade both the island and the causeway and

reprocess and reinterpret certain seismic data. If the Company

elects to extend the appraisal phase of the contract beyond the

first year, it may do so by committing to an additional two wells

during each of the next two-year periods (for a total commitment

of five wells over a five-year period). Development costs and

production will be shared 49% by the Company and 51% by CNODC.

XCL is designated as the operator.

Domestic Properties

- ------------------U.S. Exploration and Production Activities. The Company has

sold substantially all of its U.S. producing properties except

for an interest in the Berry R. Cox Field (the "Cox Field") in

South Texas and is seeking to sell or joint venture its interest.

The Company holds a 60% to 100% working interest in 1,265 acres

in this field on which there are currently four producing wells

(3.45 net wells). The Company's 1997, 1996 and 1995 annual net

sales of natural gas from the Company's interest in the Cox Field

was 72,200, 467,000 and 522,000 Mcf, respectively on a sale

basis.

The December 1997, 1996 and 1995 gas price for the

Company's remaining domestic properties was $2.28, $1.84 and

$1.33 per Mcf, respectively.

During 1996, litigation

was

instituted against the Company in connection with the Cox Field

which has effectively impeded the Company's ability to consummate

a sale of such property. Upon resolution of the litigation, the

Company will continue its efforts to divest itself of these



properties.



See "-- Litigation" below.



Lutcher Moore Tract. The Company holds, in partnership with

one of its subsidiaries, a fee interest in a 62,500 acre

undeveloped tract of Louisiana fee property located in Ascension,

St. James and St. John the Baptist Parishes, Louisiana (the

"Lutcher Moore Tract"). Expressions of interest to purchase the

property have been received from several parties.

The Company

is also evaluating the possibility of developing the property

into a source of wetland mitigation credits. In connection with

the acquisition of the Lutcher Moore Tract, the Company's indirect

ownership of such tract is subject to a first mortgage, with a

current principal balance of approximately $1.5 million, and a

number of sellers' notes, with an aggregate current principal

balance of approximately $0.5 million (collectively, the "Lutcher

Moore Debt"). Recourse by the holder of the first mortgage and

the holders of the sellers' notes is limited to the Lutcher Moore

Tract,

with

neither

the Company

nor

its

wholly-owned

subsidiaries, XCL-Land Ltd. and The Exploration Company of

Louisiana, Inc., liable for the debt.

Oil and Gas Reserves

- --------------------Based on the report of Gruy, the Company's independent

engineering firm, net proved reserves in the C-D Field are

estimated to be 11.76 million barrels as of January 1, 1998.

CNODC has exercised its option to pay 51% of all development

costs and receive 51% of oil production. Consequently, the

Company's present value of estimated future pre-tax net cash

flows is approximately $64.8 million. The standarized measure of

discounted future net cash flows determined in accordance with

the rules prescribed by FASB No. 69 is $53.8 million. Future

reserve values are based on year end prices and operating costs,

production and future development costs based on current costs

with no escalation. See "Risk Factors -- Reliance on Estimates

of Proved Reserves and Future Net Revenue" and "Supplemental Oil

and Gas Information" in the Notes to the Consolidated Financial

Statements.

Gruy has been preparing reserve estimates for the Company's

oil and gas reserves since August 1996. Gruy was selected by the

Company for this task based upon its reputation, experience and

expertise in this area.

Gruy is an international petroleum

consulting firm with offices in Houston and Dallas, Texas. Their

staff includes petroleum engineers and geologic consultants.

Services they provide include reserve estimates, fair value

appraisals, geologic studies, expert witness testimony

and

arbitration. In 1997 the Company paid Gruy approximately $68,400

in fees for reserve report valuations and other services.

No

instructions were given and no limitations were imposed by the

Company on the scope of or methodology to be used in preparing

the reserve estimates.

Offices

- ------On March 31, 1997, the Company sold its office building

located at 110 Rue Jean Lafitte, Lafayette, Louisiana for

$900,000. On the same day, the Company entered into a lease with

the purchaser for one floor (approximately 9,500 square feet) of

the two-story building for a term of 22 months with an option to

extend for an additional eight-month period, at a monthly rental

of $7,500 for the first 21 months and $6,039 for the last month

(which is offset against mortgage payments due from the new owner

of the building).

The outstanding balance of the underlying

mortgage was repaid in full upon the sale of the building. In

March 1998, the Company entered into a lease for approximately

3,400 square feet of office space located at 5487 San Felipe,

Suite 2110 in Houston, Texas. The lease expires December 31,

2000 and has a monthly rental of $5,166. On July 15, 1998, the

Company entered into a lease for approximately 1,649 square feet

of office space located at No. 1013, Office Tower 1, 138 Wang Fu

Jing Da Jie, Beijing, China. The lease expires July 15, 2000

(with an option to extend for an additional two years) and has a

monthly rental of $3,297 (payable in Chinese Renminbi).

Litigation



- ---------During December 1993, the Company and two of its whollyowned subsidiaries, XCL-Texas, Inc. and XCL Acquisitions, Inc.,

were

sued

in separate lawsuits entitled Ralph Slaughter,

Secretary of the Department of Revenue and Taxation, State of

Louisiana versus The Exploration Company of Louisiana, Inc. (15th

Judicial District, Parish of Lafayette, Louisiana, Docket No. 935449); Ralph Slaughter, Secretary of the Department of Revenue

and Taxation, State of Louisiana versus XCL-Texas, Incorporated

(15th Judicial District, Parish of Lafayette, Louisiana, Docket

No. 93-5450); and Ralph Slaughter, Secretary, Department of

Revenue and Taxation vs. XCL Acquisitions, Inc. (15th Judicial

District, Parish of Lafayette, Louisiana, Docket No. 93-5337) by

the Louisiana Department of Revenue for Louisiana State corporate

franchise and income taxes for the 1987 through 1991 fiscal years

in an aggregate amount (including penalties and interest through

September 1, 1993) of approximately $2.2 million.

Statutory

interest at the rate of 15% per annum on the principal will

continue to accrue from September 1, 1993 until paid. The

Louisiana Department of Revenue has also assessed additional

Louisiana State franchise tax against the Company and/or XCL

Acquisitions, Inc. for the tax years 1991 through 1996 and

additional income tax against XCL Acquisitions, Inc. for the tax

years 1991 and 1995 on the same basis as those set forth in the

lawsuits.

The Company protested the assessments and small

adjustments were made by the Department of Revenue.

The

additional income tax assessment for the 1991 and 1995 tax years

is $89,688 and the additional franchise tax assessment for the

tax years 1991 through 1996 totals $1.6 million plus statutory

interest of 15% per annum from the due date until paid and

penalties not to exceed 25% of the total tax due. The Company

believes that these assessments have been adequately provided for

in the consolidated financial statements. The Company has filed

answers to each of these suits and intends to defend them

vigorously. The Company intends to continue to protest the

assessments. The Company believes that it has

meritorious

defenses and has instructed its counsel to contest these claims.

On



July 26, 1996, three lawsuits were filed against XCLTexas, Inc., a wholly-owned subsidiary of the Company, entitled

Stroman Ranch Company Ltd., el al. v. XCL-Texas, Inc. (229th

Judicial District, Jim Hogg County, Texas, Cause No. 4550), Frank

Armstrong, et al. v. XCL-Texas, Inc. (229th Judicial District,

Jim Hogg County, Texas, Cause No. 4551), and Stroman Ranch

Company Ltd., et al. v. XCL-Texas, Inc. (229th Judicial District,

Jim Hogg County, Texas, Cause No. 4552). The lawsuits allege

various claims, including a claim that one of the oil and gas

leases in the Berry R. Cox Field should be terminated. The

Company believes the claims made in the lawsuits are without

merit and intends to vigorously defend itself. The lawsuits have

prevented the Company from selling its interest in the Cox Field.

In July 1997, China Investment and Development Corporation

("CIDC"), holders of the Company's Series B Preferred Stock sued

the Company and each of its directors in an action entitled China

Investment and Development Corporation vs. XCL Ltd.; Marsden W.

Miller, Jr.; John T. Chandler; David A. Melman; Fred Hofheinz;

Arthur

W. Hummel, Jr.; Michael Palliser; and Francis

J.

Reinhardt, Jr. (Court of Chancery of the State of Delaware in and

for New Castle County, Civil Action No. 15783-NC).

The suit

alleged breach of (i) contract, (ii) corporate charter, (iii)

good faith and fair dealing and (iv) fiduciary duty with respect

to the alleged failure of the Company to redeem CIDC's Series B

Preferred shares for a claimed aggregate redemption price of

approximately $5.0 million. Effective December 31, 1997, the

Company and CIDC entered into an interim settlement agreement

pursuant to which the Company paid CIDC $1 million as a deposit

in anticipation of a final settlement and dismissal of the

lawsuit. On March 3, 1998, the final settlement took place and,

shortly thereafter, the deposit was returned to XCL. On March 9,

1998, the lawsuit was dismissed with prejudice.

On



January 24, 1997, a subsidiary of the Company filed an

action

captioned L.M. Holding Associates, L.P. v. LaRoche

Chemicals, Inc. (23rd Judicial District Court, St. James Parish,

Louisiana, No. 24, 338, Section A). The lawsuit claims that

LaRoche failed to properly maintain its 8" brine line that runs

10 miles across the subsidiary's property in St. James Parish,

Louisiana, discharged brine from this line onto the subsidiary's



property and no longer has the right to operate said line.

In

1998, the court issued a preliminary injunction enjoining LaRoche

from discharging brine onto the subsidiary's property

and

enjoining LaRoche from continued operation of the 8" brine line

without a scientific system for early detection of leaks and

without periodic monitoring of the line. The Company is seeking

damages and cancellation of LaRoche's right to operate the brine

line.

No trial date has been set. The Company intends to

vigorously prosecute the lawsuit.

Other than as disclosed above, as of the date hereof, there

are no material pending legal proceedings to which either the

Company or any of its subsidiaries is a party or to which any of

their properties are subject which would have a material adverse

effect on the business or properties of the Company, taken as a

whole.

MANAGEMENT

Officers of the Company and its wholly owned subsidiaries

serve at the pleasure of the Board of Directors and are appointed

annually at the meeting of the Board of Directors immediately

following the annual meeting of shareholders. The following

individuals were officers and directors of the Company and its

subsidiaries as of October 1, 1998:

<TABLE>

<CAPTION>

Name

- ---------------------<S>

<C>

Marsden W. Miller, Jr.



Position

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



Age

------



Officer

Director

Since

Since

---------



<C>



<C>



Chairman of the Board and Chief

Executive Officer of the Company

and Principal Accounting Officer (1)



57



1981



1981



John T. Chandler



Vice Chairman of the Board of the

Company and Chairman and Chief

Executive Officer of XCL-China Ltd. (1)(4)



65



1982



1983



Danny M. Dobbs



President and Chief Operating Officer

of the Company and President of XCLChina Ltd.(4)



52



1991



--



Benjamin B. Blanchet



Executive Vice President and Director

of the Company(1)



45



1997



1997



Richard K. Kennedy



Vice President of Engineering of the

Company



44



1989



--



R. Carter Cline



Vice President-Land of the Company



49



1990



--



Herbert F. Hamilton



Executive Vice President Operations,

XCL-China Ltd.(4)



62



1995



--



Joseph T. K. Chan



Vice President, XCL-China LubeOil

Ltd.(5)



51



1998



--



John H. Haslam



Treasurer of the Company



56



1996



--



Lisha C. Falk



Secretary of the Company



37



1997



--



Fred Hofheinz



Director of the Company, Attorney at

Law(2)(3)



60



--



1991



Arthur W. Hummel, Jr.



Director of the Company, Independent

Consultant(2)(3)



78



--



1994



Sir Michael Palliser



Director of the Company, Independent

Consultant(2)(3)



76



--



1994



Francis J. Reinhardt, Jr.



Director of the Company, Partner in

Carl H. Pforzheimer & Co.(2)(3)



68



--



1992



R. Thomas Fetters, Jr.



Director of the Company, Independent

Consultant (2)(3)



58



--



1997



<C>



Peter F. Ross



Director of the Company, Chairman of

Dawnay Day Capital Markets



_______________

(1)



Member of the Executive Committee. The Committee met

once

during

1997 and, subject to certain

statutory

limitations on its authority, has all of the powers of the

Board of Directors while the Board is not in session, except

the power to declare dividends, make and alter Bylaws, fill

vacancies on the Board or the Executive Committee, or change

the membership of the Executive Committee.



(2)



Member of the Compensation Committee. The Committee met

twice in 1997.

It is charged with the responsibility of

administering and interpreting the Company's stock option

plans; it also recommends to the Board the compensation of

employee-directors, approves the compensation of

other

executives and recommends policies dealing with compensation

and personnel engagements.



(3)



Member of the Audit Committee. The Committee met once in

1997.

It reviews with the independent auditors the general

scope of audit coverage. Such review includes consideration

of the Company's accounting practices, procedures and system

of

internal accounting controls.

The Committee

also

recommends to the Board the appointment of the Company's

independent auditors, and at least annually the Committee

reviews the services performed and the fees charged by the

independent auditors engaged by the Company.



(4)



(5)



XCL-China Ltd. is an International Business Company

incorporated under the laws of the British Virgin Islands,

wholly owned by the Company, which manages the Company's oil

and gas operations on the Zhao Dong Block.

XCL-China LubeOil Ltd. is an International Business

Company incorporated under the laws of the British Virgin

Islands, wholly owned by the Company, which holds a 49%

interest in a joint venture with CNPC United LubeOil

Corporation for the production and sale of lubricants.



</TABLE>

Under the Amended and Restated Certificate of Incorporation,

as amended, and Amended and Restated Bylaws of the Company, the

Board Directors is divided into three classes of directors

serving staggered three-year terms, with one class to be elected

at each annual meeting of shareholders and to hold office until

the end of their term and until their successors have been

elected and qualified. The current Class I directors, whose

terms

of

office expire at the 2000 annual

meeting

of

shareholders, are Messrs. Arthur W. Hummel, Jr., Michael Palliser

and Benjamin B. Blanchet; the current Class II directors, whose

terms

of

office expire at the 1998 annual

meeting

of

shareholders, are Messrs. Marsden W. Miller, Jr., R. Thomas

Fetters, Jr. and Francis J. Reinhardt, Jr.; and the current Class

III directors, whose terms of office expire at the 1999 annual

meeting of shareholders, are Messrs. John T. Chandler, Fred

Hofheinz and Peter F. Ross.

The Board held five meetings in 1997.

The average

attendance by directors at these meetings was 100%, and all

directors attended 100% of the Board and Committee meetings they

were scheduled to attend.

Under Delaware law and the Bylaws, incumbent directors have

the power to fill any vacancies on the Board of Directors,

however occurring, whether by an increase in the number of

directors,

death, resignation, retirement, disqualification,

removal from office or otherwise. Any director elected by the

Board to fill a vacancy would hold office for the unexpired term

of the director whose place has been filled except that a

director elected to fill a newly-created directorship resulting

from an increase in the number of directors, whether elected by

the Board or shareholders, would hold office for the remainder of

the full term of the class of directors in which the new

directorship was created or the vacancy occurred and until his

successor is elected and qualified. If the size of the Board is



60



--



1998



increased,

the three

possible.



the additional directors would be apportioned among

classes to make all classes as nearly equal as



The holders of the Amended Series A Preferred Stock are

entitled to cast the same number of votes (voting together with

the Common Stock as a single class) as the number of shares of

Common Stock issuable upon conversion of the Amended Series A

Preferred Stock.

The holders of the Amended Series B Preferred Stock

entitled to cast 50 votes per share (voting together with

Common Stock as a single class).



are

the



There are no arrangements or understandings with any

directors pursuant to which they have been elected a director nor

are there any family relationships among any directors or

executive officers.

Biographical Information

- -----------------------MARSDEN W. MILLER, JR., Chairman, has been Chief Executive

Officer and a director since the Company's incorporation in 1981.

He has engaged in the independent domestic and international oil

business since 1964 on an individual basis, as a stockholder and

officer in several companies and as a practicing attorney.

In

addition to the U.S. and China, he has been involved in various

aspects of the oil business in Southeast Asia, Africa, Europe,

South America, several former Soviet Republics and Canada. Mr.

Miller graduated from Louisiana State University in 1964.

JOHN T. CHANDLER is Vice Chairman of the Board and Chairman

and Chief Executive Officer of XCL-China. He joined the Company

in June 1982, becoming a director in May 1983. From 1976 until

he joined the Company he was the Managing Partner of the Oil and

Gas Group of GSA Equity, Inc., New York and director of Executive

Monetary Management, Inc., the parent company of GSA Equity, Inc.

From 1972 to 1976, he was director and Vice President of

Exploration and Production of Westrans Petroleum, Inc. and a

director of a number of its subsidiaries. During 1971 and 1972,

he was a petroleum consultant and manager of the oil department

of Den norske Creditbank in Oslo, Norway. Mr. Chandler was Vice

President and Manager of the Petroleum Department of the Deposit

Guaranty National Bank in Jackson, Mississippi from 1969 to

August 1971 and, from 1967 to February 1969, was a petroleum

engineer first for First National City Bank (now known as

Citibank, N.A.) and then The Bank of New York. From March 1963 to

July 1967, he was employed by Ashland Oil and Refining Company as

a petroleum engineer.

From 1959 to 1963, he held the same

position with United Producing Company, Inc., which was acquired

by Ashland Oil.

Mr. Chandler graduated from the Colorado School of Mines

with a Professional degree in petroleum engineering and is a

Registered Professional Engineer in the States of Colorado and

Texas, a member of the Society of Petroleum Evaluation Engineers

and a member of AIME.

DANNY M. DOBBS is the President and Chief Operating Officer

of

the Company effective December 17, 1997.

Mr.

Dobbs

previously served as Executive Vice President and Chief Operating

Officer of the Company and prior to that as Vice PresidentExploration of XCL Exploration & Production, Inc., a wholly-owned

subsidiary of the Company, having joined the Company in 1985 as

Senior Exploration Geologist. From 1981 to 1985 Mr. Dobbs was a

consulting geologist. From 1976 to 1981, he held the position of

Exploration Geologist in the South Louisiana District for Edwin

L. Cox in Lafayette, Louisiana. He served in various geologic

positions with Texaco, Inc. from 1971 to 1976, his experience

encompassing management, structural and stratigraphic mapping,

coordination of seismic programs and budget evaluation and

preparation. Mr. Dobbs holds B.S. and M.S. degrees in geology

from the University of Alabama, Tuscaloosa, Alabama.

BENJAMIN B. BLANCHET is Executive Vice President and

director of the Company. Prior to joining the Company in August

1997, and since 1983, he was a partner in the law firm of Gordon,

Arata, McCollam & Duplantis, L.L.P. in its Lafayette, Louisiana

office.

During that time, he practiced in the areas

of



commercial litigation, corporate mergers and acquisitions, oil

and gas transactions, secured financings, securities, tax and

international

law matters. Since 1985,

he

has

provided

substantial legal services to the Company, and has been the

Company's lead attorney in China. He served on the Management

Committee of Gordon, Arata, McCollam & Duplantis, L.L.P. from

1991 to 1997 and as the Managing Partner of the firm for four

years from 1992 through 1995. He practiced law with the firm of

Monroe & Lemann in New Orleans from 1978 through 1983. He is a

member of the Louisiana Bar and admitted to practice before the

United States Tax Court. Mr. Blanchet holds a B.A. degree, with

highest

distinction, from the University

of

Southwestern

Louisiana and a J.D., cum laude, from Harvard Law School.



RICHARD K. KENNEDY is Vice President of Engineering and

responsible for certain engineering aspects of the Company's oil

and gas operations. From 1987, until he joined the Company in

1989, he was an operations engineer for Wintershall Corporation.

From 1981 to 1986 he was with Borden Energy, originally as a

petroleum engineer and later as regional operations manager.

From 1979 to 1981, Mr. Kennedy was employed with Marathon Oil

Company as a reservoir engineer, then as a drilling engineer. He

was employed with Shell Oil Company as a petroleum engineer and

reservoir engineer from 1977 to 1979. Mr. Kennedy graduated from

Louisiana Tech University with a B.S. degree in petroleum

engineering.

He is a registered professional engineer in the

State of Louisiana and a member of the Society of Petroleum

Engineers.

R. CARTER CLINE is Vice President-Land, having joined the

Company in October 1990. He has over 20 years of exploration and

management experience. From 1982, until joining the Company, he

was employed by Pacific Enterprises Oil Company (USA), successor

by merger to Sabine Corporation, as East Gulf Coast Regional Land

Manager in Houston, Texas. From 1979 to 1982, he served as Vice

President-Land for Dynamic Exploration, Inc.

in Lafayette,

Louisiana.

From 1974 to 1979, he served as Region Landman in

Dallas and Division Land Manager in Houston, Texas, for Sabine

Corporation, and from 1971 to 1974 was employed by Getty Oil

Company in Houston, Texas and New Orleans, Louisiana. Mr. Cline

holds a B.B.A.

degree in Petroleum Land Management from the

University of Texas at Austin and is a Certified Petroleum

Landman.

HERBERT F. HAMILTON is Vice President Operations of XCLChina, having joined the Company in 1995. Mr. Hamilton has more

than 30 years of experience in the fields of engineering,

construction, construction management and consulting on heavy

civil

works,

offshore platforms, submarine pipelines

and

construction equipment in over 35 countries. From 1990 to 1993,

Mr.

Hamilton served as Senior Project Manager for Earl and

Wright in Houston, Texas. From 1993 to 1994, he served as

President and a consultant to Planterra, Inc. in Houston, Texas

and from 1994 until joining the Company he was an independent

consultant.

Mr. Hamilton is a Registered Professional Engineer

and

holds a B.S.

in Architectural Engineering from

the

University of Texas at Austin.

JOSEPH T. K. CHAN is Vice President of XCL-China LubeOil

Ltd., having joined the Company in 1998. Mr. Chan has more than

20 years experience in the oil industry with major American oil

companies. From August 1994 until joining the Company, Mr. Chan

was an agent and consultant for Asian importers of U.S. made

chemical, petrochemical and industrial products. From 1991 to

1994 he was Regional Manager of Sun Oil Far East, Inc. and Head

of Technical Support of China Sun Lubeoil joint venture plant in

Skekou, China and was responsible for regional sales, marketing

and production operations in Asia and the Pacific Rim under Sun

Oil Trading, Inc., a wholly owned subsidiary of Sun Oil Corp.

From 1988 to 1990, Mr. Chan was Marketing Director to De Huns

International Ltd. with chemicals and garment manufacturing

investments and operations in China. From 1986 to 1988, he

served as General Manager of Sales & Marketing and Technical

Services for U.K. based Castrol Oil Hong Kong. Mr. Chan served as

Divisional Import Manager for Li & Fung Trading in Taiwan,

Marketing Director of CDW Manufacturing Group in Hong Kong and

Project Manager of Cha Chi Ming (China Investment) Ltd. from 1982

to 1986.

From 1976 to 1981, he served as Industrial Sales &



Marketing Manager for Caltex Oil Hong Kong, a joint venture of

Chevron and Texaco in Asia. From 1975 to 1976 he was Senior

Sales

Engineer and Area Sales Manager for Drew

Chemical

Corporation. Mr. Chan was employed with Esso Standard Oil Hong

Kong as International Sales Supervisor from 1972 to 1975 and as a

Marine and Aviation Sales and Technical Representative from 1970

to 1972. Mr. Chan holds a Bachelor of Commercial Science degree

from CH University of Hong Kong and has completed the Masters

Study Program from Caltex Management Institute in Indonesia. Mr.

Chan

has also attended comprehensive training in

lubeoil

engineering from the Esso Research Center in Abington Oxford, and

leadership and refinery operations programs with Texaco and

Chevron.

JOHN H. HASLAM is Treasurer, having joined the Company in

1990.

From 1988 until joining the Company, he was employed by

United Gas Pipeline as Credit Manager. From 1986 to 1988, he

served as Director of Internal Audit for TransAmerican Natural

Gas Corporation. From 1981 to 1986 he was the Audit Manager for

ENSTAR Corporation. He was with Getty Oil from 1963 until 1981,

as Audit Manager of Joint Venture Operations and various other

accounting positions. Mr. Haslam holds a B.B.A.

degree in

Marketing from Baylor University.

LISHA FALK is Corporate Secretary, having joined the Company

in 1981. Since joining the Company Ms. Falk has served in various

administrative positions, most recently as Assistant Secretary.

R. THOMAS FETTERS, JR. is an independent oil and gas

consultant. He has over 25 years of exploration, production and

management experience, both domestic and foreign. From 1995 to

1997 Mr. Fetters was Senior Vice President of Exploration of

National Energy Group, Inc., Dallas, Texas, and from February

1990, until September 1995, he was Vice President of Exploration

of XCL Ltd., and President of XCL-China Ltd. During 1989, until

joining the Company, he served as Chairman and Chief Executive

Officer of Independent Energy Corporation. From 1984 to 1989, he

served as President and Chief Executive Officer of CNG Producing

Company in New Orleans, Louisiana, and from 1983 to 1984 as

General Manager of the Planning and Technology Division of

Consolidated Natural Gas Service Co. in Pittsburgh, Pennsylvania.

From 1966 to 1983, he served in various positions, from Geologist

to

Exploration Manager, with several divisions of

Exxon,

primarily

in

the Gulf Coast region

of

the

U.S.

and

internationally, in Malaysia and Australia. Mr. Fetters holds

B.S. and M.S. degrees in geology from the University

of

Tennessee.

FRED HOFHEINZ is an attorney at law in Houston, Texas. From

1984

to

1987, he served as President of Energy

Assets

International Corporation, a fund management company, now a

subsidiary of Torch Energy Advisors, serving as a consultant to

Torch Energy Advisors until 1989. Mr. Hofheinz also served as the

Mayor of Houston, Texas from 1974 to 1978. He, along with his

family, developed the Astrodome in Houston, and owned the Houston

Astros baseball team until 1974. He is founder and director of

United Kiev Resources, Inc., an oil and gas production company

operating in the Republic of the Ukraine in the name of its

wholly-owned

subsidiary, Carpatsky Petroleum Company.

Mr.

Hofheinz earned a Ph.D. degree in Economics from the University

of Texas and his law degree from the University of Houston.

He

was appointed as a director by the Board at a meeting held March

21, 1991.

ARTHUR W. HUMMEL, JR., a director since April 1994, is the

former U.S. Ambassador to the People's Republic of China during

the period 1981 to 1985. Since his 1985 retirement from the

State Department, after 35 years of service, he has been active

in consulting with firms doing business in East Asia, and

participating in academic and scholarly conferences in the U.S.

and in the East Asia region. He is a member and trustee of many

academic, business, and philanthropic organizations involved in

international affairs.

Mr. Hummel was born in China. After education in the U.S.

he returned to China prior to Pearl Harbor. Interned by the

Japanese, he escaped and fought with Chinese guerrillas behind

the Japanese lines in north China until the end of the war.

He obtained an M.A. (Phi Beta Kappa) in Chinese studies from



the

University of Chicago in 1949, and joined the State

Department in 1950. His early foreign assignments include Hong

Kong, Japan and Burma. He was Deputy Director of the Voice of

America in 1961-1963; Deputy Chief of Mission of the American

Embassy in Taiwan, 1965-1968; Ambassador to Burma, 1968-1970;

Ambassador to Ethiopia, 1975-1976; Ambassador to Pakistan, 19771981; and Ambassador to the Peoples Republic of China, 1981-1985.

He was Assistant Secretary of State for East Asia 1976-1977. He

has received numerous professional awards from within and outside

the Government.

SIR MICHAEL PALLISER, a director since April 1994, was from

1984 to 1993 Chairman of Samuel Montagu & Co. Limited, the London

merchant bank which was owned by Midland Bank, of which he was

Deputy Chairman from 1987 to 1991, and which is now part of the

Hong Kong & Shanghai Banking Corporation. He was Vice Chairman

of Samuel Montagu from 1993 to 1996. He is a former Director of

BAT Industries, Bookers, Eagle Star, Shell and United Biscuits.

In 1947, he joined the British Diplomatic Service and served

in a variety of overseas and Foreign Office posts before becoming

head of the Planning Staff in 1964-1966, Private Secretary to the

Prime Minister, 1966-1969, Minister in the British Embassy in

Paris, 1969-1971, and the British Ambassador and Permanent

Representative to the European Communities in Brussels from 19711975.

He was, from 1975 until his retirement in 1982, Permanent

Under-Secretary of State in the Foreign and Commonwealth Office,

and Head of the Diplomatic Service. From April to July 1982, he

was a special adviser to the Prime Minister in the Cabinet Office

during the Falklands War. He was appointed a Member of the Privy

Council in 1983.

Effective December 31, 1995, Mr. Palliser

resigned as President of the China-Britain Trade Group and a

director of the UK-Japan 2000 Group, and effective February 29,

1996, he resigned as Deputy Chairman of British Invisibles.

Mr.

Palliser is a former member of the Trilateral Commission, a

director of the Royal National Theatre. He is currently Chairman

of the Major Projects Association, designed to assist in and for

the handling of major industrial projects. Mr. Palliser also

serves as Vice-Chairman of the Salzburg Seminar, a center for

intellectual exchange based in Middlebury, Vermont, with its

conference center in Salzburg, Austria.

Sir Michael Palliser was educated at Wellington College and

Merton College, Oxford. He saw wartime service in the British

Army with the Coldstream Guards.

FRANCIS J. REINHARDT, JR., is a partner in the New York

investment banking firm of Carl H. Pforzheimer & Co.

Mr.

Reinhardt has been a partner in the firm for over 30 years and

has held various positions, specializing in independent oil and

gas

securities,

mergers

and

acquisitions,

placements

participation and institutional sales since 1956. Mr. Reinhardt

holds a B.S. degree from Seton Hall University and received his

M.B.A. from New York University. Mr. Reinhardt is a member of

the New York Society of Security Analysts, a member of and has

previously served as president of the Oil Analysts Group of New

York, a member and past president of the National Association of

Petroleum Investment Analysts and a member of the Petroleum

Exploration Society of New York. Mr. Reinhardt also serves as a

director of Mallon Resources Corporation, a Nasdaq

traded

petroleum and mining company, as well as several privately held

companies.

Mr.

Reinhardt was appointed as a director of the

Company at a Board meeting held December 11, 1992.

PETER F. ROSS, was appointed Chairman of Dawnay Day Capital

Markets in March 1998. Dawnay Day & Co. is a London based

private investment banking firm. Mr. Ross retired as Chairman of

Henderson Crosthwaite Institutional Brokers on December 31, 1996,

after holding that position since 1987. Under Mr. Ross' term as

Chairman, Henderson Crosthwaite became one of the leading firms

in London in the area of oil and gas placements. From 1977 to

1986 he was head of Henderson Crosthwaite's institutional sales

department, with special responsibility for the oil and gas

division, until its acquisition by Guinness Mahon Bank in 1986.

Mr. Ross was commissioned into the British Army serving with

the 5th Royal Inniskilling Dragoon Guards, his last posting being

to Libya where he retired and set up an industrial services

business. Following the Islamic Revolution in 1971, he returned

to the United Kingdom and joined London stockbrokers Northcote &



Co.

In 1974, he joined George Henderson & Co., becoming

partner in 1975, upon the merger with Fenn and Crosthwaite.

Mr.

Ross was appointed as a director of the Company at a meeting of

the Board held April 7, 1998.



a



Executive Compensation

- ---------------------The following table sets forth information regarding the

total compensation of the Chief Executive Officer and each of the

four most highly compensated executive officers of the Company at

the end of 1997, as well as the total compensation paid to each

such individual for the Company's two previous fiscal years.

Each of the named individuals has held his respective office

throughout the entire fiscal year.

<TABLE>

<CAPTION>

Summary Compensation Table



Name and

Principal

Position

---------<C>

<C>

Marsden W. Miller, Jr.

Chairman and Chief

Executive Officer



Long Term Compensation

----------------------------------Annual Compensation

Awards

Payouts

------------------------------------------------ ----------(1)

(2)

(3)

Other

Restricted

Annual

Stock

Options/

LTIP

All Other

Salary Bonus CompenAwards

SARs

Payout

CompenYear

($)

($)

sation($)

(#)

(#)

($)

sation($)

----- ------- ----------- ----------------------- --------<C>

<C>

<C>

<C>

<C>



---



-----



1,000,000

110,000

---



150,000



--



--



1996

1995



150,000

150,000



---



---



333,333

20,000

---



Danny M. Dobbs

1997

President and Chief Operating

Officer

1996

1995



136,875



--



--



--



135,000

116,250



---



---



---



Richard K. Kennedy

Vice President



1997



112,500



--



--



--



1996

1995



75,000

75,000



---



---



1997

1996

1995



144,000

144,000

98,800



----



----



John T. Chandler(4)

Vice Chairman; Chairman

and Chief Executive Officer

of XCL-China



Herbert F. Hamilton(5)

Executive Vice President

Operations, XCL-China



1997



150,000



--



1996

1995



150,000

150,000



1997



</TABLE>

_______________

(1)



Excludes the cost to the Company of other compensation

that, with respect to any above named individual, does not

exceed the lesser of $50,000 or 10% of such individual's

salary and bonus.



(2)



Represents grants of restricted stock awards under the

Long-Term Stock Incentive Plan as amended and restated in

1997 (adjusted as to Common Stock to give effect to the

Reverse Stock Split). The first line under 1997 reflects

restricted stock awards for shares of Common Stock and the

second line reflects restricted stock awards for shares of

Amended

Series

A Preferred Stock.

See

"Awards

to

Management."



(3)



Represents awards of stock options granted under the

Company's Long-Term Stock Incentive Plan as amended and

restated in 1997 (adjusted as to Common Stock to give effect

to the Reverse Stock Split). The first line under 1997

reflects non-qualified stock options for shares of Common

Stock and the second line reflects non-qualified stock

options for shares of Amended Series A Preferred Stock. See

"Awards to Management."



--



--



--



---



---



---



--



--



---



---



133,333

5,000

-8,000

400,000

25,000

6,466

--



--



--



---



---



--



--



---



266,666

5,000

---



---



---



----



--13,333



----



----



(4)



XCL-China is a wholly-owned subsidiary of the Company

which manages the Company's operations on the Zhao Dong

Block.



(5)



Mr.

Hamilton commenced employment with the Company on

April 24, 1995. As part of his employment package he was

awarded options to purchase 13,333 shares of Common Stock

(adjusted to give effect to the Reverse Stock Split).

Mr. Hamilton has been granted additional options in

See "Awards to Management" below.



1998.



Stock Options

- ------------The Company currently maintains one stock option plan which

was adopted by shareholders in 1992 and was amended and restated

in 1997. The plan is administered by the Compensation Committee

and provides for the granting of options to purchase shares of

Common Stock to key employees and directors of the Company, and

certain other persons who are not employees of the Company but

who from time to time provide substantial advice or other

assistance or services to the Company.

On June 2, 1992, shareholders approved the Long-Term Stock

Incentive Plan ("1992 LTSIP"). The 1992 LTSIP was adopted with

the view of conforming the Company's prior plans to certain

regulatory changes adopted by the Commission and affording

holders of previously granted options the opportunity to exchange

their options for equivalent options under the 1992 LTSIP.

By

action of the Board of Directors, effective June 1, 1997, the

1992 LTSIP was amended and restated, and certain awards were

granted thereunder, all subject to approval by shareholders which

was secured at the Company's Special Meeting in Lieu of Annual

Meeting of Shareholders held on December 17, 1997.

1997 LTSIP Restatement

---------------------Nature of Awards.

The 1997 LTSIP Restatement makes

available to the Compensation Committee the power to grant

certain awards ("Awards") to acquire shares of the Company's

Preferred Stock as well as shares of Common Stock.

In common

with the 1992 LTSIP, the 1997 LTSIP Restatement makes available

to the Compensation Committee a number of incentive devices in

addition to Incentive Stock Options ("ISOs") (which are not

available with respect to Preferred Stock) and Nonqualified Stock

Options ("NSOs"), including reload options ("ROs") (which are not

available with respect to Preferred Stock), restricted stock

awards ("RSAs"), and performance units ("PUs") or appreciation

options ("AOs") (which were not authorized under the 1992 LTSIP),

each

of which is described below and in the 1997 LTSIP

Restatement. NSOs to acquire Preferred Stock, a new feature, may

include an accrued dividend feature. The Board believes that

these award alternatives will enable the Committee to tailor the

type of compensation to be granted to key personnel to meet both

the Company's and such employee's requirements in the most

efficient manner possible.

Number of Awards.

For Common Stock Awards, the 1997

LTSIP Restatement authorizes an aggregate of 4 million shares (as

adjusted for the Reverse Stock Split) of Common Stock for

issuance pursuant to awards granted thereunder, including grants

to non-employee directors. For Preferred Stock Awards, the 1997

LTSIP Restatement authorizes an aggregate of 200,000 shares of

the Company's Amended Series A Preferred Stock, or any other

series of Preferred Stock of the Company as designated by the

Committee with respect to an Award.

Description of Awards. As set forth above, and like the

1992

LTSIP,

the

1997 LTSIP Restatement

authorizes

the

Compensation Committee to grant NSOs, ISOs, ROs (i.e., the

granting of additional options, where an employee exercises an

option with previously owned stock, covering the number of shares

tendered as part of the exercise price), RSAs (i.e., stock

awarded to an employee, subject to forfeiture in the event of a

premature termination of employment, failure of the Company to

meet certain performance objectives or other conditions), PUs



(i.e., share-denominated units credited to the employee's account

for

delivery or cash-out at some future date based upon

performance

criteria to be determined by the Compensation

Committee), and "tax-withholding" (i.e., where the employee has

the option of having the Company withhold shares on exercise of

an award to satisfy tax withholding requirements). AOs (i.e.,

awards in which payments are based upon appreciation in shares or

other criteria determined by the Compensation Committee) are a

new

feature added to the 1992 LTSIP by the 1997

LTSIP

Restatement.

Outside Director Awards. The 1997 LTSIP Restatement also

authorizes the Board to grant Awards to non-employee directors

and to set the terms and conditions of such Awards, without the

restrictions previously set forth in the 1992 LTSIP which were

required by certain federal securities law rules since abolished.

Administration of Plan. In keeping with the provisions of

the

1992

LTSIP, the Compensation Committee will

develop

administration guidelines from time to time which will define

specific eligibility criteria, the types of awards to

be

employed, whether such awards relate to Common Stock or Preferred

Stock, and the value of such awards. Specific terms of each

Award will be provided in individual Award agreements granted

each Award recipient. Key employees and other individuals who in

the judgment of the Committee may provide a valuable contribution

to the success of the Company and its affiliates will be

eligible.

The Committee may establish different general Award

eligibility criteria for Awards involving Preferred Stock which

may require a higher level of management responsibility and

authority.

Change in Control Provisions. The 1997 LTSIP Restatement

contains change-in-control provisions which provide that the

threshold for determining if a "change in control of XCL" has

occurred as a result of a person or entity acquiring Company

stock has been lowered from 30% to 20% (disregarding the

acquisition of such stock by certain shareholders of

the

Company).

The 1997 LTSIP Restatement retains the 1992 LTSIP's

provisions pursuant to which a "change in control of XCL" will be

deemed to occur as a result of certain contested Board of

Director elections.

If a "change in control of XCL" occurs

pursuant to the provisions described above, ISOs and NSOs then

outstanding will become exercisable in full, the forfeiture

restrictions on any RSAs to the extent then applicable will lapse

and amounts payable with respect to PUs and AOs then outstanding

will become payable in full. Also, under certain Awards

made

under the 1997 LTSIP Restatement (see discussion below) the

occurrence of a "change in control of XCL" could obligate the

Company with respect to making payments with respect to Awards in

cash rather than in kind, or in obligating the Company to

repurchase individuals' shares of Common Stock or Preferred Stock

received under certain 1997 LTSIP Restatement Awards.

Under

certain circumstances which are unforeseen at this time, the

existence of the change in control protections for individuals

receiving Awards under the 1997 LTSIP Restatement and resulting

obligations to the Company may impede the consummation of a

change in control of the Company.

Option Exercise Price. Under the 1997 LTSIP Restatement,

the Compensation Committee shall determine the option price of

all NSOs and ISOs; provided, however, in the case of ISOs, the

option price shall not be less than the fair market value of the

Common Stock on the date of grant. Such "fair market value" is

the average of the high and low prices of a share of Common or

Preferred Stock traded on the relevant date, as reported on the

Exchange, or other national securities exchange, or an automated

quotation system, or pursuant to a good faith determination by

the Board of Directors, if not so traded in a public market.

The 1997 LTSIP Restatement does not extend the term of the

1992 LTSIP and, therefore, the 1997 LTSIP Restatement will

terminate (and no further awards thereunder will be granted

after) June 2, 2002. In view of the fact that there is no public

market for the Amended Series A Preferred Stock, the fair market

value of the Amended Series A Preferred Stock on November 10,

1997, determined in good faith by the Board of Directors based

upon the last bid price of the Amended Series A Preferred Stock

in the PORTAL Market, as reported to the Company by Jefferies,

was $80.00 per share.



Awards to Management

- -------------------On June 5, 1997, the Board made certain Awards under the

1997 LTSIP Restatement.

These Awards were approved by the

shareholders of the Company in connection with the approval of

the 1997 LTSIP Restatement voted on at the Special Meeting of

Shareholders.

Effective June 1, 1997, M. W. Miller, Jr. was granted an

Appreciation Option with respect to appreciation in the Company's

total market capitalization (as defined) from and after June 1,

1997. See "Appreciation Option for M.W. Miller, Jr." below for a

more detailed discussion of such grant.

The closing price of the Company's Common Stock on the AMEX

on a recent date is set forth on the cover page of this

Prospectus.

The following tables set forth, for those persons named in

the "Summary Compensation Table," information on stock options

granted during 1997 and all stock options outstanding as of

December 31, 1997, adjusted to reflect the Reverse Stock Split.

The closing price on the AMEX on June 2, 1997 for the Common

Stock was $0.21875 (which price is not adjusted to reflect the

Reverse Stock Split), and the fair market value of the Amended

Series A Preferred Stock, based upon last sales price information

in the PORTAL Market of the National Association of Securities

Dealers, Inc. as supplied by Jefferies, was $85.00 on June 2,

1997. Mr. Miller's Appreciation Option (described below) is not

included because of the indeterminate nature of the Award.

Option/SAR Grants in Last Fiscal Year

<TABLE>

<CAPTION>

Potential Realizable Value

at Assumed Annual Rates

of Stock Price Appreciation

for Option Term



Individual Grants

____________________________

(a)



(b)



Name

------<S>

<C> <C>

Marsden W. Miller, Jr. (1)

33,601,492

John T. Chandler (2)

1,634,758



(c)



(d)

% of Total

Options/

SARs

Granted to

Options/

Employees in

SARs

Fiscal

Granted(#)

Year

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



(e)



(f)



<C>

<C>

110,000*

64.7



<C>



(g)



(h)



Exercise or

Base Price Expiration

($/Share)

Date

0% ($)

---------- ----------- -----<C>



5%($)

----------



10%($)

------



<C>



85.00



June 1, 2007



--



5,880,165



133,333+



6.7



3.75



June 1, 2007



--



212,641



5,000*



2.9



85.00



June 1, 2007



--



267,280



Danny M. Dobbs (3)

4,904,287



400,000+



20.0



3.75



June 1, 2007



--



637,294



Richard K, Kennedy (4)

3,269,516



266,666+



13.3



3.75



June 1, 2007



--



425,282



5,000*



2.9



85.00



June 1, 2007



--



267,280



1,527.341



1,527,341

Herbert F. Hamilton (5)

-



--



--



--



*Amended Series A Preferred Stock

+Common Stock

</TABLE>

_______________

(1)

granted an



Effective June 1, 1997, M. W. Miller, Jr. was

NSO to purchase 110,000 shares of Amended Series A



--



--



--



-



Preferred Stock for an option exercise price of $85.00 per share

(aggregate

purchase price of $9,350,000).

Such

NSO

is

exercisable as follows: as to 27,500 shares on June 1, 2000; as

to 66,000 shares on June 1, 2001, and as to 16,500 shares on June

1, 2002. Mr. Miller's NSO will expire on June 1, 2007 or, if

earlier, the date his employment is terminated by the Company for

cause or the date he voluntarily terminates his employment

without good reason.

(2)

Effective June 1, 1997, John T. Chandler was granted

an NSO to purchase 133,333 shares of Common Stock (adjusted for

the Reverse Stock Split) for an option exercise price (adjusted

for the Reverse Stock Split) of $3.75 per share (aggregate

purchase price of approximately $500,000) and an NSO to purchase

5,000 shares of Amended Series A Preferred Stock for an option

exercise price of $85.00 per share (aggregate purchase price of

$425,000). Such Common Stock NSO is exercisable as follows:

as

to 44,445 shares on June 1, 1999; as to 44,444 shares on June 1,

2000, and as to 44,444 shares on June 1, 2001. Such Amended

Series A Preferred Stock NSO is exercisable as follows:

as to

1,250 shares on June 1, 2000; as to 1,750 shares on June 1, 2001;

and as to 2,000 shares on June 1, 2002. Mr. Chandler's Common

Stock NSO and his Amended Series A Preferred Stock NSO will each

expire on June 1, 2007 or, if earlier, the date his employment is

terminated by the Company for cause or the date he voluntarily

terminates his employment without good reason.

(3)

Effective June 1, 1997, Danny M. Dobbs was granted

an NSO to purchase 400,000 shares of Common Stock (adjusted for

the Reverse Stock Split) for an option exercise price (adjusted

for the Reverse Stock Split) of $3.75 per share (aggregate

purchase price of $1,500,000) and an NSO to purchase 25,000

shares of Amended Series A Preferred Stock for an option exercise

price

of

$85.00 per share (aggregate purchase price

of

$2,125,000).

Such Common Stock NSO is exercisable as follows:

as to 133,334 shares on June 1, 1999; as to 133,333 shares on

June 1, 2000; and as to 133,333 shares on June 1, 2001. Such

Amended Series A Preferred Stock NSO is exercisable as follows:

as to 6,250 shares on June 1, 2000; as to 8,750 shares on June 1,

2001; and as to 10,000 shares on June 1, 2002. Mr. Dobbs' Common

Stock NSO and his Amended Series A Preferred Stock NSO will each

expire on June 1, 2007 or, if earlier, the date his employment is

terminated by the Company for cause or the date he voluntarily

terminates his employment without good reason.

(4)

Effective June 1, 1997, Mr. Richard Kennedy was

granted an NSO to purchase 266,666 shares of Common Stock

(adjusted for the Reverse Stock Split) at an exercise price

(adjusted for the Reverse Stock Split) of $3.75 per share

(aggregate purchase price of approximately $1,000,000), and an

NSO to purchase 5,000 shares of Amended Series A Preferred Stock

at an exercise price of $85.00 per share (aggregate purchase

price of $425,000). Such Common Stock NSO is exercisable as

follows:

as to 88,890 shares on June 1, 1999; as to 88,888

shares on June 1, 2000; and as to 88,888 shares on June 1, 2001.

Mr. Kennedy's Common Stock NSO will expire on June 1, 2007 or, if

earlier, the date his employment is terminated by the Company for

cause or the date he voluntarily terminates his employment

without good reason. Such Amended Series A Preferred Stock NSO

is exercisable as follows: as to 1,250 shares on June 1, 2000;

as to 1,750 shares on June 1, 2001; and as to 3,000 shares on

June 1, 2002. Mr. Kennedy's Amended Series A Preferred Stock NSO

will expire on August 1, 2007 or, if earlier, the date his

employment is terminated by the Company for cause or the date he

voluntarily terminates his employment without good reason.

(5) Effective June 30, 1998, Mr. Hamilton was granted an NSO to

purchase 150,000 shares of Common Stock at an exercise price of

$3.75 per share. These options are not included in the table

shown above.

<TABLE>

<CAPTION>

Aggregated Option/SAR Exercises in Last Fiscal Year

and Fiscal Year-End Option/SAR Values

(a)



(b)



(c)

Shares



(d)

Number of Securities



(e)

Value of Unexercised



Name

-----



Acquired

on

Exercise

---------



<S>

<C>

<C>

Marsden W. Miller, Jr.



Underlying Unexercised

in-the-Money

Options/SARs at

Options/SARs

Fiscal Year-End(#)

Fiscal Year-End($)(4)(5)

-------------------------------------------------Exercisable

Unexercisable Exercisable

Unexercisable

----------------------- ------------ -------------<C>

<C>

<C>

<C>

Value

Realized

--------



---



---



334,994 (1)

-(2)

160,000 (3)



-110,000 (2)

--



----



John T. Chandler



---



---



75,330 (1)

-(2)

74,999 (3)



133,333 (1)

5,000 (2)

--



----



-558,332

--



Richard K. Kennedy



---



---



16,629 (1)

-(2)



266,666 (1)

5,000 (2)



---



1,116,664

--



Danny M. Dobbs



---



---



22,653 (1)

-(2)

38,799 (3)



402,155 (1)

25,000 (2)

--



----



1,675,000

---



Herbert F. Hamilton

</TABLE>

_____________



--



--



13,332 (1)



--



(1)



Represents options to purchase shares of Common Stock

exercisable under the Company's stock option plans at

December 31, 1997 (as adjusted to reflect the Reverse Stock

Split).



(2)



Represents options to purchase shares of Amended Series A

Preferred Stock exercisable under the Company's 1997 LTSIP

Restatement at December 31, 1997.



(3)



Represents the aggregate number of five-year stock

purchase warrants, received (a) upon surrender of

an

employment agreement with the Company, determined based upon

a formula whereby each of the individuals was to be offered

a warrant, based upon the length of time of employment with

the Company, for a maximum of two shares of Common Stock for

each dollar of compensation remaining to be paid to such

individual under his agreement (based upon the product of

his highest monthly base salary and the number of months

remaining under his contract), at an exercise price of

$18.75 per share, and (b) for each dollar of salary

reduction for the 15-month period commencing January 1, 1993

through March 31, 1994, as based on the same formula and at

the same exercise price used in the granting of warrants

upon surrender of employment agreements. See "Employment

Agreements; Termination of Employment and Change-in-Control

Arrangements" below.



(4)



At December 31, 1997, the Company's Common Stock price

was lower than the option and/or warrant exercise prices (as

adjusted to reflect the Reverse Stock Split) with the

exception of options granted effective June 1, 1997.



(5)



At December

Preferred Stock

price.



31, 1997, the Company's Amended Series A

price was equal to the option exercise



These options were all awarded under the Company's stock

option plans or the exchange of stock purchase warrants for the

surrender of employment agreements, all of which are described

above. Additional options have been granted to Mr. Hamilton in 1998.

Appreciation Option for M.W. Miller, Jr.

---------------------------------------Pursuant to the 1997 LTSIP Restatement, the Board approved

an Appreciation Option for M. W. Miller, Jr., which was approved

by shareholders at the December 17, 1997 Special Meeting of the

Shareholders. The Board determined that the Appreciation Option

to M. W. Miller, Jr. was in the best interests of the Company and

its shareholders, and is required in order to retain the services

of Mr. Miller, who has been instrumental in developing the

Company's China activities and in successfully concluding the



--



----



--



Company's Offerings. The Appreciation Option would also provide

Mr. Miller with additional incentive to increase the value of the

Company based upon its market capitalization, thereby directly

benefiting the shareholders of the Company by increasing the

value of their investments in the Company.

<TABLE>

<CAPTION>

Long-Term Incentive Plans

Awards in Last Fiscal Year



(a)



Name

----<S>

<C>

<C>

Marsden W. Miller, Jr.



(b)

Number of

Shares, Units

or Other Rights

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



(c)

Performance or

Other Period

Until Maturation

or Payout

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



<C>

(1)



Estimated Future Payouts

Under Non-Stock Price Based Plans

---------------------------------(d)

(e)

(f)

Threshold

($ or #)

---------



Target

($ or#)

------



<C>

(1)



</TABLE>

____________

(1)

The Appreciation Option Agreement provides Mr. Miller

with the right, upon his payment of the Exercise Price (as

defined below), to additional compensation (payable in cash or in

shares of Common Stock or Preferred Stock or a combination

thereof, as elected by the Company) based upon 5% of the

difference between the market capitalization of the Company as of

June 1, 1997 and the market capitalization of the Company as of

the date that Mr. Miller exercises the Appreciation Option. For

purposes of the Appreciation Option, the Company's

market

capitalization is the total fair market value of the Company's

outstanding

shares of Common Stock, Preferred

Stock

and

outstanding options and warrants. In general, fair market value

is determined based on the trading price of marketable securities

and by the Board of Directors as to the fair market value for

securities for which there is no ready market. Fair market value

as of the date of exercise of the Option is based on the average

fair market value of the 30-day period immediately preceding the

date of the Appreciation Option exercise. On June 1, 1997 and

December 31, 1997, the aggregate market capitalization of the

Company was $161,547,223 and $177,572,416, respectively.

Upon

exercise of his Option, in the event the Company elects to settle

the Option with shares of Stock, Mr. Miller must pay the Company

twenty percent (20%) of the amount he is entitled to receive upon

exercise of the Appreciation Option (before any reduction as

hereinafter set forth), or any increment thereof, up to an

aggregate maximum of $5 million (the "Exercise Price") in cash.

In the event the Company elects to settle the Option in cash, the

amount of cash Mr. Miller will receive will be reduced by the

amount of the Exercise Price. Because Mr. Miller's Appreciation

Option contemplates compensation determined with reference to

increases

in

the Company's market capitalization

without

restriction, there is no effective limit on the amount of

compensation which may become payable thereunder. Mr. Miller may

exercise his Appreciation Option as of any June 1 or December 1

commencing June 1, 2002, upon 45 days written notice, in whole or

in 10% increments. In the event that Mr. Miller exercises his

Appreciation Option for less than the total amount available

thereunder, the percentage increment as to which it is exercised

will cease to be available to create additional compensation

opportunity for Mr. Miller based upon subsequent appreciation in

the Company's market capitalization. Mr. Miller's Appreciation

Option expires on June 1, 2007 and will remain exercisable at any

time prior to such expiration notwithstanding his termination of

employment with the Company unless such employment is terminated

by the Company for "cause" or is terminated by Mr. Miller without

"good reason." In keeping with the provisions of the 1997 LTSIP

Restatement discussed in "1997 LTSIP Restatement - Change of

Control Provisions," in the event of a "change in control of XCL"

the Appreciation Option will become immediately exercisable and

the Company will be obligated to pay Mr. Miller, in cash, upon

any exercise of his Appreciation Option, at least 40% of the net

amount payable. This obligation may impede the consummation of a

change of control of the Company.



(1)



Maximum

($ or #)

-------<C>



(1)



(1)



Material Federal Income Tax Effects

- ----------------------------------The following is a general summary of the material federal

income tax effects to the Company under current law of the

various awards which may be granted under the 1997 LTSIP

Restatement.

These descriptions do not purport to cover all

potential tax consequences.

Section 162(m) of the Internal Revenue Code of 1986, as

amended

(the

"Code"),

limits

deductibility

of

certain

compensation for the Company's Chief Executive Officer and the

additional four executive officers of the Company who are highest

paid and employed at year end to $1 million per year unless

certain conditions are met which result in compensation being

characterized as "performance-based." Awards under the Plan will

not satisfy the conditions necessary to cause the compensation

earned under them to qualify as "performance-based" compensation,

which is not subject to the deductibility limit of Section 162(m)

of the Code. It is the position of the Board of Directors that

the approach necessary for the design of incentive compensation

that will satisfy the criteria under Section 162(m) of the Code

would compromise the best interests of the Company and its

shareholders.

Certain provisions in the 1997 LTSIP Restatement may afford

the recipient of an Award under the 1997 LTSIP Restatement with

special protections or payments which are contingent upon a

change in the ownership or effective control of the Company or in

the ownership of a substantial portion of the Company's assets.

To the extent that they are triggered by the occurrence of any

such event, these special protections or payments may constitute

"parachute payments" which, when aggregated with other "parachute

payments" received by the recipient, could result in

the

recipient receiving "excess parachute payments."

The Company

would not be allowed a deduction for any such "excess parachute

payments" and the recipient of such "excess parachute payments"

would be subject to a nondeductible 20% excise tax upon such

payments in addition to income tax otherwise owed with respect to

such payments.

Section 401(k) Plan

- ------------------In 1989, the Company adopted an employee benefit plan under

Section 401(k) of the Internal Revenue Code for the benefit of

employees meeting certain eligibility requirements. The Company

has obtained a favorable determination from the Internal Revenue

Service regarding the tax-favored status of this plan. Employees

can contribute up to 10% of their compensation. The Company, at

its discretion and subject to certain limitations, may contribute

up to 75% of the contributions of each participant. The Company

did not make any contributions to the 401(k) Plan in 1997.

Compensation of Directors and Other Arrangements

- -----------------------------------------------The Company reimburses its directors for travel and lodging

expenses

incurred in attending meetings of the Board

of

Directors.

Effective January 1, 1990, directors (other than

Messrs. Hummel and Palliser and those directors who are officers

of the Company) were paid an annual retainer of $18,000 plus a

fee of $1,000 for each Board meeting attended. In addition, such

directors were paid a fee of $1,000 for each committee meeting

attended.

In April 1994, the Company entered into separate consulting

agreements with Messrs. Hummel and Palliser, upon their becoming

directors. Each of the agreements is terminable by either of the

parties thereto upon written notice and provides that the

individuals will render consulting services to the Company in

their respective areas of expertise. Pursuant to the terms of

the agreements, each of those directors receives compensation at

the rate of $50,000 per annum, which includes the compensation

they would otherwise be entitled to receive as directors and for

attending meetings of the Board. In addition, pursuant to the

terms of the 1992 LTSIP, Messrs. Hummel, Palliser, Reinhardt and



Hofheinz, each a non-employee director, were each granted stock

options for 6,666 shares of Common Stock exercisable at prices

ranging from $18.75 to $31.59 per share (adjusted for the Reverse

Stock Split).

In June 1997, the Company entered into a consulting

agreement with Mr. Fetters, a director of the Company.

The

agreement is for a one-year term ending July 31, 1998, to

continue thereafter on a month to month basis. The agreement may

be terminated by either party on thirty days written notice.

Pursuant to the terms of the agreement, Mr. Fetters is to consult

with the Company on all aspects of the Company's exploration,

development and production projects. For his services Mr. Fetters

is to receive $30,000 per annum, which is in addition to the

compensation he receives as a director for attending meetings of

the Board. In addition to the above compensation, Mr. Fetters is

entitled to receive a finder's fee on certain specifically

identified projects.

Effective June 1, 1997, Messrs. Hummel, Palliser, Reinhardt,

Hofheinz and Fetters were each granted nonqualified stock options

to purchase 66,666 shares of Common Stock (adjusted for the

Reverse Stock Split) exercisable at $3.75 (adjusted for the

Reverse Stock Split) per share under the 1997 LTSIP Restatement.

See "Stock Options - 1997 LTSIP Restatement - Awards

to

Management" herein.

Benjamin B. Blanchet, in his capacity as Executive Vice

President, is entitled to a salary of $80,000 per year for up to

80 hours per month of services.

Effective August 1, 1997, the Company entered into a

Services

Agreement with Mr. Blanchet.

The

Agreement

is

terminable by either party at any time without cause. Under the

Agreement, Mr. Blanchet is engaged to act as counsel to the

Company to perform from time to time such services as the Company

may request of him in that capacity. In general, compensation

for services under the Services Agreement will be at the rate of

$175 per hour for up to 80 hours per month. Also, under the

Services Agreement, the Company has agreed to provide Mr.

Blanchet with office space, supplies, secretarial assistance, a

library

allowance,

professional

liability

insurance,

reimbursement for continuing legal education expenses and bar

dues. Under the Services Agreement, Mr. Blanchet may, except as

prohibited

by law or the Louisiana Rules of Professional

Responsibility, represent other clients and engage in business

for his own account.

In connection with his employment by the Company, Mr.

Blanchet received from the Company a $100,000 loan to replace

benefits that he forfeited when he withdrew as a partner of

Gordon, Arata, McCollam & Duplantis, L.L.P. to become Executive

Vice President of the Company. The loan is to be repaid over

eight years from annual bonus payments equal to interest, at the

rate of 6.5% per annum, plus one-eighth of the original principal

balance to be paid by the Company to Mr. Blanchet each year and

shall be forgiven in its entirety if (i) the Company shall fail

to pay timely any such bonus payment, shall breach the Services

Agreement or shall terminate his employment without "cause" or

(ii) Mr. Blanchet terminates his employment with "good reason,"

in either case as such terms are defined in the note evidencing

such loan. In January 1998 a bonus payment of $12,500 was paid

to Mr. Blanchet and used by him to pay the first installment on

the note.

Effective August 1, 1997, Benjamin B. Blanchet was granted

an NSO to purchase 400,000 shares of Common Stock for an option

exercise price of $3.75 per share (aggregate purchase price of

$1,500,000.00).

Such Common Stock NSO is exercisable as to

133,334 shares on August 1, 1999; as to 133,333 shares on August

1, 2000 and as to 133,333 shares on August 1, 2001. On that same

date Mr. Blanchet was granted an NSO to purchase 25,000 shares of

Amended Series A Preferred Stock for an option exercise price of

$85.00 per share (aggregate purchase price of $2,125,000).

Such

Amended Series A Preferred Stock NSO is exercisable as to 6,250

shares on August 1, 2000; as to 8,750 shares on August 1, 2001

and as to 10,000 shares on August 1, 2002. Mr. Blanchet's NSOs

will expire on August 1, 2007 or, if earlier, the date his

employment is terminated by the Company for cause or the date he

voluntarily terminates his employment without good reason.



Effective June 30, 1998, Mr. Ross was granted nonqualified

stock

options to purchase 66,666 shares of Common

Stock

exercisable at $3.75 per share under the 1997 LTSIP Restatement.

During 1997 all regular employees were provided health

insurance, a portion of the premium for which is paid by the

Company, and life and disability insurance based upon a factor of

the employee's base salary.

Employment Agreements; Termination of Employment and Change-inControl Arrangements

- --------------------------------------------------------------Effective April 1, 1994, Messrs. M.W. Miller, Jr., J.T.

Chandler, D.M. Dobbs, and R.C. Cline, in their capacities as

executive and administrative officers of the Company and its

various

subsidiaries, agreed to surrender their employment

agreements in consideration of the issuance of five-year warrants

to purchase Common Stock at an exercise price of $18.75 per share

(adjusted for the Reverse Stock Split), subject to customary antidilution adjustments.

The number of warrants issued to such

individuals was determined based upon a formula whereby each of

the individuals was offered a warrant to purchase, based upon the

length of time of employment with the Company, a maximum of two

shares of Common Stock for each dollar of compensation remaining

to be paid to such individual under his agreement (based upon the

product of his highest monthly base salary and the number of

months remaining under his agreement). Accordingly, Mr. Miller

received warrants to purchase 125,000 shares; Mr. Chandler,

68,333 shares; Mr. Dobbs, 38,333 shares; and Mr. Cline, 16,666

shares, all adjusted for the Reverse Stock Split.

Effective January 1, 1989, the Company adopted a policy

addressing severance upon separation from the Company.

Under

this policy benefits due upon a change-in-control as therein

defined range from three months salary for employees with less

than one year of service to 24 months salary for employees with

more than 10 years of service.

Report on Repricing of Options/SARs

- ----------------------------------During the fiscal year ended December 31, 1997, there were

no repricings of stock options awarded to any of the named

executive officers.

Compensation Committee Interlocks and Insider Participation

- ----------------------------------------------------------For the year ended December 31, 1997, the following

nonexecutive directors of the Company, served as members of the

Compensation Committee of the Board of Directors: Messrs.

M.

Palliser, A.W. Hummel, Jr., F. Hofheinz (Chairman) and F.J.

Reinhardt, Jr. None of the members of the Compensation Committee

were formerly, nor are any members currently, officers or

employees of the Company or any of its subsidiaries.

Compensation Committee Report on Executive Compensation

------------------------------------------------------The Compensation Committee of the Board of Directors

("Committee") establishes the general compensation policies of

the Company, establishes the compensation plans and specific

compensation levels for executive officers and certain other

managers, and administers the Stock Option Plans and Long Term

Stock Incentive Plan. The Committee currently consists of four

independent, nonemployee directors: Messrs. F. Hofheinz, who

serves as Chairman, M. Palliser, Arthur W. Hummel, Jr. and

Francis J. Reinhardt, Jr.

Compensation Policies and Philosophy

- -----------------------------------The Committee has determined that the compensation program

of the Company should not only be adequate to attract, motivate

and retain executives, key employees and other individuals who

the Company believes may make significant contributions to the

Company's results, but should also be linked to the value

delivered to shareholders as reflected in the price of the



Company's Common Stock.

The Committee believes that the cash compensation of

executive officers, as well as other key employees, should be

competitive with other similarly situated companies while, within

the Company, being fair and discriminating on the basis of

personal performance.

In general, in establishing total cash

compensation for its executives, the Committee has taken into

account the median cash compensation of executives employed by

competitors including some of the companies reflected in the peer

group identified in the Performance Graph set forth below, which

the Committee believes represent the Company's most direct

competition

for

executive talent. The Committee

receives

recommendations from management as to executive compensation and,

in light of the Company's performance and the economic conditions

facing the Company, determines appropriate compensation levels

for recommendation to the Board of Directors. The Committee does

not assign relative weights to individual factors and criteria

used in determining executive compensation and does not use

quantifiable targets in determining compensation. For 1997, the

Company did not retain the services of a compensation consulting

firm.

Awards of stock options are intended both to retain

executives, key employees and other individuals who the Company

believes may make significant contributions to the Company's

results and to motivate them to improve long-term stock market

performance. Options are granted at or above the prevailing

market price and will have value only if the price of the

Company's Common Stock increases.

Effective January 1, 1994, Section 162(m) of the Internal

Revenue Code of 1986 (the "Code") generally denies a tax

deduction to any publicly held corporation for compensation that

exceeds $1 million paid to certain senior executives in a taxable

year,

subject

to

an

exception

for

"performance-based

compensation" as defined in the Code and subject to certain

transition provisions. Gains on the exercise of nonqualified

stock options granted through December 31, 1994, will be tax

deductible under the transition rules. Restricted stock awards

by

definition granted after February 17, 1993,

are

not

deductible. At present the Committee does not intend to recommend

amendment to the Stock Option Plans to meet the restrictive

requirements of the Code.

The Committee believes that annual incentive awards should

be commensurate with performance. It further believes that in

order to meet this objective it needs to have the ability to

exercise its judgment or discretion to evaluate performance

against qualitative criteria. It is the Committee's opinion that

the benefits to the Company of the use of a qualitative approach

to the compensation of senior executives such as the Chairman

outweigh the nonmaterial loss of a portion of the deductions

associated with that compensation.

In recognition of the efforts and sacrifices of management

that had enabled the Company in mid-1997 to be on track to meet

its 1997 goals, the need to retain existing management and the

need to attract qualified and competent personnel, in June 1997,

the

Board of Directors reassessed the need for adjusting

management's compensation to provide for additional incentives to

management.

As a result of this reassessment, the Board of

Directors approved amendments to and a restatement of the

Company's 1992 LTSIP subject to shareholders approval, which was

obtained on December 17, 1997. These amendments generally made

available to the Committee the authority to grant Awards to

executives employed by the Company entitling such executives to

acquire shares of the Company's Preferred Stock and Common Stock.

They also made available to the Committee the authority to grant

appreciation awards. As described in greater detail in "Awards

to Management," the Board of Directors made, subject to the

approval of the shareholders of the Company, which was obtained

on December 17, 1997, certain Awards under the 1997 LTSIP

Restatement effective as of June 1, 1997 (except for awards to

the CFO and an Executive Vice President which were effective

October 6 and August 1, 1997, respectively).

The Committee

believes that the 1997 LTSIP Restatement and the Awards granted

thereunder effectively encourage retention and continuity of

management,

appropriately reward management for

its

past

performance and align the interests of management with those of



the Company's shareholders by providing management with

opportunity to share in the creation of the Company's value.



the



On December 17, 1997, the Committee reviewed the Company's

1997 financial results and 1997 nonfinancial goals and determined

that, in light of (i) the Company's continued successful drilling

results in the Zhao Dong Block in the Bohai Bay in China, (ii)

the fact that top officials in China's oil industry have

indicated that the Company will be offered additional exploration

and

development rights in China and (iii) the

Company's

successful placement in May 1997 of $100 million of Preferred

Stock and Notes, the proceeds of which allowed the Company to

commence

achieving its objectives in China, the Company's

financial and operating goals for 1997 had been met and exceeded.

Company Performance and Chief Executive Officer Compensation

- -----------------------------------------------------------The

Committee,

in connection with determining

the

appropriate compensation for Marsden W. Miller, Jr. as Chief

Executive Officer ("CEO"), took into account the financial

condition of the Company, including its liquidity requirements.

It determined that the CEO had been successful in disposing of

assets and raising capital throughout the year. Taking into

consideration the performance of the CEO, as well as the

Company's current cash position and near term requirements, the

adoption of the 1997 LTSIP Restatement and the

NSO

and

Appreciation Option awarded to the CEO under the 1997 LTSIP

Restatement, the Committee decided that the 1997 awards should

serve in lieu of a cash salary increase or bonus to the CEO for

the present time.

Compensation of Other Executive Officers

- ---------------------------------------The Committee, in consultation with the CEO, applied the

information and other factors outlined above in reviewing and

approving the compensation of the Company's other executive

officers.

December 17, 1997



COMPENSATION COMMITTEE

Fred Hofheinz, Chairman

Arthur W. Hummel

Michael Palliser

Francis J. Reinhardt, Jr.



Shareholder Return Performance Presentation

- ------------------------------------------Set forth below is a line graph comparing the percentage

change in the cumulative total shareholder return on

the

Company's Common Stock against the AMEX Market Value Index for

the years 1993 through 1997, with a peer group selected by the

Company for the past five fiscal years. The peer group consists

of the same independent oil and gas exploration and production

companies used in last year's comparison, namely: Alta Energy

Corporation;

Amerac Energy Corporation (formerly

Wolverine

Exploration Company); Bellwether Exploration Company;

Brock

Exploration Corporation; Tom Brown, Inc.; Caspen Oil, Inc.;

Chemfirst Inc. (formerly First Mississippi Corporation); Cobb

Resources Corporation; Coda Energy, Inc.; Comstock Resources,

Inc.;

Crystal Oil Company; DeKalb Energy Company;

Edisto

Resources Company; Energen Corporation; Forest Oil Corporation;

Geodyne Resources, Inc.; Global Natural Resources, Inc.; Goodrich

Petroleum

Corporation (formerly Patrick Petroleum Company);

Hallador Pete Company; Hondo Oil & Gas Company; Kelley Oil & Gas

Partners;

Louis

Dreyfus Natural

Gas

(formerly

American

Exploration Company); Magellan Petroleum Corporation; Maynard Oil

Company; Monterey Resources, Inc. (formerly McFarland Energy,

Inc.); MSR Exploration Limited; Numac Energy, Inc.; Pacific

Enterprises; Penn Virginia Corporation; Plains Resources, Inc.;

Presidio Oil; Wainoco Oil Corporation; Wichita River Oil; and

Wiser Oil Company. The relevant information with respect to the

peer group was furnished by Standard & Poors Compustat Service.

The graph assumes that the value of the investment in the

Company's Common Stock and the peer group stocks were $100 on

January 1, 1992 and that all dividends were reinvested.

[Shareholder Return Performance Presentation Graph]



XCL

Peer Group

AMEX



1993

Return

-----49.96

121.87

119.52



1994

Return

-----72.18

121.48

108.63



1995

Return

------27.73

153.45

137.32



1996

Return

-----16.62

183.12

146.10



1997

Return

-----24.82

217.52

171.48



SECURITY OWNERSHIP

OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Security Ownership of Certain Beneficial Owners

- ----------------------------------------------The following table sets forth as of September 30, 1998, the

individuals or entities known to the Company to own more than

5 percent of the Company's outstanding shares of voting

securities. As of that date there were 22,926,333 shares of

Common Stock, excluding 69,471 shares held as treasury stock;

1,181,614 shares of Amended Series A Preferred Stock; and

48,405 shares of Amended Series B Preferred Stock issued and

outstanding. Except as otherwise indicated, all shares are

owned both of record and beneficially.

<TABLE>

<CAPTION>



Name and Address

of Beneficial Owner

- ---------------------<S>

<C>

<C>

Cumberland Associates

1114 Avenue of the Americas

New York, New York 10036



Amended Series A

Amended Series B

Common Stock (1)

Preferred Stock(2)

Preferred Stock (3)

------------------------------------------- ---------------------Number of

Percent

Number of

Percent

Number of

Percent

Shares

of Class

Shares

of Class

Shares

of Class

------------ ------------------------------------<C>

<C>

<C>

<C>

2,070,669



(4)



8.30



146,793



275,256(6)



12.42



4,248,406(4)(5)



16.11



Mitch Leigh

29 West 57th Street

New York, New York 10019



1,987,539 (4)(7)



10.03



--



--



--



--



Marsden W. Miller, Jr.

1,665,713 (4)(8)

110 Rue Jean Lafitte, 2nd Floor

Lafayette, Louisiana 70508



7.11



--



--



--



--



--



--



8,882,773 (4)(9)



27.79



195,869



_______________

(1)



This table includes shares

conversion of the shares of

Stock.

Each share of Amended

convertible into approximately



(2)



The holders of Amended Series A Preferred Stock are

entitled to cast the same number of votes as the shares of

Common

Stock

then

issuable upon conversion

thereof

(currently 11 votes) on any matter subject to the vote of

Common Stockholders.



(3)



Each share of Amended Series B Preferred Stock is

convertible into approximately 26.3 shares of Common Stock,

if the Common Stock issuable on conversion has not been

registered and 21 shares of Common Stock, if the Common

Stock issuable on conversion has been registered, subject to

adjustment, on or after August 31, 1998.

Each share of

Amended Series B Preferred Stock is entitled to 50 votes per

share.



(4)



Includes



shares



of Common Stock issuable upon

Amended Series A Preferred

Series A Preferred Stock is

11 shares of Common Stock.



issuable



upon



the



exercise



of



16.58



48,405



--



KAIM Non-Traditional, L.P.

1800 Avenue of the Stars,

2nd Floor

Los Angeles, California 90026



Putnam Investment

Management, Inc.

25 Braintree Hill Office Park

Braintree, MA 02184



23.29



--



100



outstanding stock purchase warrants exercisable

next 60 days.



within



the



(5)



Includes 16,874 shares owned by Richard A. Kayne, a

director, CEO and President of Kayne Anderson Investment

Management,

Inc., the general partner of

KAIM

NonTraditional, L.P. ("KAIM LP"). The shares over which Mr.

Kayne has sole voting and dispositive power are held by him

directly or by accounts for which he serves as trustee or

custodian. The shares over which Mr. Kayne and KAIM LP have

shared voting and dispositive power are held by accounts for

which KAIM LP serves as investment adviser (and, in some

cases as general partner). KAIM LP disclaims beneficial

ownership of these shares, except to the extent that they

are held by it or attributable to it by virtue of its

general partner interests in certain limited partnerships

holding

such shares.

Mr. Kayne disclaims

beneficial

ownership of the shares reported, except those shares

attributable to him by virtue of his limited and general

partner interests in such limited partnerships and by virtue

of his indirect interest in the interest of KAIM LP in such

limited partnerships.



(6)



Includes 2,610 shares owned by Richard Kayne, a director,

CEO and President of Kayne Anderson Investment Management,

Inc., the general partner of KAIM Non-Traditional, L.P.

("KAIM LP") The shares over which Mr. Kayne has sole voting

and dispositive power are held by him directly or by

accounts for which he serves as trustee or custodian.

The

shares over which Mr. Kayne and KAIM LP have shared voting

and dispositive power are held by accounts for which KAIM LP

serves as investment adviser (and, in some cases as general

partner). KAIM LP disclaims beneficial ownership of these

shares, except to the extent that they are held by it or

attributable to it by virtue of its general

partner

interests in certain limited partnerships holding such

shares.

Mr. Kayne disclaims beneficial ownership of the

shares reported, except those shares attributable to him by

virtue of his limited and general partner interests in such

limited partnerships and by virtue of his indirect interest

in the interest of KAIM LP in such limited partnerships.



(7)



Includes 118,732 shares owned by Mr. Leigh's wife. Does

not include shares and warrants held in custodial and trust

accounts for Mr. Leigh's minor children, which Mr. Leigh

does not control. Mr. Leigh disclaims beneficial ownership

of all shares held by his wife and minor children.



(8)



Includes shares issuable upon the exercise of stock options

exercisable within the next 60 days; and 1,000,000 shares of

restricted stock subject to certain forfeiture provisions.



(9)



Putnam Investment Management, Inc. has shared voting and

investment power over securities held by accounts for which

Putnam Investment Management, Inc. serves as investment

adviser.



</TABLE>

Security Ownership of Management

- -------------------------------The following table sets forth information concerning the

shares of the Company's Common Stock owned beneficially by each

director of the Company, and all directors and executive officers

as a group as of September 30, 1998. As of that date there were

22,926,333

shares of Common Stock issued and outstanding,

excluding 69,741 shares of Common Stock held as treasury stock,

and 1,181,614 shares of Amended Series A Preferred Stock issued

and outstanding. The mailing address for all such individuals is

XCL Ltd., 110 Rue Jean Lafitte, 2nd Floor, Lafayette, Louisiana

70508.

<TABLE>

<CAPTION>



Name of Beneficial Owner



Common Stock

_____________________________

Number

Percent

of Shares

of Class



Amended Series A Preferred Stock

______________________________

Number

Percent

of Shares

of Class



- ----------------------------------------- --------<S>

<C>

<C>

<C>

Marsden W. Miller, Jr.

1,665,713 (1)(2)(3)(4)

7.11

John T. Chandler

533,709 (1)(2)(3)(4)

2.31

Benjamin B. Blanchet

200 (5)

-Fred Hofheinz

23,332 (3)

0.10

Arthur W. Hummel, Jr.

23.332 (3)

0.10

Sir Michael Palliser

23,332 (3)

0.10

Francis J. Reinhardt, Jr.

57,464 (3)(6)

0.25

R. Thomas Fetters, Jr.

79,365 (4)

0.34

Peter F. Ross

-- (3)

-All directors and officers of the

Company as a group (17 persons)

2,810,427 (1-6)

12.24

____________

(1)



Includes 133,333 shares which are subject to an option

granted under agreement dated October 1, 1985 in favor of

John T.

Chandler. Such shares are also included in Mr.

Chandler's holding inasmuch as the option is presently

exercisable.

For purposes of the total holdings of the

group, the shares are included solely in Mr. Miller's share

holdings.



(2)



Includes shares of restricted stock awarded to Messrs.

Miller and Chandler which are subject to certain forfeiture

provisions.



((3)



Includes shares of Common Stock which may be acquired

pursuant to options which are exercisable within 60 days.



(4)



Includes shares of Common Stock which may be acquired

pursuant to stock purchase warrants exercisable within 60

days.



(5)



Represents shares of Common Stock owned by Mr. Blanchet's

children.

Mr. Blanchet disclaims beneficial ownership of

these shares.



(6)



Includes 6,666 shares of Common Stock owned by Carl H.

Pforzheimer & Co. of which Mr. Reinhardt is a general

partner and 13,333 shares owned by Petroleum and Trading

Corporation of which Mr. Reinhardt is an officer and

director. Mr. Reinhardt disclaims beneficial ownership of

the shares owned by Petroleum and Trading Corporation.



</TABLE>

DESCRIPTION OF EXISTING DEBT

General

- ------The Company's only outstanding long-term indebtedness is

represented by the Notes issued in connection with the Note

Offering concluded on May 20, 1997. The Notes are limited in

aggregate principal amount to $75 million. The Notes represent

senior obligations of the Company and rank pari passu in right of

payment with all indebtedness of the Company and senior to any

indebtedness that is expressly subordinated to the Notes.

The

Notes are secured by (i) a pledge of all the capital stock of XCLChina and any other future restricted subsidiary and (ii) the

subsidiary guarantees of XCL-China (which has given a full and

unconditional guaranty) and any other Subsidiary Guarantor.

The

Notes will mature on May 1, 2004. The Notes bear interest at the

rate of 13.50% per annum, payable semiannually on May 1 and

November 1 of each year, commencing November 1, 1997.

The Notes were issued pursuant to the terms of the Indenture

with Fleet National Bank as the original Trustee. The Trustee is

now State Street Bank and Trust Company of Connecticut N.A. The

terms of the Indenture are also governed by certain provisions

contained in the Trust Indenture Act of 1939, as amended.

The

Indenture contains customary representations and warranties by

the Company as well as certain affirmative and negative covenants

briefly described elsewhere in this Prospectus.

See "Risk

Factors -- Restrictions Imposed by Terms of the Company's

Indebtedness."



----------------<C>

-20,000 (2)

--------



-0.02

--------



20,000 (2)



0.02



<C>



The Company also had $2.1 million in limited recourse debt

outstanding as of June 30, 1998, which was collateralized by the

Lutcher Moore Tract. Expressions of interest to purchase the

property have been received from several parties and the Company

is presently evaluating such proposals with the possible intent

to sell the property.

The Company is also evaluating the

possibility of developing the property into a source of wetland

mitigation credits. See "Management's Discussion and Analysis of

Financial Condition and Results of Operations," "Business -Domestic Properties -- Lutcher Moore Tract."

DESCRIPTION OF CAPITAL STOCK

The authorized capital stock of XCL consists of 500,000,000

shares of common stock, par value $0.01 per share ("Common

Stock"), and 2,400,000 shares of preferred stock, par value $1.00

per

share ("Preferred Stock"), 70,000 of which have been

designated Amended Series B, Cumulative Convertible Preferred

Stock, and 2,085,000 of which have been designated Amended Series

A, Cumulative Convertible Preferred Stock.

Common Stock

------------General

- ------As of September 30, 1998, there were 22,926,333 shares of

Common Stock outstanding, excluding 69,471 shares held

in

treasury, held by approximately 3,480 stockholders of record.

Common Stock is not redeemable, does not have any conversion

rights and is not subject to call. Holders of shares of Common

Stock have no preemptive right to maintain their percentage of

ownership in future offerings or sales of stock of XCL.

Holders

of shares of Common Stock have one vote per share in all

elections of directors and on all other matters submitted to a

vote of stockholders of XCL. The holders of Common Stock are

entitled to receive dividends, if any, as and when declared from

time to time by the Board of Directors of XCL out of funds

legally available therefor (subject to restrictions in the

Indenture

and

any

credit agreement).

Upon

liquidation,

dissolution, or winding up of the affairs of XCL, the holders of

Common Stock will be entitled to participate equally and ratably,

in proportion to the number of shares held, in the net assets of

XCL available for distribution to holders of Common Stock.

The

shares of Common Stock currently outstanding are, and the shares

of Common Stock underlying the Warrants offered hereby when

issued will be, fully paid and nonassessable.

Effective December 17, 1997, the Company effected a one-forfifteen reverse stock split of its outstanding shares of Common

Stock.

The



United States registrar and transfer agent for the

Common

Stock is ChaseMellon Shareholder Services,

L.L.C.,

Overpeck Centre, 85 Challenger Road, Ridgefield Park, New Jersey

07660 (Telephone No. 1-800-851-9677). The transfer agent for

the Common Stock in the United Kingdom is IRG plc, Balfour House,

390/398 High Road, Ilford, Essex IG1 1NQ, England (Telephone No.

0181-478-8241).

Special Charter and By-Law Provisions

- ------------------------------------General Effect.

The Board of Directors of the Company

believes that certain provisions in its Amended and Restated

Certificate

of Incorporation, as amended ("Certificate

of

Incorporation") and the Amended and Restated By-Laws of XCL (the

"By-Laws") will effectively reduce the possibility that a third

party could effect a sudden or surprise change of majority

control of the Company's Board of Directors or successfully

complete a takeover of XCL without the support of the incumbent

Board of Directors.

Certain provisions in the Certificate of Incorporation and

By-Laws of XCL may have significant effects on the ability of the

stockholders of XCL to change the composition of the incumbent

Board of Directors and to benefit from certain transactions that

are opposed by the incumbent Board of Directors.



XCL has adopted a number of provisions in its Certificate of

Incorporation and By-Laws that might discourage certain types of

transactions that involve an actual or threatened change of

control of XCL. The provisions may make it more difficult and

time consuming to change majority control of the Board of

Directors, and thus reduce the vulnerability of XCL to an

unsolicited offer to acquire XCL, particularly an offer that does

not contemplate the acquisition of all of XCL's outstanding

shares. As more fully described below, the Board believes that,

as a general rule, such unsolicited offers are not in the best

interests of XCL and its stockholders at this time.

The Board of Directors of XCL believes that the threat of

removal of XCL's management, in the case of a takeover bid,

severely curtails its ability to negotiate effectively with a

potential purchaser of XCL or its subsidiaries.

In such a

situation, management is deprived of the time and information

necessary to evaluate the takeover proposal, to study alternative

proposals, and to help ensure that the best transaction involving

XCL is ultimately undertaken. The Board believes a takeover of

XCL without prior negotiation with XCL's management would be

detrimental to XCL and its stockholders. Consequently, the Board

thinks that the benefits of protecting its ability to negotiate

with the proponent of an unfriendly or unsolicited proposal to

take over or restructure XCL outweigh the disadvantages of

discouraging such proposals. The Certificate of Incorporation

makes it more difficult for a holder of a substantial block of

Common Stock to acquire control of, or to remove, the incumbent

Board and could thus have the effect of entrenching incumbent

management. At the same time, the anti-takeover provisions help

ensure that the Board, if confronted by a surprise proposal from

a third party who has recently acquired a block of Common Stock,

will have sufficient time to review the proposal and alternatives

to it and to seek better proposals for its stockholders,

employees, suppliers, customers, and others.

The anti-takeover provisions are intended to encourage

persons seeking to acquire control of XCL to initiate such an

acquisition

through

arm's-length negotiations

with

XCL's

management

and

Board of Directors.

The

Certificate

of

Incorporation could have the effect of discouraging a third party

from making a tender offer or otherwise attempting to obtain

control of XCL, even though such an attempt might be beneficial

to XCL and its stockholders.

Fair Price Provision. The purchaser in corporate takeovers

often pays cash to acquire a controlling equity interest in a

corporation and then arranges a transaction to acquire the

balance of the shares for a lower price or less desirable

consideration (frequently securities of the purchaser that do not

have an established trading market at the time of issue) or both.

This practice is known as "two-tier pricing" and tends (and may

be designed) to cause stockholders to accept the initial offer

for fear of becoming minority stockholders in a controlled

corporation or being forced to accept a lower price or less

favorable consideration for their shares.

To alleviate this

problem, XCL has included in its Certificate of Incorporation a

provision (the "Fair Price Provision") designed to assure that

all stockholders of XCL will receive substantially the same price

for their shares in transactions in which XCL is acquired in two

or more steps.

The Fair Price Provision discourages two-step acquisitions

of XCL by requiring that mergers and certain other business

combinations involving XCL and any Interested Stockholder (as

hereinafter defined) either (1) meet certain minimum price and

procedural requirements, (2) be approved by a majority of the

members of XCL's Board of Directors who are unaffiliated with the

Interested

Stockholder and who were directors before

the

Interested Stockholder became a 20% stockholder, (3) be approved

by the favorable vote of at least 67% of the voting power of the

Voting Stock and a majority of the outstanding shares of Voting

Stock (as hereinafter defined) held by persons who are neither

Interested

Stockholders

nor

affiliates

of

Interested

Stockholders, or (4) be approved by the holders of at least 80%

of the outstanding shares of Voting Stock.

from



The Fair Price Provision is designed to prevent a purchaser

utilizing two-tier pricing and similar tactics in an



attempted takeover of XCL. It has the overall effect of making

it more difficult to acquire and exercise control of XCL and may

provide officers and directors with enhanced ability to retain

their position in the event of a takeover bid.

It is not

designed to prevent or discourage all tender offers for control

of XCL.

The Fair Price Provision does not preclude an offeror

from making a tender offer for some of the shares of XCL's stock

without proposing a Business Combination (as defined below) in

which the remaining shares of stock are purchased. Except for

the

restrictions on Business Combinations, the Fair Price

Provision will not prevent a holder of a controlling interest of

the XCL Common Stock from exercising control over XCL or

increasing its interest in XCL. The Board will support or oppose

any future takeover proposal, whether or not the proposal

satisfies the fair price requirements for the Fair

Price

Provision, if the Board determines that its support or opposition

is in the best interests of XCL's stockholders.

The Fair Price Provision will not limit the ability of a

third party to effect a Business Combination, as long as such

third party owns (or can obtain the affirmative votes of) at

least 80% of the outstanding shares of all classes of capital

stock entitled to vote generally in the election of directors

(the "Voting Stock").

Certain Definitions Used in the Fair Price Provision.

An

"Interested Stockholder" is defined in the Fair Price Provision

as anyone who is the beneficial owner of 20% or more of the

Voting Stock, and includes any person who, in a transaction not

involving a public offering, is an assignee of or has succeeded

to any shares of Voting Stock of XCL that were at any time within

the prior two-year period beneficially owned by an Interested

Stockholder.

The term "beneficial owner" includes

persons

directly and indirectly owning or having the right to acquire or

vote the stock. The Board of Directors of XCL considers that a

20%

holding,

which is four times the minimum

ownership

requirement

imposed in connection with

various

reporting

requirements under the Exchange Act for stockholders of public

companies, is appropriate to define an Interested Stockholder.

A

"Business

Combination"

includes

the

following

transactions: (1) a merger or consolidation of XCL or any

subsidiary with an Interested Stockholder or with any other

company or entity that is, or after such merger or consolidation

would be, an affiliate of an Interested Stockholder; (2) the sale

or other disposition by XCL or a subsidiary of assets having an

aggregate fair market value equal to 10% or more of the net

assets of XCL or more if an Interested Stockholder (or an

affiliate thereof) is a party to the transaction; (3) the

issuance or transfer of stock or other securities of XCL or of a

subsidiary to a person or entity that, immediately before such

issuance, is an Interested Stockholder (or an affiliate thereof)

in exchange for cash or property (including stock or other

securities) having an aggregate fair market value equal to 10% or

more of the net assets of XCL; (4) the adoption of any plan or

proposal for the liquidation or dissolution of XCL proposed by or

on behalf of an Interested Stockholder (or an affiliate thereof);

or (5) any reclassification of securities, recapitalization,

merger with a subsidiary or other transaction that has the

effect, directly or indirectly, of increasing the proportionate

share of the outstanding stock (or securities convertible into

stock) of any class of XCL or any of its subsidiaries owned by an

Interested Stockholder or affiliate.

A "Disinterested Director" is a member of the Board of

Directors of XCL who is not affiliated with or a nominee of an

Interested Stockholder and was a director of XCL immediately

before the time the Interested Stockholder became an Interested

Stockholder, and any successor to such Disinterested Director who

is not affiliated with or a nominee of an Interested Stockholder

and was recommended for nomination or election to the Board by a

majority of the Disinterested Directors then on the Board.

Requirements for Certain Business Combinations Without the

Fair Price Provision. If XCL's Certificate of Incorporation did

not include the Fair Price Provision, mergers, consolidations,

the sale of substantially all of the assets of XCL, the adoption

of

a plan of dissolution of XCL and reclassification of

securities and recapitalizations of XCL involving amendments to

the Certificate of Incorporation would require approval by the



holders of a majority of the voting power of the Voting Stock.

Certain

other transactions, such as sales of

less

than

substantially all of the assets of XCL, certain mergers involving

a wholly owned subsidiary of XCL and recapitalizations and

reclassifications not involving amendments to the Certificate of

Incorporation would not require stockholder approval.

Requirements for Certain Business Combinations Under the

Fair Price Provision. Under the Fair Price Provision, it will be

a

condition to a Business Combination with an Interested

Stockholder that the transaction either (1) meet certain price

criteria and procedural requirements (discussed below), or (2) be

approved by a majority of the Disinterested Directors, or (3) be

approved by the favorable vote of at least 67% of the voting

power of the Voting Stock and a majority of the outstanding

shares of Voting Stock held by persons who are neither Interested

Stockholders or affiliates of Interested Stockholders, or (4) be

approved by the favorable vote of at least 80% of the voting

power of the Voting Stock. If the minimum price criteria and

procedural requirements are met or the requisite approval of the

Disinterested Directors is obtained with respect to a particular

Business Combination, then the normal requirements of Delaware

law will apply, and only a majority vote of the outstanding

Voting Stock will be required or, for certain transactions as

noted above, no stockholder vote will be necessary.

If the

minimum price criteria and procedural requirements are not met or

the requisite approval of the Disinterested Directors is not

obtained, or the requisite vote of shareholders not affiliated

with the Interested Stockholder is not obtained, then a Business

Combination with an Interested Stockholder will require an 80%

stockholder vote. One consequence of the Fair Price Provision,

therefore, is that additional time and expense would be required

to effect certain Business Combinations due to the need to hold a

special stockholders' meeting.

Exceptions to Higher Vote Requirements under the Fair Price

Provision. The 80% affirmative stockholder vote contemplated by

the Fair Price Provision will be required only if (1) the minimum

price criteria and procedural requirements described under (a)

and (b) below are not satisfied or (2) the transaction is not

approved by a majority of the Disinterested Directors or (3) the

requisite vote of shareholders not affiliated with the Interested

Stockholder is not obtained.

(a)

Minimum Price Criteria. In a Business Combination

involving cash or other consideration paid to XCL's stockholders,

the consideration must be either cash or the same type of

consideration used by the Interested Stockholder in acquiring the

largest portion of its Voting Stock before the first public

announcement of the terms of the proposed Business Combination

(the "Announcement Date"). In addition, the fair market value

(calculated in accordance with the Fair Price Provision) of the

consideration to be paid on the date the Business Combination was

consummated (the "Consummation Date") must meet certain minimum

price criteria described herein.

In the case of payments to holders of Common Stock and

Preferred Stock, the fair market value per share of such payments

must be at least equal in value to the higher of (1) the highest

price per share (including brokerage commissions, transfer taxes

and soliciting dealers' fees) paid by the Interested Stockholder

in acquiring any shares of such class or series of stock during

the

two years before the Announcement Date (even if the

Interested Stockholder was not an Interested Stockholder at the

time of any such acquisitions) or in the transaction in which it

became an Interested Stockholder (whichever is higher), or (2)

the fair market value per share of such class or series of stock

on the Announcement Date or on the date on which the Interested

Stockholder became an Interested Stockholder (the "Determination

Date"), whichever is higher; provided, however, the holders of

Preferred Stock shall be entitled to receive an amount at least

equal

to

the

highest preferential amount

payable

upon

dissolution, liquidation or winding up of XCL applicable thereto

if the Interested Stockholder has not previously purchased shares

of Preferred Stock or such price paid for Preferred Stock is

lower

than

such preferential amount.

If the

Interested

Stockholder purchased any shares of Common Stock during the twoyear period before the Announcement Date, the minimum price might

be fixed based on a purchase occurring as long as two years

before the Announcement Date. If the Determination Date was more



than two years before the Announcement Date, then the minimum

price could be set as of such earlier date. If the Interested

Stockholder did not purchase any shares of Common Stock during

the two-year period before the Announcement Date or in the

transaction on the Determination Date in which it became an

Interested

Stockholder (e.g., if it became an

Interested

Stockholder through the acquisition of shares of another class of

Voting Stock), the minimum price would be as determined under (2)

above.

For example, if the acquisition by an Interested Stockholder

of its Common Stock interest was by cash purchases in open market

transactions and the highest price paid per share of Common Stock

during the previous two years (including in the transaction in

which it became an Interested Stockholder) was $5.00, and

assuming that the fair market values per share of Common Stock on

the Determination Date and on the Announcement Date were $4.00

and $4.50, respectively, the amount required to be paid to the

holders of Common Stock would be the amount per share in cash

equal to the higher of (1) $5.00 (the highest price paid), and

(2)

$4.50 (fair market value on the Announcement

Date).

Accordingly, in order to comply with the Fair Price Provision's

minimum price criteria, the Interested Stockholder would be

required to pay at least $5.00 per share in cash to holders of

Common Stock in the Business Combination. If the Interested

Stockholder did not purchase any shares of Common Stock during

the two-year period before becoming an Interested Stockholder

(e.g., if it became an Interested Stockholder through the

acquisition of shares of another class of Voting Stock), the

minimum price payable under the Fair Price Provision for shares

of

Common Stock would be the fair market value on

the

Announcement Date or on the Determination Date, whichever is

higher, resulting in a price, in the foregoing example, of $4.50

per share in cash. All such prices shall be subject to an

appropriate adjustment in the event of any stock dividend, stock

split, subdivision, combination of shares or similar event.

In the case of payments to holders of any class or series of

XCL's Voting Stock other than Common Stock, the fair market value

per share of such payments must be at least equal to the higher

of (a) the highest price per share determined with respect to

such class or series of stock in the same manner as described in

clauses (1) and (2) of the preceding paragraphs, or (b) the

highest preferential amount per share to which the holders of

such class or series of Voting Stock are entitled in the event of

a voluntary or involuntary liquidation of XCL.

Under the minimum price requirements, the fair market value

of non-cash consideration to be received by holders of shares of

any class of Voting Stock in a Business Combination is to be

determined in good faith by the Board of Directors of XCL.

Under the Fair Price Provision, the Interested Stockholder

is required to meet the minimum price with respect to each class

of stock before proposing the Business Combination.

If the

minimum price criteria and the procedural requirements (discussed

below) are not met with respect to each class of Voting Stock,

then an 80% vote of stockholders will be required to approve the

Business Combination unless the transaction is approved by the

favorable vote of at least 67% of the voting power of the Voting

Stock and a majority of the outstanding shares of Voting Stock

held by persons who are neither Interested Stockholders nor

affiliates of Interested Stockholders, or by a majority of the

Disinterested Directors.

If the proposed Business Combination does not involve

receipt by the other stockholders of XCL of cash or other

property, such as a sale of assets or an issuance of XCL's

securities to an Interested Stockholder, then the price criteria

discussed above will not apply and an 80% vote of stockholders

will be required unless the transaction is approved by the

favorable vote of at least 67% of the voting power of the Voting

Stock and a majority of the outstanding shares of Voting Stock

held by persons who are neither Interested Stockholders nor

affiliates of Interested Stockholders, or by a majority of the

Disinterested Directors.

(b)

Procedural Requirements. Under the Fair Price

Provision, unless the Business Combination is approved by a

majority of the Disinterested Directors, the Business Combination



will be subject to the 80% stockholder vote requirement, even if

it satisfies the minimum price criteria, in each of the following

situations:

(1)

If XCL, after the Interested Stockholder became

an Interested Stockholder, (i) reduced the rate of dividends

paid on the Common Stock (unless such reduction

was

necessary to reflect any subdivision of the Common Stock),

or (ii) failed to increase the rate of dividends as

necessary to reflect any reclassification (including any

reverse stock split), recapitalization, reorganization or

any similar transaction which has the effect of reducing the

number of outstanding shares of Common Stock, unless such

reduction was approved by a majority of the Disinterested

Directors.

This provision is designed to prevent

an

Interested Stockholder from attempting to depress the market

price of the Common Stock before proposing a Business

Combination by reducing dividends on the Common Stock, and

thereby reducing the consideration required to be paid

pursuant to the minimum price provisions of the Fair Price

Provision.

(2)

If the Interested Stockholder acquired any

additional shares of Voting Stock except in the transaction

pursuant to which it became an Interested Stockholder. This

provision is intended to prevent an Interested Stockholder

from purchasing additional shares of Voting Stock without

compliance with the provisions of the Fair Price Provision.

(3)

If the Interested Stockholder, at any time

after it became an Interested Stockholder, whether in

connection

with the proposed Business Combination

or

otherwise, received the benefits of any loss or other

financial assistance or tax advantage provided by XCL (other

than proportionately as a stockholder). This provision is

intended to deter an Interested Stockholder from selfdealing or otherwise taking advantage of its equity position

in XCL by using XCL's resources to finance the proposed

Business Combination or otherwise for its own purposes in a

manner not proportionately available to all stockholders.

Under the Fair Price Provision, unless the Business

Combination is approved by a majority of the Disinterested

Directors, to avoid the 80% stockholder vote requirement even if

the other conditions described above are met, a proxy or

information statement disclosing the terms and conditions of the

proposed Business Combination and complying with the requirements

of the proxy rules promulgated under the Exchange Act will have

to be mailed to all stockholders of XCL at least 30 days before

the consummation of a Business Combination. This provision is

intended to ensure that XCL's stockholders will be fully informed

of the terms and conditions of the proposed Business Combination

even if the Interested Stockholder is not otherwise legally

required to disclose such information to stockholders.

NONE OF THE MINIMUM PRICE OR PROCEDURAL REQUIREMENTS

DESCRIBED ABOVE WILL APPLY IN THE CASE OF A BUSINESS COMBINATION

APPROVED BY A MAJORITY OF THE DISINTERESTED DIRECTORS OR THE

FAVORABLE VOTE OF 67% OF THE OUTSTANDING SHARES AND A MAJORITY OF

THE SHARES HELD BY PERSONS WHO ARE NEITHER THE INTERESTED

STOCKHOLDER NOR AFFILIATES OF THE INTERESTED STOCKHOLDER, AND, IN

THE ABSENCE OF SUCH APPROVAL, ALL OF SUCH REQUIREMENTS WILL HAVE

TO BE SATISFIED TO AVOID THE 80% STOCKHOLDER VOTE REQUIREMENT.

Classified Board. XCL's Board of Directors is divided into

three classes of directors serving staggered three-year terms,

with one class of directors to be elected at each annual meeting

of shareholders to hold office until the end of their term or

until their successors have been elected and qualified. Directors

may not be removed without cause except upon the affirmative vote

of the holders of 67% of the outstanding shares of Voting Stock.

This provision makes it more difficult to effect an involuntary

change in incumbent management.

No

Cumulative

Voting.

Neither the Certificate

of

Incorporation nor the By-Laws permit cumulative voting. Thus, a

purchaser of a block of Common Stock representing less than a

majority of the outstanding shares will have no assurance of

proportional representation on the Board of Directors.



No Action by Stockholder Consent. Delaware law provides

that, unless a corporation's certificate of incorporation denies

the right, stockholders may act by a written consent executed by

the holders of a majority of the outstanding shares of voting

stock

without

holding a special or

annual

meeting

of

stockholders. The Certificate of Incorporation prohibits action

that is required or permitted to be taken at any annual or

special meeting of stockholders of XCL from being taken by the

written

consent of stockholders without a meeting

unless

authorized by a majority of the Disinterested Directors.

The

intent of this provision is to provide an open forum at a

stockholders' meeting for all stockholders to have a chance to

attend and be heard. This provision could have an anti-takeover

effect and tend to entrench management by forcing the holder or

holders of a majority of the outstanding stock to exercise their

prerogatives of majority ownership only by

voting

at

a

stockholders' meeting rather than by written consent.

Supermajority Voting.

The Fair Price Provision may be

altered, amended, or repealed only if the holders of 80% or more

of the outstanding shares of Voting Stock entitled to vote

thereon or 67% or more of the outstanding shares voting together

with a majority of the outstanding shares held by persons other

than the Interested Stockholder and its affiliates, vote in favor

of such action. The other anti-takeover provisions and certain

other provisions in the Certificate of Incorporation may be

altered, changed, amended, or repealed only if the holders of 67%

or more of the outstanding shares of voting stock of XCL entitled

to vote thereon vote in favor of such action.

Without this

supermajority voting, the beneficial effects of the provisions

requiring such greater percentage of vote could be nullified by

subsequent amendments approved by a vote of the holders of only a

majority of Common Stock.

Preferred Stock

--------------General

- ------Under the Certificate of Incorporation, the Board of

Directors of XCL may direct the issuance of up to 2,400,000

shares of Preferred Stock, in one or more series and with rights,

preferences, privileges, and restrictions, including, without

limitation, dividend rights, voting rights, conversion rights,

terms of redemption, and liquidation preferences, that may be

fixed or designated by the Board of Directors without any further

vote or action by XCL's stockholders. The following description

of

Preferred Stock sets forth certain general terms

and

provisions of the two series of Preferred Stock which are

currently issued and outstanding. As discussed elsewhere in this

Prospectus, effective November 10, 1997, the Company amended,

recapitalized and combined the outstanding shares of Series A

Preferred Stock and Series E Preferred Stock into shares of

Amended Series A Preferred Stock which, together with the Amended

Series

A

Preferred Stock issued in the Equity Offering,

constituted a single class of approximately $93 million (in

aggregate liquidation preference) of Amended Series A Preferred

Stock at that time. The shares of Amended Series A Preferred

Stock

currently outstanding have an aggregate

liquidation

preference of approximately $101 million. Effective January 16,

1997, the Series F Preferred Stock was mandatorily converted into

633,893 shares of Common Stock. On March 3, 1998, the Series B

Preferred Stock was sold by the holder thereof, and

the

purchasers exchanged the shares of Series B Preferred Stock for

an aggregate 44,465 shares of Amended Series B Preferred Stock.

In addition, such purchasers were issued an additional 2,620

shares (in the aggregate) of Amended Series B Preferred Stock in

payment of accrued and unpaid dividends on the Series B Preferred

Stock.

The shares of Amended Series B Preferred Stock currently

outstanding

have

an aggregate liquidation

preference

of

approximately $4.8 million. The description of Preferred Stock

set forth below and the description of the terms of a particular

series of Preferred Stock do not purport to be complete and are

qualified in their entirety by reference to the Certificate of

Incorporation and the certificate of designation relating to that

series.

The rights, preferences, privileges, and restrictions of the

Preferred Stock of each series shall be as stated in the



Certificate of Incorporation and, to the extent not stated

therein, may be fixed by the certificate of designation relating

to such series, which shall specify the terms of the Preferred

Stock as follows:

(a)

the maximum number of shares to constitute the

series and the distinctive designations thereof;

(b)

the annual dividend rate, if any, on shares of

the series and the date or dates from which dividends shall

commence to accrue or accumulate, and whether dividends

shall be cumulative;

(c)

the price at and the terms and conditions on

which the shares of the series may be redeemed, including

the time during which shares of the series may be redeemed,

the premium, if any, over and above the par value thereof,

and any accumulated dividends thereon that the holders of

shares of the series shall be entitled to receive upon the

redemption thereof, which premium may vary at different

dates and may also be different with respect to shares

redeemed through the operation of any retirement or sinking

fund;

(d)

the liquidation preference, if any, over and

above the par value thereof, and any accumulated dividends

thereon, that the holders of shares of the series shall be

entitled to receive upon the voluntary or involuntary

liquidation, dissolution, or winding up of the affairs of

XCL;

(e)

whether or not the shares of the series shall

be subject to operation of a retirement or sinking fund,

and, if so, the extent and manner in which any such

retirement or sinking fund shall be applied to the purchase

or redemption of the shares of the series for retirement or

for

other corporate purposes, and the terms and provisions

relative to the operations of such retirement or sinking

fund;

(f)

the terms and conditions, if any, on which the

shares

of the series shall be convertible into,

or

exchangeable for, shares of any other class or classes of

capital stock of XCL or any series of any other class or

classes, or of any other series of the same class, including

the price or prices or the rate or rates of conversion or

exchange and the method, if any, of adjusting the same,

provided that shares of such series may not be convertible

into shares of a series or class that has prior or superior

rights and preferences as to dividends or distribution of

assets of XCL upon voluntary or involuntary dissolution or

winding up of the affairs of XCL;

(g)

series; and



the voting rights, if any, on the shares of the



(h)

any or all other preferences and relative,

participating, optional, or other special

rights,

or

qualifications, limitations, or restrictions thereof.

Amended Series A Preferred Stock

- -------------------------------On May 20, 1997, the Company issued 294,118 shares of

Amended Series A Preferred Stock in connection with the Equity

Offering. In subsequent transactions through September 30, 1998,

the Company has issued an additional 887,507 shares of Amended

Series A Preferred Stock including shares issued in payment of

dividends on the Amended Series A Preferred Stock.

Dividend Rights

--------------Holders of the Amended Series A Preferred Stock are entitled

to receive when, as and if declared by the Board of Directors,

out of the funds of the Company legally available therefor, an

annual dividend of $8.075 per share, payable semi-annually on May

1 and November 1 in each year, commencing November 1, 1997.

Dividends are payable in additional shares of Amended Series A

Preferred Stock (valued at $85.00 per share) through November 1,



2000, and thereafter in cash, or at the Company's election, in

shares of Amended Series A Preferred Stock (valued at $85.00 per

share). Dividends on the Amended Series A Preferred Stock are

cumulative from May 20, 1997, and will be payable, when, as and

if declared, to holders of record on the applicable record date

as shall be fixed by the Board of Directors. Dividends in arrears

may be declared and paid at any time, without reference to any

regular dividend payment date, to holders of record on such date

not exceeding 60 days preceding the payment date thereof, as may

be fixed by the Board of Directors. Accrued but unpaid dividends

will not bear interest. Dividends payable for any partial semiannual period will be calculated on the basis of a 360-day year

consisting of twelve 30-day months.

If dividends are not paid in full on all outstanding shares

of the Amended Series A Preferred Stock and any other capital

stock of the Company ranking on a parity with the Amended Series

A Preferred Stock as to dividends, all dividends declared on the

Amended Series A Preferred Stock and such other parity stock may

only be declared and paid pro rata so that in all cases the

amount of dividends declared per share on the Amended Series A

Preferred Stock and such other parity stock will bear to each

other the same ratio that accrued and unpaid dividends per share

on the shares of the Amended Series A Preferred Stock and such

other parity stock bear to each other. So long as they are

outstanding, the Company's existing shares of Series B Preferred

Stock shall rank on a parity with the Amended Series A Preferred

Stock as to dividends or upon liquidation, dissolution and

winding up. Unless full cumulative dividends on all outstanding

shares of the Amended Series A Preferred Stock have been paid, no

dividends (other than in Common Stock or other stock ranking

junior to the Amended Series A Preferred Stock as to dividends

and upon liquidation, dissolution or winding up) may be paid,

declared or set aside for payment, or any other distributions

made on the Common Stock or on any other stock of the Company

ranking junior to the Amended Series A Preferred Stock as to

dividends or upon liquidation, dissolution or winding up, nor may

any Common Stock or any other stock of the Company ranking junior

to or on a parity with the Amended Series A Preferred Stock be

redeemed, purchased or otherwise acquired for any consideration

by the Company (except by conversion into or exchange for stock

of the Company ranking junior to the Amended Series A Preferred

Stock as to dividends and upon liquidation, dissolution or

winding up).

Under Delaware law, the Company may declare and pay

dividends or make other distributions on its capital stock only

out of surplus, as defined in the Delaware General Corporation

Law (the "DGCL"). On June 30, 1998, the Company had available

surplus of approximately $48 million. The payment of dividends

and any future operating losses will reduce such surplus of the

Company, which may adversely affect the ability of the Company to

continue to pay dividends on the Amended Series A Preferred

Stock. In addition, no dividends or distributions may

be

declared, paid or made if the Company is or would be rendered

insolvent by virtue of such dividend or distribution, and the

Indenture limits the Company's ability to pay cash dividends. See

"Dividend Policy."

Conversion Rights

----------------The holder of any shares of Amended Series A Preferred Stock

will have the right, at the holder's option, to convert any or

all of such shares into Common Stock at any time after the

Initial Conversion Date at a conversion price ("Conversion

Price") of, initially, $0.50 per share (subject to adjustment as

described below), or an initial effective conversion

rate

("Conversion Rate") of 170 shares of Common Stock for each share

of Amended Series A Preferred Stock (subject to adjustment as

described below), except that if the Amended Series A Preferred

Stock is called for redemption, the conversion right will

terminate as to the shares called for redemption at 5:00 p.m.,

New York City time, on the business day prior to the date fixed

for such redemption. Except as provided in the next paragraph,

no payments or adjustments in respect of dividends on shares of

Amended Series A Preferred Stock surrendered for conversion,

whether paid or unpaid and whether or not in arrears, or on

account of any dividend on the Conversion Stock issued upon

conversion, shall be made by the Company upon the conversion of



any shares of Amended Series A Preferred Stock, at the option of

the holder, including any conversion described under "-- Special

Conversion Rights" below. The holder of record of shares of

Amended Series A Preferred Stock on a dividend record date who

surrenders such shares for conversion during the period between

such dividend record date and the corresponding dividend payment

date will be entitled to receive the dividend on such dividend

payment date notwithstanding the conversion of such shares;

provided, however, that, unless such shares, prior to such

surrender, had been called for redemption on a redemption date

during the period between such dividend record date and such

dividend payment date, such shares must be accompanied, upon

surrender for conversion, by payment from the holder to the

Company of an amount equal to the dividend payable on such shares

on that dividend payment date. No fractional shares of Common

Stock will be issued upon conversion but, in lieu thereof, an

appropriate amount will be paid in cash based on the Market Price

(as defined below) for the shares of Common Stock on the day of

such conversion. No adjustment in the Conversion Price will be

required unless such adjustment would require an increase or

decrease of at least one percent (1%) in the Conversion Price;

provided, however, that any adjustment which is not made will be

carried

forward and taken into account in any subsequent

adjustment.

If the Company, by dividend or otherwise, declares or makes

a distribution on its Common Stock referred to in clause (d) or

(e) of the next paragraph, the holders of Amended Series A

Preferred Stock, upon the conversion thereof subsequent to the

close of business on the date fixed for the determination of

stockholders entitled to receive such distribution and prior to

the effectiveness of the Conversion Price adjustment in respect

of such distribution, will be entitled to receive for each share

of Common Stock into which Amended Series A Preferred Stock is so

converted the portion of the evidences of indebtedness, shares of

capital stock, cash and assets so distributed applicable to one

share of Common Stock; provided, however, that the Company may,

with

respect to all holders so converting, in

lieu

of

distributing any portion of such distribution not consisting of

cash or securities of the Company, pay such holder cash equal to

the fair market value thereof (as determined by the Board of

Directors).

The Conversion Price and the Conversion Rate will be subject

to adjustment in certain events including, without duplication,

(a) dividends (and other distributions) payable in Common Stock

to all holders of Common Stock; (b) the issuance to all holders

of Common Stock of rights or warrants, entitling holders of such

rights or warrants to subscribe for or purchase Common Stock at

less than the current Market Price; (c) subdivisions

and

combinations of Common Stock; (d) distributions to all holders of

Common Stock of evidences of indebtedness of the Company, shares

of capital stock, cash or assets (including securities, but

excluding those rights, warrants, dividends and distributions

referred

to

above

and dividends and distributions

paid

exclusively in cash); and (e) distributions to all holders of

Common Stock consisting of cash, but excluding (i) cash that is

part of a distribution referred to in (d) above and (ii) any

quarterly cash dividend to the extent it does not exceed the

amount per share of Common Stock of the next preceding quarterly

cash dividend (as adjusted to reflect any of the events referred

to in clauses (a) through (d) of this sentence), or all of any

such quarterly cash dividend if the amount thereof per share of

Common Stock multiplied by four does not exceed 15% of the

current Market Price of the Common Stock on the trading day next

preceding the date of declaration of such dividend. As a result

of the Reverse Stock Split, effective December 17, 1997 the

initial Conversion Price and the initial Conversion Rate were

adjusted to $7.50 and 11.333 shares, respectively.

The Company from time to time may voluntarily reduce the

Conversion Price (or increase the Conversion Rate) by any amount

for any period of at least 20 days, in which case the Company

will give at least 15 days' notice of such reduction (or

increase), if the Board of Directors of the Company has made a

determination that such reduction (or increase) would be in the

best interests of the Company, which determination will be

conclusive.

If the Company is party to any transaction pursuant to which



the Common Stock is converted into the right to receive other

securities, cash or other property, including by

way

of

recapitalization or reclassification (other than changes in par

value, subdivisions or combinations of outstanding shares),

consolidation, merger or sale of all or substantially all of its

assets to, any person, then upon consummation of such transaction

the Amended Series A Preferred Stock shall be convertible for the

kind and amount of shares of stock and other securities and

property that the holder of the Amended Series A Preferred Stock

would have owned immediately after any such transaction if the

holder had converted his shares immediately prior to

the

effective

date thereof (which shares of stock and

other

securities and property may not necessarily be of equal value to

the Common Stock).

The term "Market Price" of the Common Stock for any day

means the last reported sale price, regular way, on such day, or,

if no sale takes place on such day, the average of the reported

closing bid and asked prices on such day, regular way, in either

case reported on the AMEX Consolidated Transaction Tape, or, if

the Common Stock is not listed or admitted to trading on the AMEX

on such day, on the principal national securities exchange on

which the Common Stock is listed or admitted to trading, if the

Common Stock is listed on a national securities exchange, or the

National Market Tier of The NASDAQ Stock Market ("NASDAQ NSM")

or, if not listed or admitted to trading on such quotation

system, on the principal quotation system on which the Common

Stock may be listed or admitted to trading or quoted or, if not

listed

or admitted to trading or quoted on any national

securities exchange or quotation system, the average of the

closing bid and asked prices of the Common Stock in the over-thecounter market on the day in question as reported by the National

Quotation Bureau Incorporated, or similar generally accepted

reporting service, or, if not so available in such manner, as

furnished by any AMEX member firm selected from time to time by

the Board of Directors of the Company for that purpose or, if not

so available in such manner, as otherwise determined in good

faith by the Board of Directors of the Company.

Mandatory Conversion Rights

--------------------------The Amended Series A Preferred Stock may be converted, in

whole and not in part, at the election of the Company, at the

then prevailing Conversion Price at any time after November 20,

1997, provided that the Company is current in the payment of

dividends to the conversion date, that the Common Stock shall

have been traded on the AMEX or other national securities

exchange on which the Common Stock is then listed or on the

Nasdaq NSM for 20 trading days during any 30 consecutive trading

day period at a Current Market Price (as defined below) equal to

or greater than 150% of the prevailing Conversion Price, subject

to adjustment in the same manner and for the same events as the

Conversion Price. The term "Current Market Price" of the Common

Stock for any day means the reported closing bid price, regular

way, on such day, as reported on the AMEX, or, if the Common

Stock is not listed or admitted to trading on the AMEX on such

day, on the principal national securities exchange on which the

Common Stock is listed or admitted to trading, if the Common

Stock is listed on a national securities exchange, or the NASDAQ

NSM or, if the Common Stock is not quoted or admitted to trading

on such quotations system, on the principal quotation system in

which the Common Stock may be listed or admitted to trading or

quoted or, if not listed or admitted to trading or quoted on any

national securities exchange or quotation system, the average of

the closing bid and asked prices of the Common Stock in the overthe-counter market on the day in question as reported by the

National Quotation Bureau Incorporated, or similar generally

accepted reporting service, or, if not so available in such

manner, as furnished by any AMEX member firm selected from time

to time by the Board of Directors of the Company for that purpose

or, if not so available in such manner, as otherwise determined

in good faith by the Board of Directors of the Company, which

determination shall be conclusive.

Special Conversion Rights

------------------------The

conversion



Amended Series A Preferred Stock has a special

right that becomes effective upon the occurrence of



certain types of significant transactions affecting ownership or

control of the Company or the market for the Common Stock. The

purpose of the special conversion right is to provide (subject to

certain exceptions) loss protection upon the occurrence of a

Change in Control (as defined below) or a Fundamental Change (as

defined below) at a time when the Market Value (as defined below)

of the Common Stock is less than the then prevailing Conversion

Price. In such situations, the special conversion right would,

for a limited period, reduce the then prevailing Conversion Price

to the Market Value of the Common Stock.

The special conversion right is intended to provide loss

protection to investors in certain circumstances while not giving

holders a veto power over significant transactions affecting

ownership or control of the Company.

Although the special

conversion right may render more costly or otherwise inhibit

certain proposed transactions, its primary purpose is not to

inhibit or discourage takeovers or other business combinations.

Each holder of Amended Series A Preferred Stock will be entitled

to a special conversion right if a Change of Control or

Fundamental Change occurs. A Change of Control will occur if a

person or group acquires more than 50% of the Common Stock. A

Fundamental Change is, generally, a sale of all or substantially

all of the Company's assets or a transaction in which at least

66% of the Common Stock is transferred for, or is converted into,

any other assets. However, if the majority of the value of the

consideration received in a transaction by holders of Common

Stock is Marketable Stock or if the holders of Common Stock hold

a majority of the voting stock of the Company's successor, the

transaction will not be a Fundamental Change, and holders of the

Amended Series A Preferred Stock will not have special conversion

rights as a result of such transaction. In addition, the special

conversion right arising upon a Change of Control shall only be

applicable with respect to the first Change of Control that

occurs after the first date of issuance of any shares of Amended

Series A Preferred Stock. The full definitions of the terms

"Change of Control" and "Fundamental Change" appear below.

A



special conversion right will permit a holder of Amended

Series A Preferred Stock, at the holder's option during the 30day period described below, to convert all, but not less than

all, of the holders' Amended Series A Preferred Stock at a

Conversion Price equal to the Market Value of the Common Stock. A

holder exercising a special conversion right will receive Common

Stock if a Change of Control occurs and, if a Fundamental Change

occurs, will receive the same consideration received for the

number of shares of Common Stock into which the holder's Amended

Series A Preferred Stock would have been convertible at the

Market Value of the Common Stock. In either case, however, the

Company or its successor may, at its option, elect to provide the

holder with cash equal to the Market Value of the number of

shares of Common Stock into which the holder's Amended Series A

Preferred Stock is convertible.

The Company will mail to each registered holder of Amended

Series A Preferred Stock a notice setting forth details of any

special conversion right occasioned by a Change of Control or

Fundamental Change within 30 days after the event occurs. A

special conversion right may be exercised only within the 30-day

period after the notice is mailed and will expire at the end of

that

period.

Exercise of a special conversion right

is

irrevocable, and all Amended Series A Preferred Stock tendered

for conversion will be converted at the end of the 30-day period

mentioned in the preceding sentence.

Amended Series A Preferred Stock that is not converted

pursuant to a special conversion right will continue to be

convertible pursuant to the general conversion rights described

above.

The special conversion right is not intended to, and does

not, protect holders of Amended Series A Preferred Stock in all

circumstances that might affect ownership or control of the

Company or the market for the Common Stock, or otherwise

adversely affect the value of an investment in the Amended Series

A Preferred Stock. The ability to control the Company may be

obtained by a person even if that person does not, as is required

to constitute a Change of Control, acquire a majority of the

Company's voting stock. The Company and the market for the Common

Stock may be affected by various transactions that do not



constitute a Fundamental Change. In particular, transactions

involving transfer or conversion of less than 66% of the Common

Stock may have a significant effect on the Company and the market

for the Common Stock, as could transactions in which holders of

Common Stock receive primarily Marketable Stock or continue to

own a majority of the voting securities of the successor to the

Company. In addition, if the special conversion right arises as

the result of a Fundamental Change, the special conversion right

will allow a holder exercising a special conversion right to

receive the same type of consideration received by the holders of

Common Stock and, thus, the degree of protection afforded by the

special conversion right may be affected by the type

of

consideration received.

As used herein, a "Change of Control" with respect to the

Company shall be deemed to have occurred at the first time after

the first issuance of any Amended Series A Preferred Stock that

any person (within the meaning of Sections 13(d)(3) and 14(d)(2)

of the Securities Exchange Act of 1934, as amended (the "Exchange

Act")) including a group (within the meaning of Rule 13d-5 under

the Exchange Act), together with any of its Affiliates or

Associates (as defined below), files or becomes obligated to file

a report (or any amendment or supplement thereto) on Schedule 13D

or 14D-1 pursuant to the Exchange Act disclosing that such person

has become the beneficial owner of either (a) 50% or more of the

shares of Common Stock then outstanding or (b) securities

representing 50% or more of the combined voting power of the

Voting Stock (as defined below) of the Company then outstanding,

provided that a Change of Control shall not be deemed to have

occurred with respect to any transaction that constitutes a

Fundamental Change. An "Affiliate" of a specified person is a

person that directly or indirectly controls or is controlled by

or is under common control with, the person specified. An

"Associate" of a person means (i) any corporation or organization

other than the Company or any subsidiary of the Company, of which

the person is an officer or partner or is, directly

or

indirectly, the beneficial owner of 10% or more of any class of

equity securities; (ii) any trust or estate in which the person

has a substantial beneficial interest or as to which the person

serves as trustee or in a similar fiduciary capacity; and (iii)

any relative or spouse of the person or any relative of the

spouse, who has the same home as the person or who is a director

or officer or the person or any of its parents or subsidiaries.

As used herein, a "Fundamental Change" with respect to the

Company means (a) the occurrence of any transaction or event in

connection with which all or substantially all of the Common

Stock

is exchanged for, converted into, acquired for

or

constitutes

solely the right to receive cash, securities,

property or other assets (whether by means of an exchange offer,

liquidation, tender offer, consolidation, merger, combination,

reclassification or otherwise) or (b) the conveyance, sale,

lease,

assignment, transfer or other disposal of all

or

substantially all of the Company's property, business or assets;

provided, however that a Fundamental Change shall not be deemed

to have occurred with respect to either of the following

transactions or events: (i) any transaction or event in which

more than 50% (by value as determined in good faith by the Board

of Directors of the Company) of the consideration received by

holders of Common Stock consists of Marketable Stock (as defined

below) or (ii) any consolidation or merger of the Company in

which the holders of Common Stock immediately prior to such

transaction own, directly or indirectly, (1) 50% or more of the

common stock of the sole surviving corporation (or of the

ultimate parent of such sole surviving corporation) outstanding

at the time immediately after such consolidation or merger and

(2) securities representing 50% or more of the combined voting

power of the surviving corporation's Voting Stock (or the Voting

Stock of the ultimate parent of such surviving corporation)

outstanding at such time. The phrase "all or substantially all"

as used in this definition in reference to the Common Stock means

66% or more of the aggregate outstanding amount. Depending upon

the circumstances, there may be some uncertainty under Delaware

law as to whether a specific transaction constitutes a sale of

"all or substantially all" of the property, business or assets of

a company. This uncertainty may make it difficult for a holder to

determine whether or not a "Fundamental Change" has occurred, and

thus whether such holder is entitled to a special conversion

right in respect of the shares of Amended Series A Preferred

Stock held by such holder.



As used herein, "Voting Stock" means, with respect to any

person, capital stock of such person having general power under

ordinary circumstances to elect at least a majority of the board

of directors, managers or trustees of such persons (irrespective

of whether or not at the time capital stock or any other class or

classes shall have or might have voting power by reason of the

happening of any contingency).

As used herein , "Market Value" of the Common Stock or any

other Marketable Stock is the average of the last reported sales

prices of the Common Stock or such other Marketable Stock, as the

case may be, for the five business days ending on the last

business day preceding the date of the Fundamental Change or

Change of Control; provided, however, that if the Marketable

Stock is not traded on any national securities exchange or

similar quotation system as described in the definition of

"Marketable Stock" during such period, then the Market Value of

such Marketable Stock is the average of the last reported sales

prices per share of such Marketable Stock during the first five

business days commencing on the day after the date on which such

Marketable Stock was first distributed to the general public and

traded on the New York Stock Exchange ("NYSE"), the AMEX, the

NASDAQ NSM or any similar system of automated dissemination of

quotations of securities prices in the United States.

As



used herein, "Marketable Stock" means Common Stock or

common stock of any corporation that is the successor (or the

ultimate parent of such successor) to all or substantially all of

the business or assets of the Company as a result of a

Fundamental Change, which is (or will, upon distribution thereof,

be) listed or quoted on the NYSE, the AMEX, the NASDAQ NSM or any

similar system of automated dissemination of quotations or

securities prices in the United States.

Liquidation Rights

------------------In the event of any liquidation, dissolution or winding up

of the Company, after payment or provision for payment of the

debts and other liabilities of the Company, the holders of the

Amended Series A Preferred Stock shall be entitled to receive,

out of the remaining net assets of the Company available for

distribution to stockholders, liquidating distributions in the

amount of $85.00 per share, plus an amount equal to all dividends

accrued and unpaid on each such share (whether or not declared)

to the date fixed for distribution, before any distribution is

made to holders of the Common Stock or any other class of stock

of the Company ranking junior to the Amended Series A Preferred

Stock.

After receiving payment of the full amount of the

liquidating distribution to which they are entitled, the holders

of shares of Amended Series A Preferred Stock will not be

entitled to any further participation in any remaining assets of

the Company. If upon liquidation, dissolution or winding up of

the Company, the amounts payable with respect to the Amended

Series A Preferred Stock and any other capital stock ranking as

to such distribution on a parity with the Amended Series A

Preferred Stock with respect to such distributions ("Parity

Stock") are not paid in full, the holders of the Amended Series A

Preferred Stock and of such other Parity Stock will share ratably

in any such distribution of assets in proportion to the full

respective preferential amounts to which they are entitled.

Currently, the Amended Series B Preferred Stock constitutes

Parity Stock. See "-- Description of Existing Capital Stock -Preferred Stock." Neither the consolidation or merger of the

Company with another corporation nor a sale, conveyance, lease,

transfer or exchange of all or substantially all of the Company's

assets will be considered a liquidation, dissolution or winding

up of the Company for these purposes.

Optional Redemption

------------------The Amended Series A Preferred Stock will not be redeemable

prior to May 1, 2002. On or after such date, the Amended Series A

Preferred Stock may be redeemed for cash, in whole or in part, at

the option of the Company at any time or from time to time, on

not less than 30 nor more than 60 days' notice, at the following

prices per share during the 12-month period beginning on May 1 of

the year indicated:



Year

---2002

2003

2004

2005

2006 and thereafter



Redemption

Price

---------$90.00

88.75

87.50

86.25

85.00



together, in each case, with an amount equal to all dividends

(whether or not declared) accrued and unpaid to the date of

redemption.

If fewer than all the outstanding shares of Preferred Stock

are to be redeemed, the Company will select those to be redeemed

ratably or by lot in a manner determined by the Board of

Directors. All dividends upon the shares of Preferred Stock

called for redemption shall cease to accrue and all rights of the

holders thereof as shareholders of the Company (except the right

to receive the redemption price, including any accrued and unpaid

dividends to the date of redemption, without interest upon the

presentation of certificates representing the redeemed shares)

shall terminate on the date of redemption.

Mandatory Redemption

-------------------The Amended Series A Preferred Stock will be mandatorily

redeemed, in whole, on May 1, 2007, upon not less than 30 nor

more than 60 days' notice, at a redemption price of $85.00 per

share, plus accrued and unpaid dividends (whether or

not

declared) to the redemption date, payable in cash or, at the

election of the Company, in shares of Common Stock, valued at the

average of the Market Price over the 20 trading days preceding

the date of notice of redemption.

Voting Rights

------------In addition to any special voting rights granted by law and

the

class

voting rights described in the following

two

paragraphs, the holders of Amended Series A Preferred Stock will

be entitled to vote with the holders of Common Stock on all

matters on which the holders of Common Stock are entitled to

vote.

Further, each share of the Amended Series A Preferred

Stock will entitle the holder thereof to cast the same number of

votes as the full shares of Common Stock then issuable upon

conversion thereof.

Whenever dividends on the Amended Series A Preferred Stock

are in arrears in an amount equal to or exceeding three semiannual dividends (whether or not consecutive and whether payable

in cash or shares of Amended Series A Preferred Stock), the

number of directors of the Company will automatically

be

increased by two and the holders of the Amended Series A

Preferred Stock (voting separately as a class) will be entitled

to elect the additional two directors until all dividends that

were accrued and unpaid have been paid or declared and funds or

shares, as the case may be, set aside to provide for payment in

full. Upon any termination of such rights to vote for directors,

the term of office of all directors so elected shall terminate.

Without the affirmative vote or consent of the holders of at

least two-thirds of the number of shares of Amended Series A

Preferred Stock then outstanding, the Company may not (a) create

or issue or increase the authorized number of shares of any class

or classes or series of stock ranking senior to the Amended

Series A Preferred Stock, either as to dividends or upon

liquidation, dissolution or winding up, or (b) alter, change or

repeal any of the powers, rights or preferences of the holders of

the Amended Series A Preferred Stock so as to affect adversely

such powers, preferences or rights of the Amended Series A

Preferred Stock. Accordingly, the voting rights of the holders of

Amended

Series

A

Preferred Stock could,

under

certain

circumstances, operate to restrict the flexibility the Company

would otherwise have in connection with any future issuances of

equity securities or changes to its capital structure.

Miscellaneous



------------The Preferred Stock, when designated, issued and paid for,

will be fully paid and nonassessable. The Preferred Stock has no

preemptive rights and is not subject to any sinking fund.

Amended Series B Preferred Stock

- -------------------------------On March 4, 1998, in connection with settlement of

litigation instituted by the holder of the Company's Series B

Preferred Stock, the holder thereof sold its 44,465 shares of

Series

B

Preferred Stock and associated

warrants.

The

purchasers, in a simultaneous transaction exchanged the shares of

Series B Preferred Stock for Amended Series B Preferred Stock and

warrants to purchase 250,000 shares of Common Stock, subject to

adjustment. The Amended Series B Preferred Stock is entitled to

50 votes per share on all matters on which Common Stockholders

are entitled to vote and separately as a class on certain

matters; has a liquidation preference of $100 per share plus

accumulated dividends and ranks senior to the Common Stock and

pari passu with the Amended Series A Preferred Stock with respect

to the payment of dividends and distributions on liquidation; is

convertible by the holders thereof at any time after the earlier

of the effective date of the registration under the Securities

Act of the conversion stock or August 31, 1998, at $4.75 if the

conversion stock has been registered or at $3.80 if

the

conversion stock is unregistered; is redeemable at the option of

the holder at any time after December 20, 2001 at $100.00 per

share plus accrued and unpaid dividends, payable at the Company's

election in shares of Common Stock; and bears a fixed cumulative

dividend at an annual rate of $9.50 per share, payable semiannually in either cash, shares of Common Stock, or additional

shares of Amended Series B Preferred Stock, at the Company's

option.

Shares Eligible for Future Sale

- ------------------------------As of September 30, 1998, there were reserved an aggregate

of (i) 4,991,691 shares of Common Stock subject to outstanding

options; (ii) 14,840,593 shares issuable upon conversion of the

Company's outstanding Amended Series A Preferred Stock; (iii)

1,250,000 shares issuable upon conversion of the Company's

outstanding Amended Series B Preferred Stock; (iv) 17,060,604

shares issuable upon exercise of the Company's outstanding

warrants; (v) 104,375 shares reserved for sale to fund working

capital for the Company's China projects; (vi) 60,690 reserved

for sale to fund general working capital requirements of the

Company; and (vii) 387,388 shares issuable in connection with

contractual obligations. The Company would receive a total of

approximately $63.2 million if all options and warrants were

exercised and all stock reserved for sale was sold at $3.00 per

share.

Additionally, the Company will have approximately 438

million shares of Common Stock available for issuance at such

times and upon such terms as may be approved by the Company's

Board of Directors. No prediction can be made as to the effect,

if any, that future sales or the availability of shares for sale

will have on the market price of the Common Stock prevailing from

time to time.

Nevertheless, sales of substantial amounts of

Common Stock of the Company in the public market could adversely

affect the prevailing market price of the Common Stock and could

impair the Company's ability to raise capital through sales of

its equity securities.

Approximately 6.8 million shares of Common Stock (including

shares issuable upon exercise of outstanding options and warrants

and

conversion of convertible securities, the

"Restricted

Shares") are held by executive officers and directors of the

Company and affiliates of the Company and may be sold pursuant to

an effective registration statement covering such shares or

pursuant to Rule 144 of the Securities Act, subject to the

restrictions described below.

In general, under Rule 144, as currently in effect, a person

(or persons whose shares are aggregated), including an affiliate,



who has beneficially owned Restricted Shares for a least one

year, is entitled to sell within any three-month period, a number

of shares that does not exceed the greater of (i) 1% of the then

outstanding shares of the Company's Common Stock or (ii) an

amount equal to the average weekly reported volume of trading in

such shares during the four calendar weeks preceding the date on

which notice of such sale is filed with the Commission.

Sales

under Rule 144 are also subject to certain manner of sale

limitations, notice requirements and the availability of current

public information about the Company. Restricted Shares properly

sold in reliance on Rule 144 are thereafter freely tradable

without restrictions or registration under the Securities Act,

unless thereafter held by an affiliate of the Company.

In

addition, affiliates of the Company must comply with

the

restrictions and requirements of Rule 144, other than the oneyear holding period requirement, in order to sell shares of

Common Stock which are not Restricted Shares. As defined in Rule

144, an "affiliate" of an issuer is a person that directly, or

indirectly through one or more intermediaries, controls or is

controlled by, or is under common control with, such issuer.

If

two years have elapsed since the later of the date of any

acquisition of Restricted Shares from the Company or from any

affiliate of the Company, and the acquiror or subsequent holder

thereof is deemed not to have been an affiliate of the Company at

any time during the three months preceding a sale, such person

would be entitled to sell such shares in the public market

pursuant to Rule 144(k) without regard to volume limitations,

manner of sale restrictions, or public information or notice

requirements.

MATERIAL UNITED STATES INCOME TAX CONSIDERATIONS

The following discussion is a summary of material federal

income tax considerations relevant to the purchase, ownership and

disposition of the Amended Series A Preferred Stock and the

Common Stock, but does not purport to be a complete analysis of

all the potential tax effects thereof. The discussion is based

upon the Internal Revenue Code of 1986 (the "Code"), Treasury

regulations, and Internal Revenue Service ("IRS") rulings and

judicial decisions now in effect, all of which are subject to

change at any time by legislative, judicial or administrative

action. No information is provided herein with respect to state

and local taxes or estate and gift tax considerations.

This

information is directed to the original investors who hold the

Amended Series A Preferred Stock and the Common Stock as "capital

assets" within the meaning of Section 1221 of the Code. In

addition, this discussion does not address the tax consequences

to certain holders as to whom special rules apply (including life

insurance companies, tax exempt organizations, banks and dealers

in securities). The Company has not sought, nor does it intend

to seek an opinion from tax counsel, or a ruling from the IRS

that the tax consequences described in the following discussion

will be accepted by the IRS. This discussion does not purport to

address all federal income tax aspects that may be relevant to

holders

in light of their particular circumstances.

Each

prospective investor should consult and should rely on his own

tax advisor concerning the tax consequences to him of the

purchase, ownership and disposition of the Amended Series A

Preferred Stock and the Common Stock.

Taxation of the Amended Series A Preferred Stock and Common Stock

- ----------------------------------------------------------------Dividends on Amended Series A Preferred Stock or Common

Stock

---------------------------------------------------------Dividends paid on the Amended Series A Preferred Stock or

Common Stock will be taxable under Section 301 of the Code as

ordinary income to the extent of the Company's current and

accumulated "earnings and profits" (as defined in the Code).

Dividends received by corporate holders of the Amended Series A

Preferred Stock or Common Stock out of such earnings and profits

generally will qualify, subject to the limitations under Sections

246(c) and 246A of the Code, for the 70% dividends received

deduction allowable to corporations under Section 243 of the Code

(although the benefits of such deduction may be reduced or



eliminated by the corporate alternative minimum tax). Under

Section 246(c) of the Code, to be eligible for the dividends

received deduction, a corporate holder must hold its shares of

Amended Series A Preferred Stock or Common Stock for at least 46

days during the 90-day period beginning 45 days before the date

on which the shares became ex-dividend (91 days during the 180day period beginning 90 days before the shares became ex-dividend

in the case of a preferred dividend attributable to a period or

periods aggregating more than 366 days). A taxpayer's holding

period for these purposes is suspended during any period in which

the taxpayer has an option to sell, is under a contractual

obligation to sell, has made (and not closed) a short sale of, or

has granted an option to buy, substantially identical stock or

securities, or holds one or more other positions with respect to

substantially similar or related property that diminish the risk

of loss from holding such stock. Under Section 246A of the Code,

the dividends received deduction may be reduced or eliminated if

a holder's shares of Amended Series A Preferred Stock or Common

Stock are debt financed.

Section 1059 of the Code requires a corporate stockholder to

reduce its basis (but not below zero) in the Amended Series A

Preferred

Stock or Common Stock by the nontaxed

portion

(generally the portion eligible for the dividends received

deduction described above) of any "extraordinary dividend" if the

Amended Series A Preferred Stock or Common Stock has not been

held for more than two years before the date of announcement or

agreement with respect to such dividend.

In addition,

a

corporate holder of Amended Series A Preferred Stock or Common

Stock would recognize additional gain on the disposition of such

stock equal to any nontaxed portions of any extraordinary

dividend that would have reduced such holder's basis but for the

limitation on reducing basis below zero.

An "extraordinary

dividend" generally is a dividend that (a) equals or exceeds 5%

in the case of preferred stock, or 10% in the case of common

stock, of the holder's adjusted basis in such stock, treating all

dividends having ex-dividend dates within a period of

85

consecutive days as one dividend or (b) exceeds 20 percent of the

holder's basis in such stock, treating all dividends having exdividend dates within a period of 365 consecutive days as one

dividend, provided that in either case fair market value of the

stock on the day before the ex-dividend date, if it can be

established by the holder, may be substituted for the stock

basis. In addition, an amount treated as a dividend in the case

of a redemption of the Amended Series A Preferred Stock that is

either non-pro rata as to all stockholders or in partial

liquidation would also constitute an "extraordinary dividend"

without regard to the length of time the Amended Series A

Preferred Stock has been held. Special rules apply with respect

to a "qualified preferred dividend," which would include any

fixed dividend payable with respect to the Amended Series A

Preferred Stock, provided it is not in arrears as to dividends

when acquired and the actual rate of return on the Amended Series

A Preferred Stock does not exceed 15% calculated by reference to

the lower of the holder's basis in the Amended Series A Preferred

Stock or its liquidation preference. The extraordinary dividend

rules will not apply to a qualified preferred dividend if the

holder has held the Amended Series A Preferred Stock for more

than five years. If the holder disposes of the Amended Series A

Preferred Stock before it has been held for more than five years,

the aggregate reduction in basis will not exceed the excess of

the qualified preferred dividends paid during the period the

Amended Series A Preferred Stock was held by the holder over the

qualified preferred dividends which would have been paid during

such period on the basis of the Amended Series A Preferred

Stock's stated rate of return calculated by reference to the

lower of the holder's basis in the Amended Series A Preferred

Stock or its liquidation preference.

To the extent that a distribution on Amended Series A

Preferred

Stock or Common Stock exceeds the current

and

accumulated

earnings

and profits of

the

Company,

such

distribution will be treated as a nontaxable return of capital

which reduces the holder's basis in its Amended Series A

Preferred Stock or Common Stock. Any such distribution in excess

of a holder's basis will be treated as short-term or long-term

capital gain, depending on whether the Amended Series A Preferred

Stock or Common Stock has been held for more than one year.

At the present time, the Company has no accumulated earnings



and profits for federal income tax purposes, and it is uncertain

whether and to what extent the Company will have current or

accumulated earnings and profits in the future.

Accordingly,

there can be no assurance that distributions to corporate holders

of the Amended Series A Preferred Stock or Common Stock will

qualify for the dividends received deduction.

Redemption Premium on Amended Series A Preferred Stock

-----------------------------------------------------Under Section 305 of the Code and applicable Treasury

regulations, if the redemption price of redeemable preferred

stock exceeds its issue price and part (or all) of such excess is

considered an unreasonable redemption premium, the entire amount

of such excess is treated as distributed over the period during

which the preferred stock cannot be redeemed. The amount treated

as distributed each year would be determined on a constant yield

to maturity basis that would result in the allocation of a lesser

amount of distributions to the early years and a greater amount

to the later years of such period. Any such constructive

distribution would be classified as a dividend, a non-taxable

recovery of basis or an amount received in exchange for the

Amended Series A Preferred Stock pursuant to the rules summed up

under " -- Dividends on Amended Series A Preferred Stock or

Common Stock." Any such constructive distribution would be taken

into account for proposes of applying the extraordinary dividend

rules discussed above.

Under recently issued Treasury Regulations, a redemption

premium that would be paid in the event of an issuer call is

considered unreasonable only if, based on all the facts and

circumstances as of the issue date, redemption pursuant to the

call is more likely than not to occur. Even if a redemption is

considered more likely than not to occur, the redemption premium

is not subject to the current inclusion rule if it is solely in

the nature of a penalty for premature redemption. A redemption

premium is considered a penalty for premature redemption only if

it is paid as a result of changes in economic or market

conditions over which neither the issuer nor the holder has legal

or practical control.

Under a safe harbor, a redemption is not treated as more

likely than not to occur if (i) the issuer and holder are not

"related," (ii) there are no plans, arrangements, or agreements

that effectively require or are intended to compel the issuer to

redeem the stock (other than a mandatory redemption right

exercisable by the holder), and (iii) exercise of the call right

would not reduce the yield of the stock, as determined under

principles similar to the principles of section 1272(a) of the

Code and the Treasury Regulations under sections 1271 through

1275. The Company anticipates that any call of the Amended Series

A Preferred Stock will fall within this safe harbor, although no

assurance can be given that it will fall within the safe harbor.

Assuming that the redemption does not fall within the safe

harbor discussed above, the Company believes, based upon the

facts and circumstances existing at the time of issuance, that it

is not more likely than not that the redemption will occur. The

Company further believes that, even if the IRS were to treat the

redemption as more likely than not to occur, the redemption

premium should be considered a penalty paid for premature

redemption of the Amended Series A Preferred Stock.

Redemption or Sale of Amended Series A Preferred Stock

-----------------------------------------------------A redemption of Amended Series A Preferred Stock for cash

will be treated, under Section 302 of the Code, as (i) a

distribution treated as a taxable dividend, (ii) a nontaxable

recovery of basis, or (iii) an amount received in exchange for

the Amended Series A Preferred Stock pursuant to the rules

described under " -- Dividends on Amended Series A Preferred

Stock or Common Stock," unless the redemption (a) results in a

"complete termination" of the stockholder's interest in the

Company

under

Section 302(b)(3) of

the

Code;

(b)

is

"substantially disproportionate" with respect to the stockholder

under Section 302(b)(2) of the Code; or (c) is "not essentially

equivalent to a dividend" under Section 302(b)(1) of the Code. In

determining whether any of these tests have been met, shares

considered to be owned by the stockholder by reason of certain



constructive ownership rules in Sections 302(c) and 318(a) of the

Code, as well as shares actually owned, must be taken into

account. If any of these tests are met, the redemption of the

Amended Series A Preferred Stock for cash would be treated as a

sale or exchange for tax purposes.

A redemption will be "not essentially equivalent to a

dividend" as to a particular stockholder if it results in a

meaningful reduction in that stockholder's interest in the

Company. If, as a result of the redemption of the Amended Series

A Preferred Stock, a stockholder of the Company, whose relative

interest in the Company is minimal and who exercises no control

over corporate affairs, suffers a reduction in his proportionate

interest

in

the

Company

(taking

into

account

shares

constructively owned by the stockholder and, in certain events,

dispositions of the stock that occur contemporaneously with the

redemption), that stockholder should be regarded as having

suffered a meaningful reduction in his interest in the Company.

If, under the foregoing rules, a redemption of Amended

Series A Preferred Stock is treated as a sale or exchange, rather

than as a distribution, or if the Amended Series A Preferred

Stock is sold, the holder would recognize taxable gain or loss

equal to the difference between the amount realized and the

holder's tax basis in the Amended Series A Preferred Stock. For

these purposes, the amount realized will generally be measured by

the amount of cash and the fair market value of any other

property received. The holder's initial cost basis in the Amended

Series A Preferred Stock will be that portion of the initial

Equity Unit price that is allocated to the Amended Series A

Preferred Stock based upon the relative fair market values of the

Amended Series A Preferred Stock and the Warrants. Each holder

should consult his tax adviser regarding the determination of the

initial cost basis of the Securities comprising the Units.

If a redemption of Amended Series A Preferred Stock is

treated as a distribution, the amount of the distribution will

generally be measured by the amount of cash and the fair market

value of any other property received. The stockholder's basis in

the redeemed Amended Series A Preferred Stock will be transferred

to any remaining stockholdings in the Company.

A distribution to a corporate stockholder in redemption of

Amended Series A Preferred Stock that is treated as a dividend

may also be considered an "extraordinary dividend" under Section

1059 of the Code. See " -- Dividends on Amended Series A

Preferred Stock or Common Stock." A redemption that is treated as

a dividend that is not pro rata as to all stockholders may be

treated as an extraordinary dividend without regard to the period

during which the stockholder held the Amended Series A Preferred

Stock.

Conversion of Amended Series A Preferred Stock Into Common

Stock

----------------------------------------------------------In general, no gain or loss will be recognized for federal

income tax purposes on conversion of Amended Series A Preferred

Stock solely into shares of Common Stock, except with respect to

any cash received in lieu of fractional shares of Common Stock.

If dividends on the Amended Series A Preferred Stock are in

arrears at the time of conversion, however, a portion of the

Common Stock received in exchange for Amended Series A Preferred

Stock could be viewed under Section 305(c) of the Code as a

distribution with respect to the Amended Series A Preferred

Stock, taxable as a dividend. The tax basis for Common Stock

received on conversion will be equal to the tax basis of the

Amended Series A Preferred Stock converted, reduced by the

portion of basis allocable to any fractional share exchanged for

cash. The holding period of the shares of Common Stock will

include the holding period of such Amended Series A Preferred

Stock.

Adjustment of Conversion Price

-----------------------------Section 305 of the Code treats holders of convertible

securities

as having received a constructive

distribution

(taxable as a dividend to the extent of the issuing corporation's

current

or accumulated earnings and profits) when certain



adjustments are made to the conversion price and conversion ratio

of such securities. For example, a constructive distribution

results when the conversion price is adjusted to reflect certain

taxable distributions with respect to the stock into which

preferred stock is convertible. Adjustment of the Conversion

Price and the Conversion Ratio at which the Amended Series A

Preferred Stock can be converted (which may occur under certain

circumstances) could cause the holders thereof to be viewed under

Section 305 of the Code as having received a deemed distribution

taxable as a dividend whether or not such holders exercise their

conversion rights.

Foreign Holders

- --------------The following discussion is a summary of material United

States federal income tax consequences to a Foreign Person that

holds a Security. The Company has not sought, nor does it intend

to seek, an opinion from tax counsel or a ruling from the IRS

with

respect

to the matters addressed in the

following

discussion. The term "Foreign Person" means a nonresident alien

individual or foreign corporation, but only if the income or gain

on the Security is not "effectively connected with the conduct of

a trade or business within the United States." If the income or

gain on the Security is "effectively connected with the conduct

of a trade or business within the United States," then the

nonresident alien individual or foreign corporation will be

subject to tax on such income or gain in essentially the same

manner as a United States citizen or resident or a domestic

corporation, as discussed herein, and in the case of a foreign

corporation, may also be subject to the branch profits tax.

In general, gain (to the extent it is not "effectively

connected with the conduct of a trade or business within the

United

States") recognized by a Foreign Person upon

the

redemption, sale, exchange or other taxable disposition of a

share of Amended Series A Preferred Stock or of shares of Common

Stock will not be subject to United States federal income tax

unless such Foreign Person is an individual present in the United

States for 183 days or more during the taxable year in which the

disposition occurs and certain other requirements are met, or

unless the Company was a United States real property holding

corporation at any time during the five years preceding the

disposition while the Foreign Person held an interest in the

Company. Although the Company has previously been treated as a

United States real property holding corporation for United States

federal

income tax purposes because of its ownership

of

substantial real estate assets in the United States, the Company

believes that it is not presently a United States real property

holding corporation because the fair market value of its United

States real property interests now constitutes less than 50% of

the total fair market value of its real estate assets, including

its Chinese assets. If the Company were again to become a United

States real property holding corporation in the future, either

because of a change in the fair market values of its current

properties or through acquisitions of real property interests, a

Foreign Person who holds Amended Series A Preferred Stock or

Common Stock would generally be subject to United States federal

income tax on any gain recognized from sale or other disposition

of Amended Series A Preferred Stock or Common Stock, unless the

Common Stock is traded on an established securities market and a

Foreign Person does not directly or constructively own Amended

Series A Preferred Stock or Common Stock with a fair market value

on the date of acquisition of more than 5% of the fair market

value of the outstanding Common Stock on such date. If subject to

United States federal income tax, the gain would be treated as

effectively connected with the conduct of a trade or business

within the United States and the sale or other disposition

generally would be subject to withholding tax equal to 10% of the

amount realized therefrom.

Distributions paid on the Amended Series A Preferred Stock

or Common Stock to a Foreign Person (other than distributions

that constitute income effectively connected with a United States

trade or business) will be subject to United States federal

income tax withholding at a rate of 30% of the amount of the

distribution (unless the rate is reduced by an applicable tax

treaty). If the Company derives at least 80% of its gross income

from the active conduct of a trade or business outside the United

States for a period of three years prior to the taxable year of



the distribution (or for the taxable year of the distribution if

the Company has no gross income for such three-year period), then

distributions to Foreign Holders of Amended Series A Preferred

Stock or Common Stock will not be subject to withholding.

Any Foreign Person that recognizes gain upon the redemption,

sale, exchange or other taxable disposition of a share of Amended

Series A Preferred Stock or of shares of Common Stock or receives

a dividend on the Common Stock that is "effectively connected

with the conduct of a trade or business with the United States"

will be subject to tax in essentially the same manner as a U.S.

person, as discussed above. A Foreign Person that is a foreign

corporation engaged in a U.S. trade or business also may be

subject to the branch profits tax with respect to such gain or

dividend.

Backup Withholding

- -----------------A noncorporate holder may be subject, under certain

circumstances, to backup withholding at a 31% rate with respect

to payments received with respect to the Amended Series A

Preferred Stock and the Common Stock. This withholding generally

applies only if the holder (i) fails to furnish his, her or its

social security or other taxpayer identification number ("TIN"),

(ii) furnishes an incorrect TIN, (iii) is notified by the IRS

that he, she or it has failed to report properly payments of

interest and dividends and the IRS has notified the Company that

he, she or it is subject to backup withholding, or (iv) fails,

under certain circumstances, to provide a certified statement,

signed under penalty of perjury, that the TIN provided is his,

her or its correct number and that he, she or it is not subject

to backup withholding. Any amount withheld from a payment to a

holder under the backup withholding rules is allowable as a

credit against such holder's federal income tax liability,

provided that the required information is furnished to the IRS.

Certain holders (including, among others, corporations

and

foreign

individuals who comply with certain

certification

requirements) are not subject to backup withholding. Holders

should consult their tax advisors as to their qualification for

exemption from backup withholding and the procedure for obtaining

such an exemption.

SELLING SECURITY HOLDERS

An aggregate of up to 1,219,199 shares of Amended Series A

Preferred Stock may be offered by certain Selling Security

Holders. As of July 31, 1998, the Selling Security Holders, none

of whom has a material relationship with the Company or any of

its predecessors or affiliates except as set forth herein, were

as follows:

[TO BE COMPLETED BY AMENDMENT]

<TABLE>

<CAPTION>

Shares of Amended Series

Shares of Amended Series A

Maximum Number



A



Preferred Stock

Preferred Stock Beneficially

Owned After

Name of Selling Security Holder

Offering

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



Owned Prior to the Offering

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



of Shares to be



Beneficially



Sold in the Offering

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



the

----------



Number



Percent



Number



------



-------



------



Percent

------<S>

<C>

<C>

Arbco Associates, L.P.

0.00%

The Bank of New York Nominees

0.00%

Cumber International

0.00%

Cumberland Partners

0.00%

Evanston Insurance Company

0.00%



<C>



<C>



<C>



113,567



9.31



113,567



--



28,418



2.33



28,418



--



15,138



1.24



15,138



--



153,765



12.61



153,765



--



16,758



1.37



16,758



--



Foremost Insurance Company

19,502

0.00%

Hallco, Inc.

29,317

0.00%

Hare & Co.

14,079

0.00%

Kayne Anderson Non-Traditional

Investments, L.P.

85,949

0.00%

Lone Star Partners, L.P.

20,828

0.00%

Longview Partners

24,236

0.00%

Mees Pierson Nominees UK Limited

29,676

0.00%

J. Edgar Monroe Foundation

12,234

0.00%

MSS Nominees Limted

23,776

0.00%

Offense Group Associates, L.P.

54,290

0.00%

Opportunity Associates, L.P.

34,530

0.00%

Putnam Advisory Company

14,892

0.00%

Putnam Investment Management Inc.

205,172

0.00%

TCW Shared Opportunity Fund II L.P.

28,924

0.00%

Topa Insurance Company

15,685

0.00%

T. Rowe Price Strategic Partners

II Fund

59,915

0.00%

Vidacos Nominees Limited A/C BAR

11,870

0.00%

Less than 1% holders

0.00%

Total

1,219,199

</TABLE>



1.60



19,502



--



2.40



29,317



--



1.15



14,079



--



7.05



85,949



--



1.71



20,828



--



1.99



24,236



--



2.43



29,676



--



0.99



12,234



--



1.95



23,776



--



4.45



54,290



--



2.83



34,530



--



1.22



14,892



--



16.83



205,172



--



2.37



28,924



--



1.29



15,685



--



4.91



59,915



--



11,870



---



An aggregate of up to 33,592,721 shares of Common Stock may

be offered by certain Selling Security Holders. As of July 31,

1998, the Selling Security Holders, none of whom has a material

relationship with the Company or any of its predecessors or

affiliates except as set forth herein, were as follows:

[TO BE

COMPLETED BY AMENDMENT]

<TABLE>

<CAPTION>



Name of Selling Security Holder

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



Shares of Common Stock

Maximum Number

Shares of Common Stock

Beneficially Owned

of Shares to be

Beneficially Owned

Prior to the Offering

Sold in the Offering

After the Offering

------------------------------------------- ---------------------Number

Percent

Number

Percent

---------------------------<C>

<C>

<C>



<S>

<C>

<C>

Arbco Associates, L.P.

2,047,549

The Bank of New York Nominees

Boland Machine & Manufacturing Co.

21,705

Butler Partners

27,777

Construction Specialists, Inc.

108,526

Patrick B. Collins

Daniel O. Conwill, IV

136,447

Cumber International

171,559

Cumberland Partners

1,798,619

Dornbush Family, L.P.

35,838

EnCap Investments, L.P.

62,675

Evanston Insurance Company

208,136

Fidelity Summer Street Trust

347,593

Foremost Insurance Company

307,239

Hallco, Inc.

332,250

Hare & Co.

Darlene F. Hart

8,000

ING (U.S.) Capital Corporation

633,333

JEFCO

653,053



8.30



2,021,388

0.09



26,161



21,705



0.11

--



-



0.12

0.47



27,777

108,526



---



---



0.59

0.74

7.19

0.16

0.27

0.90

1.49

1.33

1.43



136,447

171,559



---



---



35,838

4,858

208,136

347,593

305,026

332,250



-57,817

--2,213

--



-0.25

--0.01

--



0.03

2.71

2.77



4,000

466,666

653,053



4,000

166,667

--



0.02

0.71

--



Kayne Anderson Non-Traditional

Investments, L.P.

1,615,464

Kayne Anderson Offshore Limited

154,700

Shauvik Kundagrami

10,240

Abby Leigh

David Leigh Trust

14,444

Mitch Leigh

Rebecca Leigh Trust

14,444

Lone Star Partners, L.P.

278,710

Longhorn Partners

27,777

Longview Partners

274,667

Joseph L. Maly, Jr.

20,480

Robert H. Matthews

4,000

Kathy Costner-McIlhenny

20,000

Mees Pierson Nominees UK Limited

J. Edgar Monroe Foundation

161,335

Estate of J. Edgar Monroe

88,491

Morgan Stanley Dean Witter

Diversified Investment Trust

173,791

MSS Nominees Limited

Offense Group Associates, L.P.

1,117,196

Opportunity Associates, L.P.

641,941

Putnam Advisory Company

774,505

Putnam Fiduciary Trust Company

384,286

Putnam Investment Management Inc.

8,928,135

David P. Quint

1,684

Rauscher Pierce & Clark

(Guernsey) Ltd.

50,399

Arthur Rosenbloom & Nancy

Rosenbloom Living Trust

157,990

John W. Sinders, Jr.

65,280

Target Trust

TCW Leveraged Income Investment

Trust L.P.

656,331

TCW Shared Opportunity Fund II LP

980,871

Topa Insurance Company

240,877

Valux S.A. Luxembourg

24,000

Vidacos Nominees Limited A/C BAR

William Wang

Donald & Joanne Westerberg

16,110

Kurt Wettenschwiler

18,533

Less Than 1% Holders of Amended Series

A Preferred Stock

Total



6.64

0.67

0.04



1,648,193

111,290

10,240



0.06



14,444



--



--



0.06

1.20

0.12

1.18

0.09

0.02

0.09



14,444

278,710

27,777

274,667

20,480

4,000

20,000



--------



--------



0.70

0.38



160,353

65,116



982

23,375



-0.10



0.75



173,791



--



--



4.68

2.74

3.27

1.67

28.03

0.01



1,115,353

641,941

774,505

384,286

8,928,135

1,684



0.22



50,399



0.69

0.28

2.80

4.12

1.04

0.10

0.07

0.08



</TABLE>

The Company is registering the Securities on behalf of the

Selling Security Holders.

As used herein, "Selling Security

Holders"

includes pledgees, donees, transferrees or

other

successors in interest to be named Selling Security Holder after

the date of this Prospectus. The Securities may be sold from

time to time on one or more exchanges or in the over-the-counter

market or in private transactions or otherwise, at prices and at

terms then prevailing or at prices related to the then current

market price, or in negotiated transactions. The Securities may

be

sold

in

one or more of the following:

negotiated

transactions; a block trade in which the broker-dealer so engaged

will attempt to sell the shares as agent but may position and

resell a portion of the block as principal to facilitate the

transaction; purchases by a broker-dealer as principal and resale

by

such

broker-dealer for its account pursuant to

this

Prospectus; an exchange distribution in accordance with the rules

of

such exchange; and ordinary brokerage transactions and

transactions in which the broker solicits purchasers.

Such

transactions may or may not involve brokers or dealers.

In

effecting sales, broker-dealers engaged by the Selling Security

Holders may arrange for other broker-dealers to participate in

the resales.

In connection with distributions of the Securities or

otherwise, the Selling Security Holders may enter into hedging

transaction with broker-dealers or others. In connection with

such transactions, Selling Security Holders, broker-dealers or

others may engage in put and call options and in short sales of

the shares registered hereunder in the course of hedging the

positions they assume. The Selling Security Holders may also



240,706

43,410

--



0.99

0.19

--



1,843

------



0.01

------



--



--



144,151

65,280



13,839

--



0.06

--



554,665

864,347

205,046

12,000



101,666

101,666

35,831

12,000



0.43

0.43

0.15

0.05



16,110

12,000

33,592,721



-6,533



0.03



sell shares short and redeliver the shares to close out such

short positions. The Selling Security Holders may also enter

into option or other transactions with broker-dealers which

require the delivery to the broker-dealer of the Securities

registered hereunder, which the broker-dealer may resell or

otherwise transfer pursuant to this Prospectus.

The Selling

Security

Holders may also loan or pledge the

Securities

registered hereunder to a broker-dealer or other third party and

the broker-dealer and such other third party may sell the

Securities so loaned or upon a default the broker-dealer or other

third party may effect sales of the pledged Securities pursuant

to this Prospectus.

Broker-dealers or agents may receive compensation in the

form of commissions, discounts or concessions from Selling

Security Holders in amounts to be negotiated in connection with

the sale. Such broker-dealers and any other participating brokerdealers may be deemed to be "underwriters" within the meaning of

the Securities Act, in connection with such sales and any such

commission, discount or concession received by broker-dealers may

be deemed to be underwriting discounts or commissions under the

Securities Act.

In addition, any Securities covered by this

Prospectus which qualify for sale pursuant to Rules 144, 144A or

904 may be sold under such Rules rather than pursuant to this

Prospectus.

The Selling Security Holders may agree to indemnify any

broker-dealer

or agent that participates

in

transactions

involving sales of the Securities against certain liabilities,

including liabilities arising under the Securities Act.

The

Company and certain of the Security Holders have agreed to

indemnify certain persons including broker-dealers or agents

against certain liabilities in connection with the offering of

the

Securities,

including liabilities arising

under

the

Securities Act. Because Selling Security Holders may be deemed

to be "underwriters" within the meaning of Section 2(11) of the

Securities Act, the Selling Security Holders will be subject to

the prospectus delivery requirements of the Securities Act, which

may include delivery through the facilities of the AMEX pursuant

to Rule 153 under the Securities Act. The Company has informed

the

Selling

Security

Holders that the

anti-manipulative

provisions of Regulation M promulgated under the Exchange Act may

apply to their sales in the market.

Upon the Company being notified by a Selling Security Holder

that any material arrangement has been entered into with a brokerdealer for the sale of the Securities through a block trade,

special offering, exchange distribution or secondary distribution

or a purchase by a broker or dealer, a supplement to this

Prospectus will be filed, if required, pursuant to Rule 424(b)

under the Securities Act, disclosing (i) the name of each such

Selling

Security Holder and of the participating

brokerdealer(s), (ii) the number of shares involved, (iii) the price at

which such shares were sold, (iv) the commissions paid or

discounts or concessions allowed such broker-dealer(s), where

applicable, (v) that such broker-dealer(s) did not conduct any

investigation to verify the information set out or incorporated

by reference in this Prospectus and (vi) other facts material to

the transaction. In addition, upon the Company being notified by

a Selling Security Holder that a donee or pledgee intends to sell

more than 500 shares, a supplement to this Prospectus will be

filed.

On



May 20, 1997, the Company entered into two Registration

Rights Agreements (collectively, the "Registration Agreements")

with Jefferies as the initial purchaser in the Offerings.

Pursuant to the Registration Agreements, the initial purchaser

and all subsequent holders of Amended Series A Preferred Stock

and Equity Warrants issued in the Offerings were granted certain

registration rights with respect to the Amended Series

A

Preferred Stock and the Common Stock issuable upon conversion of

the Amended Series A Preferred Stock.

In addition, the Company is registering certain outstanding

shares of Common Stock previously issued in certain private

placements, as well as Common Stock issuable on exercise of

certain outstanding warrants, pursuant to certain "piggy back"



registration covenants and other contractual agreements to

the Company is subject.



which



Pursuant

to such Registration Agreements and

other

contractual arrangements, the Company has agreed to indemnify the

Selling Security Holders against certain liabilities, including

liabilities under the Securities Act.

The Company is registering the Securities at its expense

including paying all filing, printing, legal and accounting fees

in connection therewith; provided, however, the Selling Security

Holders will pay all applicable stock transfer taxes, brokerage

commissions, discounts or other transaction charges and expenses.

Jefferies has performed and may in the future

various investment banking services for the Company.



perform



LEGAL MATTERS

Certain legal matters with respect to the Securities will be

passed upon for the Company by Satterlee Stephens Burke & Burke

LLP, New York, NY.

EXPERTS

The consolidated balance sheets of the Company and XCL-China

Ltd. as of December 31, 1997 and 1996 and the consolidated

statements of operations, shareholders' equity, and cash flows

for each of the three years in the period ended December 31, 1997

included in this Prospectus have been included herein in reliance

on the reports, both of which include an explanatory paragraph

regarding the Company's ability to continue as a going concern,

of PricewaterhouseCoopers LLP, independent accountants, given on

the authority of that firm as experts in accounting and auditing.

ENGINEERS

The estimate of the oil and gas reserves as of January 1,

1998, for the Company's interests in the Zhao Dong Block as

prepared by H.J. Gruy and Associates, Inc. referenced in this

Prospectus has been included herein in reliance upon

the

authority of such firm as experts with respect to the matters

contained in such firm's report.

GLOSSARY OF TERMS

Unless otherwise indicated in this Prospectus, natural gas

volumes are stated at the legal pressure base of the State or

area in which the reserves are located at 60 degrees Fahrenheit.

Natural gas equivalents are determined using the ratio of six Mcf

of natural gas to one barrel of crude oil, condensate or NGLs.

The following definitions shall apply to the technical terms

used in this Prospectus.

"Bbl" means barrel or barrels.

"Bcf" means billion cubic feet.

"BOE" means barrel of crude oil equivalent.

"BOPD" means barrel per day.

"DD&A" means depletion, depreciation and amortization.

"Developed acreage" means acreage which consists

acres spaced or assignable to productive wells.



of



"Developed well" means a well drilled within the proved

area of a crude oil or natural gas reservoir to the depth of

stratigraphic horizon (rock layer or formation) known to be

productive for the purpose of extraction of proved crude oil

or natural gas reserves.

"Dry hole" means an exploratory or development well

found to be incapable of producing either crude oil or gas

in sufficient quantities to justify completion as a crude

oil or natural gas well.



"EBITDA" means earnings from continuing operations

before income taxes, interest expense, DD&A and other noncash charges.

"Exploratory well" means a well drilled to find and

produce crude oil or natural gas in an unproved area, to

find a new reservoir in a field previously found to be

producing crude oil or natural gas in another reservoir, or

to extend a known reservoir.

"Farmout" means a leasehold held by the owner thereof

under an agreement between operators, whereby a lease owner

not desirous of drilling at the time agrees to assign the

lease, or some portion of it (in common or in severalty) to

another operator who is desirous of drilling the tract.

"Finding cost", expressed in dollars per BOE, is

calculated by dividing the amount of total exploration and

development capital expenditures (excluding any amortization

with respect to deferred financing fees) by the amount of

proved reserves added during the same period

(including

the effect on proved reserves of reserve revisions).

"G&A" means general and administrative.

"Gross" natural gas and crude oil wells or "gross"

wells or acres is the number of wells or acres in which the

Company has an interest.

"LOE"



means



lease operating expenses and



production



taxes.

"MBbl" means thousand barrels.

"MBOE" means thousand barrels of crude oil equivalent.

"Mcf" means thousand cubic feet.

"Mcfpd" means thousand cubic feet per day.

"MMBbls" means million barrels of crude oil.

"MMBOE" means million barrels of crude oil equivalent.

"MMBTU" means million British Thermal Units.

"MMcf" means million cubic feet.

"MMcfpd" means million cubic feet per day.

"Net" natural gas and crude oil wells or "net" acres

are determined by multiplying "gross" wells or acres by the

Company's working interest in such wells or acres.

"NGL" means natural gas liquid.

"Production costs" means lease operating expenses

taxes on natural gas and crude oil production.

"Productive wells" means producing

capable of production.



wells



and



and

wells



"Proved developed reserves" means reserves that can be

expected to be recovered through existing wells

with

existing equipment and operating methods and those reserves

that exist behind the casing of existing wells when the cost

of

making such reserves available for production

is

relatively small compared to the cost of a new well.

"Proved reserves" or "reserves" means the estimated

quantities of crude oil, natural gas, and NGLs which

geological and engineering data demonstrate with reasonable

certainty to be recoverable in future years from known

reservoirs under existing economic and operating conditions,

i.e., prices and costs as of the date the estimate is made.

Prices include consideration of changes in existing prices

provided only by contractual arrangements, but not on

escalations based upon future conditions.



"Proved undeveloped reserves" means reserves that are

expected to be recovered from new wells on undrilled

acreage, or from existing wells where a relatively major

expenditure is required for recompletion.

Reserves on

undrilled acreage shall be limited to those drilling units

offsetting productive units that are reasonably certain of

production

when drilled.

Proved reserves

for

other

undrilled units can be claimed only where it can be

demonstrated with certainty that there is continuity of

production from the existing productive formation. Under no

circumstances

should estimates for proved

undeveloped

reserves be attributable to any acreage for which an

application of fluid injection or other improved recovery

technique is contemplated, unless such techniques have been

proved effective by actual tests in the area and in the same

reservoir.

"Service well" is a well used for water injection in

secondary recovery projects or for the disposal of produced

water.

"Undeveloped acreage" means leased acres on which wells

have not been drilled or completed to a point that would

permit the production of commercial quantities of crude oil

and natural gas, regardless whether or not such acreage

contains proved reserves.

INDEX TO FINANCIAL STATEMENTS

Page

XCL Ltd.

- ------Report of Independent Accountants

Consolidated Balance Sheets as of December

December 31, 1996



31,



1997



and



Consolidated Statements of Operations for each of the three

years in the period ended December 31, 1997

Consolidated Statements of Shareholders' Equity for each of

the three years in the period ended December 31, 1997

Consolidated Statements of Cash Flows for each of the three

years in the period ended December 31, 1997

Notes to Consolidated Financial Statements

Supplemental Information

Schedule II - Valuation and Qualifying Accounts

Unaudited



Consolidated Balance Sheet as of June



30,



1998



Unaudited Consolidated Statements of Operations for the

months ended June 30, 1998 and 1997

Unaudited Consolidated Statements of Shareholders'

for the six months ended June 30, 1998



six



Equity



Unaudited Consolidated Statements of Cash Flow for the

months ended June 30, 1998 and 1997



six



Notes to Unaudited Consolidated Financial Statements

XCL-China Ltd.

- -------------Report of Independent Accountants

Balance Sheets as of December 31, 1997 and December 31, 1996

Statements of Operations for each of the three years in the

period ended December 31, 1997

Statements of Shareholders' Deficit for each of

years in the period ended December 31, 1997



the



three



Statements of Cash Flows for each of the three years in the

period ended December 31, 1997

Notes to Financial Statements

Supplemental Information

<PAGE>

REPORT OF INDEPENDENT ACCOUNTANTS



To the Board of Directors and Shareholders of



XCL Ltd.



We have audited the consolidated financial statements and the

financial statement schedule of XCL Ltd. and Subsidiaries listed

in

the

Index on page F-1.

These consolidated financial

statements

and

financial

statement

schedule

are

the

responsibility of the Company's management. Our responsibility is

to express an opinion on these consolidated financial statements

and financial statement schedule based on our audits.

We conducted our audits in accordance with generally accepted

auditing standards. Those standards require that we plan and

perform the audit to obtain reasonable assurance about whether

the financial statements are free of material misstatement.

An

audit includes examining, on a test basis, evidence supporting

the amounts and disclosures in the financial statements.

An

audit also includes assessing the accounting principles used and

significant estimates made by management, as well as evaluating

the overall financial statement presentation. We believe that

our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above

present fairly, in all material respects, the consolidated

financial position of XCL Ltd. and Subsidiaries as of December

31, 1997 and 1996, and the consolidated results of their

operations and their cash flows for each of the three years in

the period ended December 31, 1997, in conformity with generally

accepted accounting principles. In addition, in our opinion, the

financial statement schedule referred to above, when considered

in relation to the basic consolidated financial statements taken

as a whole, presents fairly, in all material respects, the

information required to be included therein.

The accompanying consolidated financial statements have been

prepared assuming that the Company will continue as a going

concern.

As discussed in Note 2 to the consolidated financial

statements, the Company is generating minimal revenues and

although the Company has cash (including its restricted cash) in

the amount of approximately $32 million as of December 31, 1997,

and a positive working capital position, it must generate

additional cash flows to satisfy its development and exploratory

obligations with respect to its China properties. There is no

assurance that the Company will be able to generate the necessary

funds to satisfy these contractual obligations and to ultimately

achieve profitable operations, which creates substantial doubt

about its ability to continue as a going concern. Managements'

plans in regard to these matters are described in Note 2.

The

consolidated financial statements do not include any adjustments

that might result from the outcome of this uncertainty.

/S/ PRICEWATERHOUSECOOPERS LLP



Miami, Florida

April 10, 1998

<PAGE>

December 31

------------------1997

1996

-------



A S S E T S

----------Current assets:

Cash and cash equivalents

Cash held in escrow (restricted)

Accounts receivable, net



$



21,952

10,263

101



$



113

-23



Refundable deposits

Other

Total current assets



1,200

451

-------33,967

--------



-212

-----348

------



21,172



13,571



33,132

------54,304

-1,163

------55,467



21,238

------34,809

135

2,492

------37,436



Property and equipment:

Oil and gas (full cost method):

Proved undeveloped properties, not being

amortized

Unevaluated properties

Land, at cost

Other

Accumulated depreciation, depletion and

amortization



Investments

Assets held for sale

Debt issue costs, less amortization

Other assets

Total assets



$



(1,000)

(1,491)

------------54,467

35,945

------------4,173

2,383

21,155

21,058

4,268

950

1,059

180

-----------119,089 $ 60,864

========

=======



L I A B I L I T I E S A N D S H A R E H O L D E R S' E Q U I T Y

------------------------------------------------------------------Current liabilities:

Accounts payable and accrued costs

Due to joint venture partner

Dividends payable

Current maturities of long term debt



$



Total current liabilities

Long-term debt, net of current maturities

Other non-current liabilities

Commitments and contingencies (Notes 2 and 11)

Shareholders' equity:

Preferred stock-$1.00 par value; authorized

2.4 million shares at December 31, 1997

and 1996; issued shares of 1,196,236 at

December 31, 1997 and 669,411 at

December 31, 1996 - liquidation preference

of $103 million at December 31, 1997

Common stock-$.01 par value; authorized 500

million shares at December 31, 1997

and 1996; issued shares of 21,710,257 at

December 31, 1997 and 285,754,151 at

December 31, 1996

Common stock held in treasury - $.01 par value;

69,470 shares at December 31, 1997

and 1,042,065 shares at December 31, 1996

Unearned compensation

Additional paid-in capital

Accumulated deficit



$



$



3,901

4,202

928

38,022

------47,053

--------



5,386



2,770



1,196



669



217



2,858



(1)

(12,021)

298,588

(247,154)

-------40,825

--------



Total shareholders' equity

Total liabilities and

shareholders'equity



2,727

4,504

1,813

2,524

-------11,568

-------61,310



119,089

========



(10)

-226,956

(219,432)

------11,041

------$



60,864

=======



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

<PAGE>

<TABLE>

XCL Ltd. and Subsidiaries

CONSOLIDATED STATEMENTS OF OPERATIONS

(In Thousands, Except Per Share Amounts)

Year Ended December 31



-------------------------1997

1996

1995

---------<CAPTION>

<S>

Oil and gas revenues from properties held for sale



<C>

$

236

$ 1,136

-----------



<C>

$ 2,480

------



<C>



Costs and operating expenses:

Operating

Depreciation, depletion and amortization

Provision for impairment of oil and gas

properties

Writedown of other assets and investments

General and administrative costs

Other



210

126



3,850

2,444

3,487

227

-----10,929

-----(9,793)

------



75,300

4,461

4,551

590

------88,153

------(85,673)

-------



(8,450)

-2,212

853

-----(5,385)

------



(2,415)

(661)

8

787

------(2,281)

-------



(2,998)

613

133

88

------(2,164)

-------



(13,443)



(12,074)



(87,837)



Other income (expense):

Interest expense, net of amounts capitalized

Gain (loss) on sale ofinvestments/assets

Interest income

Other, net



Net loss

Preferred stock dividends

Net loss attributable to common stock

Loss per share (basic):

Net loss before extraordinary item

Extraordinary item



985

2,266



--4,910

3,048

-----8,294

-----(8,058)

------



Operating loss



Loss before extraordinary item

Extraordinary charge for early extinguishment of

debt



342

579



(551)

------------------(13,994) (12,074)

(87,837)

(13,728)

(5,356)

(4,821)

-----------------$(27,722) $(17,430) $ (92,658)

=======

=======

=======

$



(1.33) $

(.98) $

(5.77)

(.03)

-------------------$ (1.36) $

(.98) $

(5.77)

=======

======

=======



Net loss per share

Loss per share (diluted):

Net loss before extraordinary item

Extraordinary item



$



(1.33) $

(.98) $

(5.77)

(.03)

-------------------$ (1.36) $

(.98) $

(5.77)

=======

======

=======



Net loss per share



Average number of shares used in per share computations:

Basic

20,451

Diluted

20,451



17,705

17,705



16,047

16,047



</TABLE>

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

<PAGE>

<TABLE>

XCL Ltd. and Subsidiaries

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

(Thousands of Dollars)



Total

Preferred



Common



Treasury



Paid-In



Accumulated



Unearned



Capital



Deficit



Compensation



-------



-----------



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



Shareholders'

Stock



Stock



Stock



Equity

------------<CAPTION>

<S>

<C>

<S>

Balance, December 31, 1994

$



------



<C>

<C>

649

$

2,372



--------



<C>

$



(35)



$206,241



<C>

$(114,027)



<C>

$



-



$



------



95,200

Net loss

(87,837)

Dividends

(4,821)

Preferred shares issued

5,124

Preferred shares subscribed

4

Common shares issued

8,125

Treasury shares purchased

(1,257)

Treasury shares issued

2,362



-



-



-



-



(87,837)



-



-



-



-



-



(4,821)



-



32



-



-



5,092



-



-



4



-



-



-



-



-



-



189



-



7,936



-



-



-



-



(25)



(1,232)



-



-



-



-



35



2,327



-



-



-----



------



-----



-------



--------



------



685



2,561



220,364



(206,685)



-



-



-



-



-



(12,074)



-



-



-



-



-



(673)



-



10



-



-



128



-



-



(4)



-



-



-



-



-



(22)



5



-



17



-



-



-



292



-



6,339



-



-



-



-



(3)



(138)



-



-



-



-



18



246



-



-



------



------



-----



-------



-------



------



669



2,858



226,956



(219,432)



-



--------



Balance, December 31, 1995

16,900

Net loss

(12,074)

Dividends

(673)

Preferred shares issued

138

Preferred shares subscribed

(4)

Preferred shares converted

to common shares

Common shares issued

6,631

Treasury shares purchased

(141)

Treasury shares issued

264



(25)



-----



Balance, December 31, 1996

11,041

Net loss

(13,994)

Dividends

(13,728)

Preferred shares issued

37,028

Common shares issued

4,593

Issuance of stock purchase

warrants

15,032

Unearned compensation

853

Reverse stock split 1 for 15

-



-



-



-



-



(13,994)



-



-



-



-



-



(13,728)



-



507



-



-



36,521



-



-



-



198



-



4,395



-



-



-



-



-



15,032



-



-



20



13



-



12,841



-



9



2,843



-



----



-------



--------



-



(2,852)



-----Balance, December 31, 1997

$40,825



(10)



$1,196

=====



----$



217

=====



$



(1)

=====



$298,588



(12,021)

--------



$ (247,154) $(12,021)



=======



======

</TABLE>

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

<PAGE>

XCL Ltd. and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Thousands of Dollars)

Year Ended December 31

--------------------------------1997

1996

1995

---------Cash flows from operating activities:

Net loss

$ (13,994)

$ (12,074) $ (87,837)

-----------------Adjustments to reconcile net loss



========



=======



-----



to net cash used in

operating activities:

Depreciation, depletion and

amortization

Provision for impairment of oil

and gas properties

Extraordinary charge for early

extinguishment of debt

(Gain) loss on sale of

investments/assets

Amortization of discount on senior

secured notes

Writedown of other assets and

investments

Stock compensation programs

Other

Change in assets and liabilities:

Accounts receivable

Refundable deposits

Accounts payable and accrued

costs

Non-current liabilities and

other

Total adjustments



126



579



2,266



--



3,850



75,300



551



--



--



--



661



1,342



--



--



-853



2,444

--



4,461

--



796



--



--



(78)

(1,200)



799

--



875

--



(132)



575



(765)



2,655

------4,913

-------



Net cash used in operating

activities

(9,081)

------Cash flows from investing activities:

Capital expenditures

(16,097)

Investments

Proceeds from sales of assets and

investments

Other

Net cash (used in) provided

by investing activities

Cash flows from financing activities:

Proceeds from sales of common stock

Proceeds from issuance of preferred

stock

Proceeds from sale of treasury stock

Proceeds from Senior Secured Notes

Loan proceeds

Payment of long-term debt

Payment of notes payable

Proceeds from exercise of options and

warrants

Payment of preferred stock dividends

Payment for treasury stock

Stock/note issuance costs and other

Net cash provided by

(used in) financing

activities

Net increase (decrease) in cash and cash

equivalents

Cash and cash equivalents at beginning of

year

Cash and cash equivalents at end of year

Supplemental information:

Cash paid for interest, net of amounts

capitalized



(1,790)



(613)



12

------8,920

-------



803

------82,327

-------



(3,154)

-------



(5,510)

-------



(1,489)



(8,458)



(491)



(1,624)



797



9,210



2,655



--------



4

-------



64

------



(17,090)

-------



7,234

-------



(7,363)

------



652



1,766



3,553



25,000

-75,000

6,100

(35,503)

(6,100)



144

264

-315

(8,344)

--



3,068

2,487

--(522)

--



1,590

--(8,466)

-------



691

-(141)

(272)

------



874

(250)

(1,257)

(221)

------



58,273

-------



(5,577)

------



7,732

------



32,102



(1,497)



(5,141)



113

-----$32,215

======



1,610

-----$

113

======



6,751

-----$ 1,610

=====



$ 7,441

======



$ 1,591

======



$ 2,602

======



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

<PAGE>

XCL Ltd. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



(1)



Summary of Significant Accounting Policies:



Principles of Consolidation:

--------------------------The consolidated financial statements include the accounts

of XCL Ltd. and its wholly owned subsidiaries ("XCL" or the

"Company") after the elimination of all significant intercompany

accounts and transactions.

Certain reclassifications have been

made to prior year financial statements to conform to current

year presentation. These reclassifications had no effect on net

loss, cash flows or shareholders' equity.

Use of Estimates in the Preparation of Financial Statements:

- ----------------------------------------------------------The preparation of the Company's financial statements, in

conformity

with

generally accepted accounting

principles,

requires management to make estimates and assumptions that affect

reported amounts of assets, liabilities, revenues and expenses,

and disclosure of contingent assets and liabilities.

Actual

results could differ from those estimates.

Cash and Cash Equivalents:

------------------------The Company considers deposits which can be redeemed on

demand and investments which have original maturities of less

than three months, when purchased, to be cash equivalents. As of

December 31, 1997, the Company's cash and cash equivalents were

deposited primarily in three financial institutions.

Concentration of Credit Risk:

---------------------------The Company operates exclusively in the oil and gas industry

and receivables are due from other producers who may be affected

by economic conditions in the industry. The Company has not

experienced any material credit losses.

The Company's financial instruments that are exposed to

concentrations

of credit risk consist primarily

of

cash

equivalents/short-term investments and trade receivables.

The Company believes that no single short-term investment

exposes the Company to significant credit risk. Additionally,

creditworthiness of its counterparties, which are major financial

institutions, are monitored. As of December 31, 1997, the Company

had cash in financial institutions in excess of the insured

amounts.

Fair Value of Financial Instruments:

----------------------------------For the purposes of disclosure requirements pursuant to

Statement of Financial Accounting Standards No. 107 "Disclosures

About Fair Market Value of Financial Instruments," fair value of

current assets and liabilities approximate carrying value, due to

the short-term nature of these items. The Company believes the

fair value of long-term debt approximates carrying value. Fair

value

of

such

financial instruments is not

necessarily

representative of the amount that could be realized or settled.

Oil and Gas Properties:

---------------------The Company accounts for its oil and gas exploration and

production activities using the full cost method of accounting.

Accordingly, all costs associated with acquisition, exploration,

and development of oil and gas reserves, including appropriate

related costs, are capitalized. The Company capitalizes internal

costs that can be directly identified with its acquisition,

exploration and development activities and does not capitalize

any costs related to production, general corporate overhead or

similar activities.

The capitalized costs of oil and gas properties, including

the estimated future costs to develop proved reserves, are

amortized on the unit-of-production method based on estimates of

proved oil and gas reserves. The Company's domestic oil and gas



reserves were estimated by Company engineers in 1997 and 1996,

and foreign reserves in 1997 and 1996 by independent petroleum

engineers.

Investments in unproved

properties

and

major

development projects are not amortized until proved reserves

associated with the projects can be determined

or

until

impairment occurs. If the results of an assessment indicate that

properties are impaired, the amount of the impairment is added to

the capitalized costs to be depleted. The Company capitalizes

interest on expenditures made in connection with exploration and

development

projects

that are

not

subject

to

current

amortization.

Interest is capitalized for the period that

activities are in progress to bring these projects to their

intended use.

During the fourth quarter of 1995, the Company decided to

concentrate on the development of its China investments, and

decided to dispose of its domestic properties. Accordingly, the

recorded value of the Company's domestic properties was reduced

to their estimated fair market value and the resulting balances

were transferred to assets held for sale.

The Company reviews the carrying value of its oil and gas

properties each quarter on a country-by-country basis, and limits

capitalized costs of oil and gas properties to the present value

of estimated future net revenues from proved reserves, discounted

at 10 percent, plus the lower of cost or fair value of unproved

properties as adjusted for related tax effects and deferred tax

reserves. If capitalized costs exceed this limit, the excess is

charged to depreciation, depletion and amortization expense

("DD&A") in the period in which it occurs.

Proceeds from the sale of proved and unproved properties are

accounted for as reductions to capitalized costs with no gain or

loss recognized unless such sales would significantly alter the

relationship between capitalized costs and proved reserves of oil

and gas. Abandonments of properties are accounted for

as

adjustments of capitalized costs with no loss recognized.

The Company accounts for site restoration, dismantlement and

abandonment costs in its estimated future costs of proved

reserves.

Accordingly, such costs are amortized on a unit of

production basis and reflected with accumulated depreciation,

depletion and amortization. The Company identifies and estimates

such costs based upon its assessment of applicable regulatory

requirements, its operating experience and oil and gas industry

practice in the areas within which its properties are located.

To date the Company has not been required to expend any material

amounts to satisfy such obligations. The Company does not expect

that future costs will have a material adverse effect on the

Company's operations, financial condition or cash flows.

The

standardized measure of discounted future net cash flows includes

a deduction for any such costs.

Other Property and Equipment:

---------------------------Other property and equipment primarily consists of furniture

and

fixtures, equipment and software.

Major renewals and

betterments are capitalized while the costs of repairs and

maintenance are charged to expense as incurred.

The costs of

assets retired or otherwise disposed of and the applicable

accumulated depreciation are removed from the accounts, and the

resulting gain or loss is reflected in operations.

Other

property and equipment costs are depreciated using the straightline method over the estimated useful lives of the assets, which

range from 3 to 15 years.

Capitalized Interest and Amortized Debt Costs:

--------------------------------------------During fiscal 1997, 1996 and 1995, interest and associated

costs of approximately $5.8 million, $2.8 million and $3.1

million, respectively were capitalized on significant investments

in

oil

and gas properties that are not being currently

depreciated, depleted, or amortized and on which exploration or

development activities are in progress.

Deferred debt issue

costs and discount on senior secured notes are amortized on the

straight-line basis over the term of the related debt agreement.

The discount on senior secured notes is the amount attributable

to the detachable Common Stock purchase warrants.



Income Taxes:

-----------The Company accounts for income taxes in compliance with

Statement of Financial Accounting Standards No. 109 (SFAS No.

109) "Accounting for Income Taxes." Requirements by this standard

include recognition of future tax benefits, measured by enacted

tax rates, attributable to: deductible temporary differences

between financial statement and income tax bases of assets and

liabilities; and, net operating loss carryforwards.

Recognition

of such tax assets are limited to the extent that realization of

such benefits is able to be reasonably anticipated.

Revenue Recognition:

------------------Oil and gas revenues are recognized using the accrual method

at the price realized as production and delivery occurs. Amounts

which are contingently receivable are not recognized until

realized.

Foreign Operations

-----------------The Company's future operations and earnings will depend

upon the results of the Company's operations in China. There can

be no assurance that the Company will be able to successfully

conduct such operations, and a failure to do so would have a

material adverse effect on the Company's financial position,

results of operations and cash flows. Also, the success of the

Company's operations will be subject to numerous contingencies,

some

of

which

are beyond management's

control.

These

contingencies include general and regional economic conditions,

prices for crude oil and natural gas, competition and changes in

regulation.

Since the Company is dependent on international

operations, specifically those in China, the Company will be

subject to various additional political, economic and other

uncertainties. Among other risks, the Company's operations will

be subject to the risks of restrictions on transfer of funds;

export duties, quotas and embargoes; domestic and international

customs and tariffs; and changing taxation policies, foreign

exchange restrictions, political conditions and governmental

regulations.

Stock Based Compensation:

-----------------------Statement of Financial Accounting Standards No.

123

"Accounting for Stock-Based Compensation," ("SFAS No. 123")

encourages, but does not require companies to record compensation

costs for stock-based compensation plans at fair value.

The

Company has chosen to continue to account for stock-based

employee compensation using the intrinsic value method prescribed

in Accounting Principles Board Opinion No. 25, "Accounting for

Stock Issued to Employees." Accordingly, compensation cost for

stock options, awards and warrants is measured as the excess, if

any, of the quoted market price of the Company's stock at the

date of the grant over the amount an employee must pay to acquire

the stock.

Earnings Per Share:

-----------------During 1997, the Company adopted Statement of Financial

Accounting Standards No. 128 "Earnings Per Share" ("SFAS No.

128")

and has restated all years presented in accordance

therewith.

SFAS No. 128 requires a dual presentation of basic

and diluted earnings per share ("EPS") on the face of the

statement of operations. Basic EPS is computed by dividing income

available to common stockholders by the weighted average number

of common shares for the period. Diluted EPS reflects the

potential dilution that could occur if securities or other

contracts to issue common stock were exercised or converted into

common stock or resulted in the issuance of common stock that

would then share in earnings.

Environmental Expenditures

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



Environmental expenditures relating to current operations

are expensed or capitalized, as appropriate, depending on whether

such expenditures provide future economic benefits. Liabilities

are recognized when the expenditures are considered probable and

can be reasonably estimated. Measurement of liabilities is based

on currently enacted laws and regulations, existing technology

and

undiscounted

site-specific

costs.

Generally,

such

recognition coincides with the Company's commitment to a formal

plan of action.

Common Stock Reverse Split

-------------------------Effective December 17, 1997, the Company amended and

restated its Certificate of Incorporation to effect a one-forfifteen reverse split of the Company's Common Stock. All share

amounts presented herein have been adjusted to reflect the

reverse split.

Recent Accounting Pronouncements

-------------------------------In June 1997, the FASB issued SFAS No. 130, "Reporting

Comprehensive Income", which is effective for the Company's year

ending December 31, 1998. SFAS No. 130 establishes standards for

the reporting and displaying of comprehensive income and its

components.

The Company will be analyzing SFAS No. 130 during

1998 to determine what, if any, additional disclosures will be

required.

In June 1997, the FASB Issued SFAS No. 131, "Disclosures

about Segments of an Enterprise and Related Information", which

is effective the Company's year ended December 31, 1998.

This

statement establishes standards for reporting of information

about operating segments. The Company will be analyzing SFAS No.

131 during 1998 to determine what, if any, additional disclosures

will be required.

(2)



Liquidity and Management's Plan



The Company, in connection with its 1995 decision to dispose

of its domestic properties, is generating minimal annual revenues

and is devoting all of its efforts toward the development of its

China properties. Although the Company has cash available in the

amount of approximately $32 million as of December 31, 1997

(including restricted cash of approximately $10 million) and a

positive working capital position, management anticipates that

additional funds will be needed to meet all of its development

and exploratory obligations until sufficient cash flows are

generated from anticipated production to sustain its operations

and to fund future development and exploration obligations.

Management plans to generate the additional cash needed

through the sale or financing of its domestic assets held for

sale and the completion of additional equity, debt or joint

venture transactions. There is no assurance, however, that the

Company will be able to sell or finance its assets held for sale

or to complete other transactions in the future at commercially

reasonable terms, if at all, or that it will be able to meet its

future contractual obligations. If production from the China

properties commences in late 1998 or the first half of 1999, as

anticipated, the Company's proportionate share of the related

cash flow will be available to help satisfy cash requirements.

However, there is likewise no assurance that such development

will be successful and production will commence, and that such

cash flow will be available.

(3)



Supplemental Cash Flow Information



There were no income taxes paid for the years ended December

31, 1997, 1996 and 1995.

The Company completed the following noncash transactions in

1997 and prior years in order to conserve cash for use in its

core activities and to meet other obligations while honoring

restrictions on cash use imposed by its bank agreement.

Such

transactions not reported elsewhere herein are as follows:

1997

----



On January 9, 1997, the Company accepted subscriptions for

an aggregate of 21,057 shares of Series F Preferred Stock, issued

in February to three individuals for 18,448 shares; 1,731 shares

and 878 shares, respectively, at $65.00/share, in exchange for

$225,000

in cash, cancellation of a consulting agreement,

surrender of Common Stock and Warrants issued in connection with

a consulting agreement, surrender of rights to acquire units of

registered Common Stock and Warrants, surrender of certain

registration rights covering 3,000,000 shares; and surrender of

certain shares of Common Stock and Warrants issued in connection

with compensation for past fundraising activities, surrender of

rights to acquire units of registered Common Stock and Warrants

and certain registration rights covering 75,000 shares.

On May 20, 1997, the Company issued 11,816 shares of Amended

Series A Preferred Stock and 133,914 warrants to acquire shares

of Common Stock, in respect of approximately $1.0 million of

accrued interest payable to those institutional holders of

Secured Subordinated Debt who purchased $8 million of Amended

Series A Preferred Stock. The shares of Amended Series A

Preferred Stock were valued at $85.00 per share.

The warrants

issued are first exercisable on May 20, 1998, at an exercise

price of $3.0945 per share, and expire on November 1, 2000.

In October, 1997, the Company issued 30,000 shares of Common

Stock and granted .003215% in aggregate Net Revenue Interest on

the Zhao Dong Block to, a former employee of the Company, and her

attorneys in settlement of litigation against the Company.

In October 1997, pursuant to an agreement effective October

1, 1997, the Company issued an aggregate of 53,333 shares of

Common Stock as compensation to a resident of Taiwan who has

performed services for the Company.

On November 11, 1997, the Company issued 26,667 shares of

Common Stock and stock purchase warrants to acquire 13,333 shares

of Common Stock to a consultant, as compensation pursuant to an

agreement dated effective as of February 20, 1997.

1996

---In March and April 1996, the Company sold units of Common

Stock and Warrants through a placement agent in a Regulation S

unit offering.

As compensation for such unit offering the

Company granted warrants to acquire an aggregate of 25,600 shares

of Common Stock.

As compensation for services performed resulting in Apache

Corp. purchasing an additional interest in the Zhao Dong Block,

during the first quarter the Company issued 3,333 shares of

Common Stock to a finder and amended the finder's existing

warrants to acquire 33,333 shares of Common Stock as to exercise

price, expiration date and forced conversion feature, to conform

the terms of such warrants to the terms of warrants granted in

the Regulation S unit offering noted above.

As compensation for identifying the placement agent for the

Regulation S unit offering, the finder earned a four percent

stock fee of the gross proceeds of the offering. In payment of

this fee, the Company during the first quarter, issued 17,817

shares

of Common Stock in connection with the initial closing

and during the second quarter issued an aggregate 8,192 shares of

Common Stock as compensation for the subsequent closings.

Effective March 1, 1996, the terms of warrants issued to a

financial advisor were amended as partial consideration for

introducing to the Company the purchaser of the Gonzalez Gas

Unit, comprising a portion of the Berry R. Cox Field.

The

warrant exercise price was reduced from $15.00 to $7.50 and the

term of the warrant was extended for three years to March 1,

1999.

During August 1996, the Company issued to a finder 18,666

warrants

to purchase 18,666 shares of Common

Stock,

as

compensation for the placement with their clients of 186,666

units, comprised of shares of Common Stock and warrants to

purchase Common Stock.



During October 1996, the Company issued approximately 93,333

shares of Common Stock plus warrants to acquire 166,666 shares of

Common Stock, as compensation to an individual in consideration

for a consulting arrangement, whereby the consultant would

introduce persons interested in investing in China through the

Company.

During February 1997, the consultant canceled the

consultant agreement and returned to the Company the shares and

warrants issued in connection therewith.

During October 1996, the Company issued 100,000 warrants to

acquire 100,000 shares of Common Stock, as compensation to an

individual for past fund raising services.

1995

---During the first quarter of 1995, the Company issued 1,247

shares of Common Stock in payment of interest on funds escrowed

in advance of purchase of Series D Preferred Stock.

During September 1995, the Company issued 3,333 units, each

unit comprised of one share of Common Stock and a five-year

warrant to purchase one share of Common Stock, plus an additional

five-year warrant on the same terms as the unit warrant to

purchase 3,333 shares of Common Stock as compensation to an

individual who assisted the Company with a private placement of

approximately 200,000 units.

(4)



Receivables



The Company's trade accounts receivable at December 31,

1997, arise primarily from business transactions with entities in

the oil and gas industry, mostly located in Texas. An oil and gas

purchaser with which the Company has contractual arrangements

accounted for approximately 76 percent of oil and gas revenue

receivables in 1997, 76 percent in 1996 and 67 percent in 1995.

(5)



Assets Held for Sale and Investments

Assets Held for Sale

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

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



During 1996, the Company was engaged in attempts to sell its

remaining domestic oil and gas properties and had a contract in

place for the sale of the property. Prior to the sale being

consummated, the Company received service of three lawsuits filed

by lessors of the most productive remaining leases, effectively

thwarting the Company's ability to consummate the sale by casting

doubt as to the Company's rights to certain interests in the

leases and demanding damages. While the Company believes that

the charges are without merit, it is of the opinion that the

property cannot be sold until such time as the litigation is

concluded or settled. In response to a request by the lessors'

counsel, the Company has granted the lessors an extension of time

to respond to discovery demands made by the Company and to allow

sufficient time to pursue settlement of this litigation (see Note

11).

As a result of these lawsuits the Company took an

additional writedown of these properties aggregating

$3.85

million during 1996.

Lutcher Moore Tract

------------------During 1993, the Company completed the acquisition of a

group of corporations which together owned 100 percent of an

unevaluated 62,500-acre tract in southeastern Louisiana (the

"Lutcher Moore Tract"). This property is pledged as collateral

for the Lutcher Moore limited recourse debt (see Note 6).

This

property is being held for sale.

Investments

- ----------Lube Oil Investment

-------------------On



July 17, 1995, the Company signed a contract with



CNPC



United Lube Oil Corporation to form a joint venture company to

engage in the manufacturing, distribution and marketing of

lubricating oil in China and southeast Asian markets. As of

December 31, 1997, the Company has invested approximately $3.3

million in the project.

Coalbed Methane Project

----------------------During 1995, the Company signed an agreement with the China

National Administration of Coal Geology, pursuant to which the

parties have commenced cooperation for the exploration and

development of coalbed methane in two areas in China. As of

December 31, 1997, the Company has invested approximately $0.6

million in the project.

(6)



Debt

Long-term debt consists of the following (000's):



Senior secured notes, net of unamortized discount

Collateralized credit facility

Subordinated debt

Office building mortgage loan



$



Lutcher Moore Group Limited Recourse Debt

Less current maturities:

Lutcher Moore Group Limited Recourse Debt

Collateralized credit facility

Subordinated Debt

Other current maturities

$



December 31

-----------------1997

1996

--------61,310

$

--17,279

-15,000

-652

------------61,310

32,931

2,524

5,091

------------63,834

38,022

(2,524)

---------61,310

=======



Substantially all of the Company's assets collateralize

these borrowings.

Accounts payable and accrued costs include

accrued interest at December 31, 1997 and 1996 of $1.8 million

and $1.5 million, respectively.

Senior Secured Notes

-------------------On May 20, 1997, the Company sold in an unregistered

offering

to qualified institutional buyers and

accredited

institutional investors (the "Note Offering") 75,000 Note Units,

each consisting of $1,000 principal amount of 13.5% Senior

Secured Notes due May 1, 2004 (collectively, the "Notes") and one

Common Stock Purchase Warrant (collectively the "Note Warrants")

to purchase 85 shares of the Company's common stock, par value

$0.01 per share (the "Common Stock"), at an exercise price of

$3.09 per share, first exercisable after May 20, 1998.

Total

funds received of $75 million were allocated, $15 million to the

Note Warrants and $60 million to the Notes. The value allocated

to the Note Warrants is being amortized to interest expense over

the term of the Notes. At December 31, 1997, the unamortized

discount on the Notes is approximately $13.7 million.

Interest on the Notes is payable semi-annually on May 1 and

November 1, commencing November 1, 1997. The Notes will mature

on May 1, 2004. The Notes are not redeemable at the option of the

Company prior to May 1, 2002, except that the Company may redeem,

at its option prior to May 1, 2002, up to 35% of the original

aggregate principal amount of the Notes, at a redemption price of

113.5% of the aggregate principal amount of the Notes, plus

accrued and unpaid interest, if any, to the date of redemption,

with the net proceeds of any equity offering completed within 90

days prior to such redemption; provided that at least $48.75

million in aggregate principal amount of the Notes remain

outstanding.

On or after May 1, 2002, the Notes are redeemable

at the option of the Company, in whole or in part, at an initial

redemption price of 106.75% of the aggregate principal amount of



(5,091)

(17,279)

(15,000)

(652)

-----$

-======



the Notes until May 1, 2003, and at par thereafter, plus accrued

and unpaid interest, if any, to the date of redemption. Upon the

occurrence of a change of control, as defined, the Company will

be obligated to make an offer to purchase all outstanding Notes

at a price equal to 101% of the principal amount thereof, plus

accrued and unpaid interest, if any, to the date of purchase.

Total interest expense incurred on the Notes was approximately

$6.2 million for the year ended December 31, 1997.

The Senior Secured Notes restrict, among other things, the

Company's ability to incur additional debt, incur liens, pay

dividends, or make certain other restricted payments.

It also

limits the Company's ability to consummate certain asset sales,

enter into certain transactions with affiliates, enter into

mergers or consolidations, or dispose of substantially all the

Company's assets. The Company's ability to comply with such

covenants may be affected by events beyond its control. The

breach of any of these covenants could result in a default.

A

default could allow holders of the Notes to declare all amounts

outstanding and accrued interest immediately due and payable.

Absent such payment, the holders could proceed against any

collateral granted to them to secure such indebtedness, which

includes all of the stock of the Company's principal operating

subsidiary, XCL-China, which has guaranteed such indebtedness. A

foreclosure on the stock of XCL China could trigger Apache's

right of first refusal under the Participation Agreement to

purchase such stock or its option to purchase the Company's

interest in the Contract. There can be no assurance that the

assets of the Company and XCL-China (a "Subsidiary Guarantor"),

or any other Subsidiary Guarantors would be sufficient to fully

repay the Notes and the Company's other indebtedness.

(7)



Shareholders' Equity



Preferred Stock

--------------As of December 31, 1997 and 1996, the Company had

following shares of Preferred Stock issued and outstanding:

<TABLE>

<CAPTION>

Shares

1997

---<S>

<C>

<C>

Series A

-Series B

44,465

Series E

-Series F

22,318

Amended Series A 1,129,453



1996

---<C>

577,803

44,954

46,654

---



Preference in

Liquidation at

December 31, 1997

----------------<C>

$



-4,446,500

-2,231,800

96,003,505

----------$102,681,805

===========



the



1997 Dividends

(In Thousands)

Declared

Accrued

------------- ------<C>

$



</TABLE>

Amended Series A Preferred Stock

-------------------------------On May 20, 1997, the Company sold, in an unregistered

offering

to qualified institutional buyers and

accredited

institutional investors (the "Equity Offering") 294,118 Equity

Units, each consisting of one share of Amended Series A,

Cumulative Convertible Preferred Stock, par value $1.00 per share

("Amended Series A Preferred Stock"), and one Common Stock

Purchase

Warrant (collectively, the "Equity Warrants")

to

purchase approximately 22 shares of the Company's Common Stock,

at

an

initial exercise price of $3.09 per share, first

exercisable on May 20, 1998.

Each share of Amended Series A Preferred Stock has a

liquidation value of $85.00, plus accrued and unpaid dividends.

Dividends on the Amended Series A Preferred Stock are cumulative

from May 20, 1997 and are payable semi-annually, commencing

November 1, 1997, at an annual rate of $8.075 per share.

Dividends are payable in additional shares of Amended Series A

Preferred Stock (valued at $85.00 per share) through November 1,



9,678

262

750

127

1,098

-----$11,915

======



$



-186

-133

1,494

----$1,813

=====



Total

----<C>

$ 9,678

448

750

260

2,592

-----$13,728

======



2000, and thereafter in cash, or at the election of the Company,

in additional shares of Amended Series A Preferred Stock.

The

Amended Series A Preferred Stock is convertible into Common

Stock, at any time after the first anniversary of the issue date,

at the option of the holders thereof, unless previously redeemed,

at an initial conversion price of $7.50 per share of Common Stock

(equivalent to a rate of 11 shares of Common Stock for each share

of Amended Series A Preferred Stock), subject to adjustment under

certain

conditions.

The Company is entitled

to

require

conversion of all the outstanding shares of Amended Series A

Preferred Stock, at any time after November 20, 1997 if the

Common Stock shall have traded for 20 trading days during any 30

consecutive trading day period at a market value equal to or

greater than 150% of the prevailing conversion rate.

The Amended Series A Preferred Stock is redeemable at any

time on or after May 1, 2002, in whole or in part, at the option

of the Company initially at a redemption price of $90.00 per

share and thereafter at redemption prices which decrease ratably

annually to $85.00 per share on and after May 1, 2006, plus

accrued and unpaid dividends to the redemption date. The Amended

Series A Preferred Stock is mandatorily redeemable, in whole, on

May 1, 2007, at a redemption price of $85.00 per share, plus

accrued and unpaid dividends to the redemption date, payable in

cash, or at the election of the Company, in Common Stock.

Upon the occurrence of a change in control or certain other

fundamental changes, the conversion price of the Amended Series A

Preferred Stock will be reduced, for a limited period, in certain

circumstances in order to provide holders with loss protection at

a time when the market value of the Common Stock is less than the

then prevailing conversion price.

The Amended Series A Preferred Stock will entitle the holder

thereof to cast the same number of votes as the shares of Common

Stock then issuable upon conversion thereof on any matter subject

to the vote of the holders of the Common Stock. Further, the

holders of the Amended Series A Preferred Stock will be entitled

to vote as a separate class (i) to elect two directors if the

Company is in arrears in payment of three semi-annual dividends,

and (ii) the approval of two-thirds of the then outstanding

Amended Series A Preferred Stock will be required for the

issuance of any class or series of stock ranking prior to the

Amended Series A Preferred Stock, as to dividends, liquidation

rights and for certain amendments to the Company's Certificate of

Incorporation that adversely affect the rights of holders of the

Amended Series A Preferred Stock.

Effective November 10, 1997, by consent of in excess of 88

percent of the outstanding shares of Series A Preferred Stock

such series of preferred stock was amended, reclassified and

converted to Amended Series A Preferred Stock. As a consequence

of such consent all dividend arrearages, and accrued and unpaid

dividends were paid in additional shares of Amended Series A

Preferred

Stock.

This amendment resulted in approximately

726,907 shares of Amended Series A Preferred Stock being issued

in respect of such reclassification and payment of dividends.

Effective November 10, 1997, by consent of in excess of 67

percent of the outstanding Series E Preferred Stock such series

of preferred stock was amended, reclassified and converted to

Amended Series A Preferred Stock. As a consequence of such

consent all accrued and unpaid dividends were paid in additional

shares of Amended Series A Preferred Stock.

This amendment

resulted in approximately 63,706 shares of Amended Series A

Preferred Stock being issued in respect of such reclassification

and payment of dividends.

Series B Preferred Stock

-----------------------The Series B, Cumulative Convertible Preferred Stock, par

value $1.00 per share (the "Series B Preferred Stock") bears a

cumulative fixed dividend at an annual rate of $10 per share,

payable semiannually, and is entitled to 50 votes per share on

all matters on which Common Stockholders are entitled to vote and

separately as a class on certain matters; ranks senior to the

Common Stock and pari passu with the Amended Series A and Series

F Preferred Stocks of the Company with respect to the payment of

dividends and distributions on liquidation; and has a liquidation



preference of $100 per share plus accumulated dividends.

On May 16, 1995, the Company received notice from the Series

B Preferred holder exercising its redemption rights. The Company

elected to redeem in shares of Common Stock and the holder

exercised its option to have the Company sell its shares of

Common Stock.

The aggregate redemption price was $5 million,

plus accrued dividends from January 1, 1995 to the date of

redemption. Approximately 5,535 shares had been redeemed at

December 31, 1997, from the sale of approximately 353,333 shares

of Common Stock. In July 1997, the holder of the Series B

Preferred Stock sued the Company and each of its directors with

respect to the alleged failure of the Company to redeem the

Series B Preferred Stock in accordance with the terms of the

Purchase Agreement and Certificate of Designation. In settlement

of that lawsuit in March 1998, the holder of the Series B

Preferred Stock revoked and withdrew its redemption notice and

sold its shares of Series B Preferred Stock and accompanying

warrants.

The purchasers exchanged the stock and warrants for

44,465 shares of Amended Series B Preferred Stock and warrants to

purchase 250,000 shares of Common Stock at an exercise price of

$5.50 per share, subject to adjustment, expiring March 2, 2002,

and received 2,620 shares of Amended Series B Preferred Stock in

payment of all accrued and unpaid dividends on the Series B

Preferred Stock.

Each share of Amended Series B Preferred Stock has a

liquidation value of $100, plus accrued and unpaid dividends.

Dividends on the Amended Series B Preferred Stock are cumulative

from March 3, 1998 and are payable semi-annually on June 30 and

December 31 of each year, at an annual rate of $9.50 per share if

paid in cash. In lieu of payment in cash, the Company may, at

its option, elect to pay any dividend in kind in shares of either

Common Stock or Amended Series B Preferred Stock at the option

of the holder. If such dividend is paid in shares of Amended

Series B Preferred Stock, the dividend will be 0.0475 shares of

dividend stock per share of Amended Series B Preferred Stock

held.

If the dividend is paid in shares of Common Stock, the

dividend shall equal the number of shares of Common Stock equal

to the quotient obtained by dividing $4.75 by the lowest average

closing price per share of Common Stock as calculated for the

last 5, 10 and 30 trading days preceding the dividend payment

date.

Fractional shares will be paid in cash or aggregated and

sold on behalf of the holders. The Amended Series B Preferred

Stock is convertible into Common Stock, at any time after the

earlier of the effective date of the registration of such Common

Stock or August 31, 1998.

Series F Preferred Stock

-----------------------In January 1998, the holders of the Series F Preferred Stock

approved an amendment to the "forced conversion" terms of the

Series F Preferred Stock. Effective January 16, 1998, the

Company forced conversion of the Series F Preferred Stock and an

aggregate of 633,893 shares of Common Stock were issued upon

conversion and in payment of accrued and unpaid dividends.

In

consideration for such amendment the holders of the Series F

Preferred Stock were issued warrants to acquire an aggregate of

153,332 shares of Common Stock at an exercise price of $0.15 per

share.

Dividends

--------Prior to November 1997, dividends with respect to the Series

A Preferred Stock were in arrearage. Effective November 10, 1997,

the Series A Preferred Stock was amended, reclassified and

converted to Amended Series A Preferred Stock. As a consequence

of such consent all dividend arrearages, and accrued and unpaid

dividends were paid in additional shares of Amended Series A

Preferred Stock.

Dividends during 1997 and 1996 on the Series B Preferred

Stock were paid from proceeds of sales of redemption stock, which

were applied first to accrued dividend then the redemption of

shares of Series B Preferred Stock. On March 3, 1998, all

accrued and unpaid dividends on the Series B Preferred Stock were

paid in shares of Amended Series B Preferred Stock.



During 1996, the Company issued 2,218 shares of Series E

Preferred Stock in payment of the June 1996 dividends payable on

the Series E Preferred Stock. During 1997, the Company issued

5,261 shares of Series E Preferred Stock in payment of the

December 31, 1996 and June 30, 1997 dividends on the Series E

Preferred Stock.

Effective November 10, 1997, the Series E

Preferred Stock was amended, reclassified and converted to

Amended Series A Preferred Stock. As a consequence of such

consent all dividend arrearages, and accrued and unpaid dividends

were paid in additional shares of Amended Series A Preferred

Stock.

During 1997, the Company issued 1,261 shares of Series F

Preferred Stock in payment of the June 30, 1997 dividends payable

on the Series F Preferred Stock.

On November 3, 1997, 12,906 shares of Amended Series A

Preferred Stock were issued in respect of the dividend payable

November 1, 1997, in the amount of $1.1 million. Upon conversion

of the Series A and Series E Preferred Stocks into Amended Series

A Preferred Stock, approximately $9.23 in accrued and unpaid

dividends on Series A Preferred Stock and approximately $0.2 in

accrued and unpaid dividends on the Series E Preferred Stock were

paid through the issuance of 790,613 additional shares of Amended

Series A Preferred Stock.

Common Stock

-----------The Company issued 1,322,034, 1,888,461 and 1,264,854

shares of Common Stock during 1997, 1996 and 1995, respectively.

The Company had 20,307,454, 18,980,805 and 16,909,532 shares of

Common Stock outstanding at December 31, 1997, 1996 and 1995,

respectively.

Common Stock Warrants

--------------------As of December 31, 1997, outstanding warrants to purchase

the Company's Common Stock are as follows:

Common Stock

Issuable Upon

Exercise

---------Total Warrants Expiring in 1998

6,667

Total Warrants Expiring after 1998 17,820,088

---------Total Warrants

17,826,755

==========



Warrant Exercise

Price

--------------$11.25

$0.15 to $22.50



During November 1996, the Company offered a holder of

136,000 warrants exercisable at $5.25 per share a reduction in

the exercise price of such warrants to $1.875 per share in

exchange for the immediate exercise of such warrants and the

issuance of a like number of new warrants. In January 1997,

136,000 shares of Common Stock were issued upon the exercise of

the warrants and 136,000 new warrants were issued, exercisable at

$1.875 per share. The Company received $255,000 upon exercise of

these warrants.

During February 1997, the Company offered to reduce the

exercise price on a total of 368,000 warrants issued

in

connection with Regulation S offerings in December 1995 and March

1996, in exchange for their immediate exercise. The offer was

made to reduce the warrant price from $3.75 to $3.30 per share.

One holder of 176,000 warrants accepted the offer and exercised

all 176,000 warrants for which the Company received net proceeds

of $555,400.

The Placement Agent agreed to accept $0.15 per

share rather than 8% of the exercise price as required under the

Placement Agent Agreement.

During April 1997, the Company issued an aggregate of

200,000 shares of Common Stock upon the exercise of warrants at

$1.875 per share and received an aggregate of $375,000 upon

exercise of such warrants.

During August and October 1997, the Company issued an

aggregate of 100,000 shares of Common Stock upon the exercise of

warrants at $2.8125 per share and received proceeds of $281,250



Proceeds if

Exercised

--------$

75,000

69,000,193

---------$69,075,193

==========



upon exercise of such warrants.

During October 1997, the Company issued 24,000

Common Stock upon the exercise of warrants at $1.875

and received $45,000 in proceeds from such exercise.



shares of

per share



Loss Per Share

-------------The following table sets forth the computation of basic and

diluted loss per share.

For the Years Ended December 31,

_________________________________

1997

------



1996

-----



1995

-----



Number of shares on which basic loss per

share is calculated:



20,541



17,705



16,047



Number of shares on which diluted loss per

share is calculated:



20,541



17,705



16,047



Net loss applicable to common shareholders



$(27,722)



$(17,430)



$(92,658)



Basic loss per share

Diluted loss per share



$

$



$

$



$

$



(1.36)

(1.36)



(0.98)

(0.98)



(5.77)

(5.77)



The effect of 33,902,036, 5,103,082 and 4,398,380 shares of

potential common stock were anti-dilutive in 1997, 1996 and 1995,

respectively, due to the losses in all three years.

(8)



Income Taxes



The Company has significant loss carryforwards which have

been recorded as deferred tax assets. Due to realization of such

amounts being deemed uncertain with respect to the provisions of

SFAS No. 109, a valuation allowance has been recorded for the

entire amount.

The significant components of the net deferred tax expense

(benefit) for 1997 and 1996, were as follows (000's):

1997

---Current year domestic net operating loss

$ (4,758)

Current year Chinese deferred costs

(356)

Prior year under accrual of Chinese deferred costs

(537)

Tax/book depreciation, depletion and amortization

difference

3,149

Oil and gas property expenditures treated as

expense for income tax purposes

-Other accruals

13

Reserve for investments

-Increase (decrease) in valuation allowance

2,489

------$

-=======



$



1996

---(4,387)

(829)

-3,046



41

(1,348)

(855)

4,332

------$

-=======



The components of the Company's deferred tax assets and

liabilities as of December 31, 1997 and 1996, were as follows (in

000's):

1997

---Deferred tax assets:

Domestic net operating loss carryforwards

Chinese deferred costs

Other liabilities and reserves

Property and equipment, net

Valuation allowance

Total deferred tax assets



$



63,730

4,439

2,802

12,593

(83,564)

------$

-========



1996

---$



58,972

3,546

2,815

15,742

(81,075)

--------$

-========



At December 31, 1997, the Company had net operating loss

carryforwards for tax purposes in the approximate amount of $174

million which are scheduled to expire by the year

2012.

Additionally, the Company has available acquired net operating

loss carryforwards, in the approximate amount of $9 million,



which are scheduled to expire by the year 2000, and which are

available to offset taxable income of an acquired subsidiary. Use

of the net operating loss carryforwards is subject to limitations

under Section 382 of the Internal Revenue Code.

At December 31, 1997, the Company had alternative minimum

tax net operating loss carryforwards in the approximate amount of

$114 million which are scheduled to expire by the year 2012.

Additionally, the Company has acquired alternative minimum tax

net operating loss carryforwards in the approximate amount of $12

million which are scheduled to expire by the year 2000, and which

are available for use by an acquired subsidiary.

The Company

also has $1.0 million of general business credit carryforwards

which are available until the year 2000 to offset future tax

liabilities of an acquired subsidiary. The Company also has

deferred

costs associated with its Chinese operations

of

approximately $13 million. The costs will be amortized and

deducted for Chinese tax purposes when the Company generates

revenue from its Chinese operations.

(9)



Stock Option Plans



The Company's stock option plans, administered by the

compensation committee, provide for the issuance of incentive and

nonqualified stock options. Under these plans the Company is

authorized to grant options to selected employees, directors and

consultants to purchase shares of the Company's Common Stock at

an exercise price (for the Company's incentive stock options) of

not less than the market value at the time such options are

granted and are accounted for in accordance with Accounting

Principles Board Opinion No. 25. In June 1992, the shareholders

of the Company approved the adoption of the Company's Long-Term

Stock Incentive Plan ("LTSIP") under which the Company is

authorized to issue an aggregate of 16.5 million shares of Common

Stock pursuant to future awards granted thereunder.

In December 1997, the shareholders of the Company approved

the amendment and restatement of the Company's LTSIP, effective

as of June 1, 1997, (i) increasing the number of shares issuable

under the LTSIP by 4 million (post-split) shares of Common Stock,

(ii) authorizing 200,000 shares of preferred stock for issuance

under the LTSIP, and (iii) ratifying certain grants of nonqualified stock options and restricted stock awards to certain

officers and directors of the Company. The LTSIP, as amended and

restated, also allows for the grant of appreciation option

awards. A grant of an appreciation option award to Mr. Miller was

ratified at that same meeting.

All of the restricted stock awards entitle the participants

to full dividend and voting rights and are restricted as to

disposition and subject to forfeiture under certain conditions.

The

shares become unrestricted upon attainment of certain

increases in the market price of the Company's Common Stock

within four years from date of grant, as provided for in the

plan.

Upon issuance of restricted shares, unearned compensation

is charged to shareholders' equity for the cost of restricted

stock and recognized as expense ratably over the earned period,

as applicable. The amount recognized for 1997 was not material

because the measurement date was December 17, 1997.

The appreciation option awarded to the Chairman provides him

with the right upon his payment of the exercise price (20% of

amount entitled to receive) to additional compensation payable in

cash or in shares of Common Stock based upon 5% of the difference

between the market capitalization (as defined) of the Company as

of June 1, 1997, and the date the option is exercised (no earlier

than June 1, 2002). Because the option contemplates compensation

determined

with

reference to

increases

in

the

market

capitalization without restriction, there is no effective limit

on

the

amount of compensation which may become

payable

thereunder. Deferred compensation of $3.2 million was recorded in

connection with the appreciation option and is being amortized

over the service period. The appreciation option expires on June

1,

2007.

Compensation expense recognized

in

1997

was

approximately $373,000.

Non-qualified options granted on June 1, 1997 for an option

price of $3.75 per share resulted in compensation expense for

1997 of $481,000.

The measurement date was established on

December 17, 1997, the date of shareholder approval.



A summary of the stock option plans activity for the years

ended December 31, 1997, 1996 and 1995 is as follows:

<TABLE>

<CAPTION>

Average



Weighted

Shares

-------



<S>

<C>

Outstanding at December 31, 1994

Granted

Forfeited



Option Price Per Share

Exercise Price

---------------------- ---------------<C>

<C>



831,012

45,333

(104,167)

--------772,178

16,133

(101,467)

--------686,844

2,000,000

(7,238)

--------2,679,606

=========



Outstanding at December 31, 1995

Granted

Forfeited

Outstanding at December 31, 1996

Granted

Forfeited

Outstanding at December 31, 1997

Options exercisable at December 31, 1997

Options exercisable at December 31, 1998

Options exercisable at December 31, 1999



$12.50 - $22.50

$18.75

$12.50 - $22.50

--------------$12.50 - $22.50

$18.75

$18.75 - $22.50

--------------$12.50 - $22.50

$3.75

$18.75 - $22.50

--------------$3.75 - $22.50

==============



$18.83

$18.75

$18.23

$18.91

$18.75

$20.14

$18.72

$3.75

$19.12

$7.55



676,451

=======

676,089

=======

683,888

=======



</TABLE>

The following table summarizes information about stock

options outstanding at December 31, 1997:

<TABLE>

<CAPTION>

Options Outstanding

Options Exercisable

______________________________________________________________________

__________________________________

Weighted average

Range of

Outstanding at

remaining life

Weighted average Exercisable at

Weighted Average

Exercise Prices

December 31, 1997

years

exercise price

December 31, 1997

exercise price

- ----------------------------------------------------------- ----------------- -------------<S>

<C>

<C>

<C>

<C>

<C>

$3.75

2,000,000

9.5

$3.75

--$18.75-$22.50

679,606

3.4

$18.72

676,451

$18.72

-------------------2,679,606

676,451

$18.72

=========

========

=====

</TABLE>

The weighted average fair value of options granted

was $5.50.



during



1997



If compensation expense for the stock options had been

determined and recorded based on the fair value on the grant date

using the Black-Scholes option pricing model to estimate the

theoretical future value of those options, the Company's net loss

per share amounts would have been reduced to the pro forma

amounts indicated below (000's, except per share data):



Net loss as reported

Compensation expense

Pro forma loss

Pro forma loss per share:

Basic

Diluted

Weighted average shares



1997

---$ (27,722)

1,012

------$ (28,734)

=======



1996

---$ (17,430)

126

------$ (17,556)

=======



1995

---$ (92,658)

537

-------$ (93,195)

========



$



$



$



(1.40)

========

$

(1.40)

========

20,451

======



(0.99)

========

$

(0.99)

========

17,705

======



(5.81)

========

$

(5.81)

========

16,047

======



Due to uncertainties in these estimates, such as market prices,

exercise possibilities and the possibility of future awards and

cancellations, these pro forma disclosures are not likely to be

representative of the effects on reported income for future

years.

For pro forma purposes, the fair value of each option grant is

estimated on the date of grant with the following weighted

average assumptions:



Expected life (years)

Interest rate

Volatility

Dividend yield

(10)



1997

---10

5.87%

135.00%

--



1996

---10

6.68%

100.00%

--



1995

---10

6.78%

100.00%

--



Employee Benefit and Incentive Compensation Plans



In 1989, the Company adopted an employee benefit plan under

Section 401(k) of the Internal Revenue Code, for the benefit of

employees meeting certain eligibility requirements. The Company

has received a favorable determination letter from the Internal

Revenue Service regarding the tax favored status of the 401(k)

plan. Employees can contribute up to 10 percent of their

compensation.

The Company, at its discretion and subject to

certain limitations, may contribute up to 75 percent of the

amount contributed by each participant. There were no Company

contributions in 1997, 1996 or 1995.

(11)



Commitments and Contingencies

Other commitments and contingencies include:

o



The Company acquired the rights to the exploration,

development and production of the Zhao Dong Block by executing a

Production Sharing Agreement with CNODC in February 1993. Under

the terms of the Production Sharing Agreement, the Company and

its partner are responsible for all exploration costs. If a

commercial discovery is made, and if CNODC exercises its option

to participate in the development of the field, all development

and operating costs and related oil and gas production will be

shared up to 51 percent by CNODC and the remainder by the

Company and its partner.

The Production Sharing Agreement includes the following

additional principal terms:

The Production Sharing Agreement is basically divided

into

three periods: the Exploration period,

the

Development period and the Production period. Work to

be performed and expenditures to be incurred during the

Exploration period, which consists of three phases

totaling seven years from May 1, 1993, are

the

exclusive responsibility of the Contractor (the Company

and

its

partner as a group). The

Contractor's

obligations in the three exploration phases are as

follows:

1.



During the first three years, the Contractor is

required to drill three wildcat wells, perform

seismic data acquisition and processing and expend

a minimum of $6 million. These obligations have

been met.



2.



During the next two years, the Contractor is

required to drill two wildcat wells, perform

seismic data acquisition and processing and expend

a minimum of $4 million (The Contractor has

elected to proceed with the second phase of the

Contract.

The

seismic

data

acquisition

requirement

for the second phase

has

been

satisfied.)



3.



During the last two years, the Contractor is

required to drill two wildcat wells and expend a

minimum of $4 million.



4.



The



Production Period for any oil



and/or



gas



field covered by the Contract (the "Contract

Area") will be 15 consecutive years (each of 12

months), commencing for each such field on the

date of commencement of commercial production (as

determined under the terms of the Contract).

However, prior to the Production Period, and

during the Development Period, oil and/or gas may

be produced and sold during a long-term testing

period.

The Production Sharing Agreement may be terminated by

Contractor at the end of each phase of the Exploration

period, without further obligation.



(12)



the



o



The Company is in dispute over a 1992 tax assessment by the

Louisiana Department of Revenue and Taxation for the years 1987

through 1991 in the approximate amount of $2.5 million. The

Company has also received a proposed assessment from the

Louisiana Department of Revenue and Taxation for income tax years

1991 and 1992, and franchise tax years 1992 through 1996 in the

approximate amount of $3.0 million. The Company has filed written

protests as to these proposed assessments, and will vigorously

contest the asserted deficiencies through the administrative

appeals process and, if necessary, litigation. The Company

believes that adequate provision has been made in the financial

statements for any liability.



o



On July 26, 1996, an individual filed three lawsuits against

a wholly owned subsidiary with respect to oil and gas properties

held for sale. One suit alleges actual damage of $580,000 plus

additional amounts that could result from an accounting of a

pooled interest. Another seeks legal and related expenses of

$56,473 from an allegation the plaintiff was not adequately

represented before the Texas Railroad Commission. The third suit

seeks a declaratory judgement that a pooling of a 1938 lease and

another in 1985 should be declared terminated and further

plaintiffs seek damages in excess of $1 million to effect

environmental restoration. The Company believes these claims are

without merit and intends to vigorously defend itself.



o



The Company is subject to other legal proceedings which

arise in the ordinary course of its business. In the opinion of

Management, the amount of ultimate liability with respect to

these actions will not materially affect the financial position

of the Company or results of operations of the Company.

Supplemental Financial Information

Quarterly Results of Operations (Unaudited)

Quarter

__________________________________

First

Second

Third

Fourth

Year

---------------------(Thousands of Dollars, Except Per Share Amounts)



1997

- ---Oil and gas revenues

Loss from operations

Net loss

Net loss per share

Basic

Diluted

1996

- ---Oil and gas revenues

Loss from operations

Net loss

Net loss per share

Basic

Diluted



$



85

(816)

(1,211)



$



(0.15)

(0.15)



$



576

(1,057)

(1,641)

(0.17)

(0.17)



53

(774)

(1,215)



$



(0.16)

(0.16)



$



361

(1,970)

(3,062)

(0.20)

(0.20)



52

(976)

(417)



$



(0.11)

(0.11)



$



94

(1,606)

(1,733)

(0.17)

(0.17)



46

(5,492)

(11,151)

(0.94)

(0.94)



$



105

(5,160)

(5,638)

(0.38)

(0.38)



Supplemental Oil and Gas Information

The following supplementary information is

accordance with the requirements of Statement

Accounting Standards No. 69 - "Disclosures About

Producing Activities."



$



presented in

of Financial

Oil and Gas



236

(8,058)

(13,994)

(1.36)

(1.36)



$



1,136

(9,793)

(12,074)

(0.98)

(0.98)



Results of Operations from U.S. Oil and Gas Producing

Activities

The results of operations from oil and gas producing

activities for the three years ended December 31, 1997 are as

follows (000's):

Year Ended December 31

---------------------1997

1996

1995

---------Revenues from oil and gas producing activities:

Sales to unaffiliated parties

Production (lifting) costs:

Operating costs (including marketing)

State production taxes and other

Production costs

Depletion and amortization

Provision for impairment of oil and gas properties

Total expenses

Pretax loss from producing activities

Income tax expense



$



236

----210

13

----223

77

-----300

----(64)

------



Results of oil and gas producing activities

(excluding corporate overhead and interest costs) $ (64)

====



$



1,136

-------



$ 2,480

------



342

985

28

51

----------370

1,036

437

1,989

3,850

75,300

------- ------4,657

78,325

------- ------(3,521) (75,845)

-------------$(3,521) $(75,845)

======

=======



The depreciation, depletion and amortization (DD&A) rate

averaged $0.81, $0.96 and $1.23 per equivalent Mcf in 1997, 1996

and 1995, respectively.

Capitalized Costs

----------------Capitalized costs relating to the Company's proved

unevaluated oil and gas properties, are as follows (000's):



and



December 31

-------------------1997

1996

------Foreign proved and unevaluated

properties under development



$



54,304

=======



$



34,305

=======



The capitalized costs for the foreign properties represent

cumulative expenditures related to the Zhao Dong Block Production

Sharing Agreement and will not be depreciated, depleted or

amortized until production is achieved.

The Company's investment in oil and gas properties as of

December 31, 1997, includes proved and unevaluated properties

which have been excluded from amortization. Such costs will be

evaluated in future periods based on management's assessment of

exploration activities, expiration dates of licenses, permits and

concessions, changes in economic conditions and other factors. As

these properties become evaluated or developed, their cost and

related estimated future revenue will be included in

the

calculation of the DD&A rate. Such costs were incurred

follows:

Costs for foreign proved and unevaluated properties

development were incurred as follows (000's):



Property acquisition costs

Capitalized interest costs

Total foreign proved and

unevaluated properties



Total

----$ 40,616

13,688

------



as



under



Year Ended December 31

----------------------------------1994

1997

1996

1995

and Prior

----------------$ 14,208 $ 4,223 $ 7,023 $ 15,162

5,791

2,767

2,596

2,534

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



under development



$ 54,304

======



$ 19,999

======



$



6,990

=====



$ 9,619

=====



$ 17,696

======



Capitalized Costs Incurred

-------------------------Total capitalized costs incurred by the Company with respect

to its oil and gas producing activities including those held for

sale were as follows (000's):

Year Ended December 31

-----------------------1997

1996

1995

---------Costs incurred:

Unproved properties acquired

$

-Capitalized internal costs

2,466

Capitalized interest and amortized debt

costs

5,791

Exploration

6,833

Development

4,909

-----Total costs incurred

$19,999

======



$



-822



$



2,767

3,401

4

----$6,994

=====



7,209

135

3,075

-1,590

-----$12,009

======



Proved Oil and Gas Reserves (Unaudited)

The following table sets forth estimates of the Company's

net interests in proved and proved developed reserves of oil and

gas and changes in estimates of proved reserves. The Company's

net interests in 1997 and 1996 are located in China and in 1995

were located in the United States.

Crude Oil (MBbls)

-----------------------1997

1996

1995

---------Proved reserves Beginning of year

Discoveries

Revisions of previous estimates

Production

Purchases (sales) of minerals in place

Transfer of property to assets held for sale

End of year

Proved developed reserves Beginning of year

End of year



10,579

1,183

---------11,762

======



-10,579

---------10,579

======



-------======



------=====



294

-24

(19)

(241)

(58)

-----=====

126

-----=====



Natural Gas (MMcf)

-----------------------1997

1996

1995

-----------Proved reserves Beginning of year

Discoveries

Revisions of previous estimates

Production

Purchases (sales) of minerals in place

Transfer of property to assets held for sale

End of year

Proved developed reserves Beginning of year

End of year



The Company's estimated quantities of oil and

December 31, 1997 were prepared by H.J. Gruy and

Inc., independent engineers.

and



-----------======



------------======



74,208

(9,003)

-(1,474)

(6,274)

(57,457)

------======



-------======



-------======



34,792

------======



gas as of

Associates,



The revisions in the Company's estimated quantities of gas

oil are attributable to revised estimates by Company



engineers

in 1995.

For fiscal 1995 significant

downward

revisions were attributed to the Company's interest in the Cox

Field in Texas due largely to performance of producing wells.

Supplementary Information (Unaudited)

The supplementary information set forth below presents

estimates of discounted future net cash flows from proved oil and

gas reserves and changes in such estimates. This information has

been prepared in accordance with requirements prescribed by the

Financial Accounting Standards Board (FASB).

Inherent in the

underlying calculations of such data are many variables and

assumptions, the most significant of which are briefly described

below:

Future cash flows from proved oil and gas reserves were

computed on the basis of (a) contractual prices for oil and gas including escalations for gas - in effect at year-end, or (b) in

the case of properties being commercially developed but not

covered by contracts, the estimated market price for gas and the

posted price for oil in effect at year-end.

Probable and

possible reserves - a portion of which, experience has indicated,

generally become proved once further development work has been

conducted - are not considered. Additionally, estimated future

cash flows are dependent upon the assumed quantities of oil and

gas delivered and purchased from the Company. Such deliverability

estimates are highly complex and are not only based on the

physical

characteristics of a property but

also

include

assumptions relative to purchaser demand. Future prices actually

received may differ from the estimates in the standardized

measure.

Future net cash flows have been reduced by applicable

estimated

operating

costs, production

taxes

and

future

development costs, all of which are based on current costs.

Future net cash flows are further reduced by future income

taxes which are calculated by applying the statutory federal

income tax rate to pretax future net cash flows after utilization

of available tax carryforwards.

To reflect the estimated timing of future net cash flows,

such amounts have been discounted by the Securities and Exchange

Commission prescribed annual rate of 10 percent.

In view of the uncertainties inherent in developing this

supplementary information, it is emphasized that the information

represents approximate amounts which may be imprecise and extreme

caution should accompany its use and interpretation.

Standardized Measure of Discounted Future Net Cash Flows Related

to Proved Oil and Gas Reserves

The standardized measure of discounted future net cash flows

from proved oil and gas reserves, determined in accordance with

rules prescribed by FASB No. 69 is summarized below, and does not

purport to present the fair market value of the Company's oil and

gas assets, but does present the present value of estimated

future cash flows that would result under the assumptions used.:

The Company previously excluded from this table, the effect of

income taxes because it believed it had a tax holiday in China.

Subsequent to December 31, 1997, the Company determined that it

would be subject to future income taxes at the maximum rate of

33% in China. Accordingly, the table below has been revised to

include estimates of such income taxes.

<TABLE>

<CAPTION>



<S>

Future cash inflows

Future costs:

Production, including taxes



$



Year Ended December 31

---------------------------1997 (a) 1996 (a) 1995 (a)

-------- -------- -------(Thousands of Dollars)

<C>

<C>

205,765 $ 222,797 $ 103,048

(45,623)



(39,033)



(20,937)



<C>



Development

Future net inflows before income taxes

Future income taxes (c)

Future net cash flows

10% discount factor

Transfer of properties to assets held for sale

Standardized measure of discounted net cash flows



(41,093)

------119,049

(22,916)

------96,133

(42,285)

--------------$

53,848

========



(40,904) (35,276)

------------142,860

46,835

(35,658)

-- (b)

-----------107,202

46,835

(44,596) (20,795)

------------(26,040)

----------$ 62,606 $

-=======

=======



</TABLE>

_____________

(a)

1997 and 1996 represent China properties only.

1995

represents U.S. properties being held for sale only.

(b)

No taxes have been reflected because of utilization of

net operating loss carryforwards.

(c)

Future income taxes are computed by applying the maximum

tax rate in China applicable to foreign-funded enterprises

of 33%.

Changes in Standardized Measure of Discounted Future Net Cash

Flow From Proven Reserve Quantities



Standardized measure-beginning of year

Increases (decreases):

Sales and transfers, net of production

costs

Net change in sales and transfer prices,

net of production costs

Extensions, discoveries and improved

recovery, net of future costs

Changes in estimated future development

costs

Development costs incurred during the

period that reduced future development

costs

Revisions of quantity estimates

Accretion of discount

Purchase (sales) of reserves in place

Changes in production rates (timing) and

other

Reclassification of reserves to assets

held for sale

Net change in income taxes

Standardized measure-end of year



Year Ended December 31

------------------------------1997 (a)

1996 (a)

1995 (a)

---------------------(Thousands of Dollars)

$ 62,606

$

-$ 60,248

-(16,396)

--



--



(1,347)



--



(15,095)



79,062



(219)



--



--



(2,886)



-----



-----



1,117

(8,003)

6,024

(4,654)



--



--



(9,364)



-7,857

------$ 53,848

=======



-(16,456)

-----$ 62,606

=======



__________

(a)

1997 and 1996 represent China properties only.

represents U.S. properties being held for sale only.



(26,040)

-------$

-=======



1995



XCL Ltd. and Subsidiaries

Schedule II-Valuation and Qualifying Accounts

For the Years Ended December 31, 1997, 1996 and 1995

(thousands of dollars)

<TABLE>

<CAPTION>

Additions

----------------------Balance at

Charged

Charges

Balance at

Beginning of

to costs

to other

End of

Description

Year

and expenses

accounts

Deduction

Year

- ------------------------------------------------ ---------1997:

- ---<S>

<C>

<C>

<C>

<C>

Allowance for doubtful



<C>



trade accounts

receivable



$



101

=======



$



-=======



Deferred tax valuation

allowance

$ 81,075

$ 2,489

=======

=======

1996:

- ---Allowance for doubtful

trade accounts

receivable

$

103

$

-=======

=======

Deferred tax valuation

allowance

$ 76,743

$ 4,332

=======

=======

1995:

- ---Allowance for doubtful

trade accounts

receivable

$

113

$

=======

======

Deferred tax valuation

allowance

$ 44,464

$ 32,279

=======

=======

</TABLE>

<PAGE>

XCL Ltd. and Subsidiaries

CONSOLIDATED BALANCE SHEET

as of June 30, 1998



$



-======



$



36

=======



$



$



-======



$



-=======



$ 83,564

======



$



2

=======



$



$



-=======

-=======



$



-=======



$ 81,075

=======



$



-======



$



10

=======



$



$



-=======



$



-======



A S S E T S

----------Current assets:

Cash and cash equivalents

Cash held in escrow (restricted)

Accounts receivable, net

Refundable deposits

Other



$



Total current assets

Property and equipment:

Oil and gas properties (full cost method):

Proved undeveloped properties, not being amortized

Unevaluated properties

Other

Accumulated depreciation, depletion and amortization



Investments

Investment in land

Oil and gas properties held for sale

Debt issue costs, less amortization

Other assets

$



11,369

5,239

188

-814

------17,610

------26,954

40,875

------67,829

1,405

------69,234

(941)

------68,293

------4,724

12,200

9,078

4,024

1,275

------117,204

=======



L I A B I L I T I E S A N D S H A R E H O L D E R S' E Q U I T Y

- ------------------------------------------------------------------Current liabilities:

Accounts payable and accrued costs

Accrued interest

Due to joint venture partner

Dividends payable

Current maturities of long- term debt

Total current liabilities

Long-term debt, net of current maturities

Other non-current liabilities



101

=======



$



(In Thousands of Dollars)

(Unaudited)



Total assets



65

======



$



925

1,949

5,079

1,611

2,074

------11,638

------62,384

5,383



103

=======



$ 76,743

=======



Commitments and contingencies (Note 7)

Shareholders' equity:

Preferred stock-$1.00 par value; authorized 2.4

million shares; issued shares of 1,230,019 at

June 30, 1998 - liquidation preference of $105

million at June 30, 1998

Common stock-$.01 par value; authorized 500 million

shares; issued shares of 22,991,191 at

June 30, 1998

Common stock held in treasury - $.01 par value;

69,470 shares

Additional paid-in capital

Accumulated deficit

Unearned compensation



1,230

230

(1)

304,195

(256,153)

(11,702)

------37,799

-------



Total shareholders' equity

Total liabilities and shareholders'

equity



$



117,204

========



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

<PAGE>

XCL Ltd. and Subsidiaries

CONSOLIDATED STATEMENTS OF OPERATIONS

For the Six Months Ended June 30, 1998 and 1997

(In Thousands, Except Per Share Amounts)

(Unaudited)

1998

----



1997

----



Costs and operating expenses:

General and administrative

Other, net



$



2,915

72

-----2,987

-----(2,987)



Operating loss

Other income (expense):

Interest income

Interest expense, net of amounts capitalized

Other, net



Net loss

Preferred stock dividends

Net loss attributable to common stock



$



Net loss per common share (basic)



$



Net loss per common share (diluted)



$



$



1,562

28

------1,590

------(1,590)



718

(1,852)

1

-----(1,133)



498

(1,646)

312

-----(836)



(4,120)

(4,879)

-----(8,999)

======



(2,426)

(3,316)

-----(5,742)

======



(.40)

======

(.40)

======



Weighted average number of common shares outstanding:

Basic

22,622

Diluted

22,622



$

$

$



(.29)

======

(.29)

======

19,511

19,511



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

</PAGE>

<PAGE>

<TABLE>

<CAPTION>

XCL Ltd. and Subsidiaries

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

(In Thousands of Dollars)

(Unaudited)



Additional

Total

Preferred



Common



Treasury



Paid-In



Accumulated



Unearned



Shareholders'

Stock



Stock



Stock



Capital



Deficit



Compensation



Equity

--------------------<S>

<C>

<C>

Balance, December 31, 1997

$ 40,825

Net loss

(4,120)

Dividends

(4,879)

Preferred shares issued

4,687

Preferred shares converted

to common shares

-Common shares issued

223

Exercise of stock purchase

warrants

331

Amortization of

unearned compensation

319

Earned Compensation stock options

413

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

$ 37,799



--------



<C>

<C>

$1,196

$

217



--------



----------



<C>

$



(1)



-----------



<C>



-----------<C>



$298,588



$ (247,154)



$ (12,021)



--



--



--



--



(4,120)



--



--



--



--



--



(4,879)



--



57



--



--



4,630



--



--



(23)



6



--



17



--



--



--



1



--



222



--



--



--



6



--



325



--



--



--



--



--



--



--



319



--



--



--



413



--



--



-----



-----



------



-------



---------



--------



$ (256,153)



$ (11,702)



=========



========



$1,230



$



=====



230

=====



$



(1)

======



$304,195

=======



=======

</TABLE>

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

</PAGE>

<PAGE>

XCL Ltd. and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Six Months Ended June 30, 1998 and 1997

(In Thousands of Dollars)

(Unaudited)

1998

---Cash flows from operating activities:

Net loss

$

Adjustments to reconcile net loss to

net cash used in operating activities:

Depreciation, depletion and amortization

Amortization of discount on senior secured notes

Stock compensation programs

Stock issued for outside professional services

Changes in assets and liabilities:

Accounts receivable

Refundable deposits

Accounts payable and accrued costs

Accrued interest

Other, net

Total adjustments

Net cash used in operating activities

Cash flows from investing activities:

Change in cash held in escrow (restricted)

Note receivable

Capital expenditures

Investments

Proceeds from sale of assets



(4,120)

50

1,074

732

223



1997

---$



(2,426)

80

----



(87)

1,200

15

129

(162)

-------3,174

-------(946)

--------



(17)

-(451)

2,205

98

------1,915

------(511)

-------



5,024

(362)

(13,424)

(551)

--------



(75,000)

-(5,025)

(388)

759

-------



Net cash used in investing activities



(9,313)

-------



(79,654)

-------



---331

-(450)

-(205)

------



652

75,000

25,000

1,184

3,316

(8,965)

(2,100)

(9,328)

-------



(324)

------



84,759

-------



(10,583)

21,952

------$ 11,369

========



4,594

113

-----$ 4,707

======



Cash flows from financing activities:

Proceeds from sales of common stock

Proceeds from senior secured notes

Proceeds from issuance of preferred stock

Proceeds from exercise of warrants and options

Loan proceeds

Payment of long-term debt

Payment of note payable

Stock/note issuance costs and other

Net cash provided by (used in) financing

activities

Net increase (decrease) in cash and cash equivalents

Cash and cash equivalents at beginning of period

Cash and cash equivalents at end of period



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

</PAGE>

XCL Ltd. and Subsidiaries

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 1998

(1)



Basis of Presentation



The consolidated financial statements at June 30, 1998, and

for the six months then ended have been prepared by the Company,

without audit, pursuant to the Rules and Regulations of the

Securities and Exchange Commission. Certain information and

footnote disclosures normally included in financial statements

prepared

in accordance with generally accepted

accounting

principles have been condensed or omitted pursuant to such Rules

and Regulations. The Company believes that the disclosures are

adequate to make the information presented herein not misleading.

These consolidated financial statements should be read

in

conjunction with the financial statements and the notes thereto

included in the Company's Annual Report on Form 10-K for the year

ended December 31, 1997. In the opinion of management, all

adjustments, consisting only of normal recurring adjustments,

necessary to present fairly the financial position of XCL Ltd.

and subsidiaries as of June 30, 1998, and 1997, and the results

of their operations for the six months ended June 30, 1998 and

1997, have been included. Certain reclassifications have been

made to prior period financial statements to conform to current

year presentation. These reclassifications had no effect on net

loss or shareholders' equity. The results of the Company's

operations

for

such interim periods are not

necessarily

indicative of the results for the full year.

Revenues and operating expenses associated with oil and gas

properties

held

for sale have become

insignificant

and

accordingly, are recorded in other costs and operating expenses

in the accompanying consolidated statements of operations.

(2)



Liquidity and Capital Resources



The Company, since its decision in 1995 to dispose of its

domestic properties, has generated minimal annual revenues and is

now devoting all of its efforts toward the development of its

China properties. Although the Company has cash available in the

amount of approximately $16.6 million at June 30, 1998 (including

restricted cash of approximately $5.2 million to pay interest due

November 1, 1998) and a positive working capital position,

additional funds will be needed to meet the Company's working

capital requirements and capital expenditure obligations until

sufficient cash flows are generated from anticipated production

to

sustain its operations and to fund future development

obligations.

Management plans to generate the additional cash needed

through the sale or financing of its domestic oil and gas

properties assets held for sale and investment in land and the



completion

of

additional equity, debt or

joint

venture

transactions. There is no assurance, however, that the Company

will be able to sell or finance its oil and gas properties held

for sale or investment in land or to complete other transactions

in the future at commercially reasonable terms, if at all, or

that it will be able to meet its future contractual obligations.

If production from the China properties commences in late 1998 or

the

first

half of 1999, as anticipated,

the

Company's

proportionate share of the cash flow will be available to

partially satisfy its cash requirements.

However, there is

likewise no assurance that such development will be successful

and production will commence as anticipated, and that such cash

flow will be available or sufficient.

(3)



Supplemental Cash Flow Information



There were no income taxes paid during

periods ended June 30, 1998 and 1997.



the



six



months



Capitalized interest for the six months ended June 30, 1998

was $5.5 million as compared to $2.6 million for the same period

in 1997. Interest paid during the six months ended June 30, 1998

amounted to $5.8 million as compared to $195,300 for the same

period in 1997.

On May 1, 1998, an interest payment in the amount of $5.3

million was made to the holders of the senior secured notes for

the interest period November 1, 1997 through May 1, 1998.

(4)



Debt



As of June

(000's):



30, 1998, long-term debt consists of the



Senior secured notes, net of unamortized discount

of $12,616



following



$



Lutcher Moore Group Limited Recourse Debt



2,074

-------64,458



Less current maturities:

Lutcher Moore Group Limited Recourse Debt

$

Substantially

these borrowings.

(5)



all



of the Company's



62,384



assets



(2,074)

-------62,384

========



collateralize



Investment in Land



The Lutcher Moore Tract previously included in oil and gas

properties held for sale has been reclassified to investment in

land in the accompanying consolidated balance sheet because the

Company is exploring alternative plans.

(6)



Preferred Stock and Common Stock



As of June 30, 1998, the Company had the following shares of

Preferred Stock issued and outstanding:



Amended Series A

Amended Series B



Shares

--------1,181,614

48,405

--------1,230,019

=========



Liquidation

Value

-----------$ 100,437,190

4,840,500

----------$ 105,277,690

===========



1998 Dividends (In Thousands)

----------------------------Declared

Accrued

Total

-----------------$

-$ 1,611

$ 1,611

------------------$

-$ 1,611

$ 1,611

=====

=======

======



Amended Series A Preferred Stock

- -------------------------------On



May 1, 1998, the Company issued an aggregate of 52,161

shares of Amended Series A Preferred Stock in payment of $4.5

million in dividends payable on that date.

Amended Series B Preferred Stock

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



On June 30, 1998, the Company issued an aggregate of 1,320

shares of Amended Series B Preferred Stock in payment of $0.1

million in dividends payable on that date.

Loss Per Share

- -------------The following table sets forth the computation of basic and

diluted loss per common share (as adjusted for a one-for-fifteen

reverse stock split effected December 17, 1997).

(In thousands, except per share data)

For the Six Months Ended

June 30,

-----------------------1998

1997

------Weighted average number of common shares

outstanding (basic):



22,622



19,511



Weighted average number of common shares

outstanding (diluted):



22,622



19,511



Net loss applicable to common stock



$



(8,999)



$



(5,742)



Basic loss per share

Diluted loss per share



$

$



(.40)

(.40)



$

$



(.29)

(.29)



The effect of 34,627,207 and 24,046,901 shares of potential

common stock were anti-dilutive in the six months ended June 30,

1998 and 1997, respectively, due to the losses in both periods.

(7)



Commitments and Contingencies

Other commitments and contingencies include:

o



The Company acquired the rights to the exploration,

development and production of the Zhao Dong Block by executing a

Production Sharing Agreement (the "Agreement") with CNODC in

February 1993. Under the terms of the Agreement, the Company and

its partner are responsible for all exploration costs. If a

commercial discovery is made, and if CNODC exercises its option

to participate in the development of the field, all development

and operating costs and related oil and gas production will be

shared up to 51 percent by CNODC and the remainder by the Company

and its partner.

The Agreement includes the following additional

principal terms:

The Agreement is basically divided into three periods:

the Exploration period, the Development period and the

Production

period.

Work to

be

performed

and

expenditures to be incurred during the Exploration

period, which consists of three phases totaling seven

years

from

May

1,

1993,

are

the

exclusive

responsibility of the Company and its partner as a

group (the "Contractor"). The Contractor's obligations

in the three exploration phases are as follows:

1.



During the first three years, the Contractor is

required to drill three wildcat wells, perform

seismic data acquisition and processing and expend

a minimum of $6 million. These obligations have

been met.



2.



During the next two years, the Contractor is

required to drill two wildcat wells, perform

seismic data acquisition and processing and expend

a minimum of $4 million. (The Contractor has

elected to proceed with the second phase of the

Agreement.

The

seismic

data

acquisition

requirement

for the second phase

has

been

satisfied.)



3.



During the last two years, the Contractor is

required to drill two wildcat wells and expend a

minimum of $4 million.



4.



The Production Period for any oil and/or gas

field

covered by the Agreement will be

15

consecutive years (each of 12 months), commencing

for each such field on the date of commencement of

commercial production (as determined under the

terms of the Agreement). However, prior to the

Production Period, and during the Development

Period, oil and/or gas may be produced and sold

during a long-term testing period.



The Agreement may be terminated by the Contractor at the end

of each phase of the Exploration period, without

further obligation.



(8)



o



The Company is in dispute over a 1992 tax assessment by the

Louisiana Department of Revenue and Taxation for the years 1987

through 1991 in the approximate amount of $2.5 million. The

Company has also received a proposed assessment from the

Louisiana Department of Revenue and Taxation for income tax years

1991 and 1992, and franchise tax years 1992 through 1996 in the

approximate amount of $3.0 million. The Company has filed written

protests as to these proposed assessments, and will vigorously

contest the asserted deficiencies through the administrative

appeals process and, if necessary, litigation. The Company

believes that adequate provision has been made in the financial

statements for any liability.



o



On July 26, 1996, an individual filed three lawsuits against

a wholly owned subsidiary with respect to oil and gas properties

held for sale. One suit alleges actual damage of $580,000 plus

additional amounts that could result from an accounting of a

pooled interest. Another seeks legal and related expenses of

$56,473 from an allegation the plaintiff was not adequately

represented before the Texas Railroad Commission. The third suit

seeks a declaratory judgement that a pooling of a 1938 lease and

another in 1985 should be declared terminated, and further,

plaintiffs seek damages in excess of $1 million to effect

environmental restoration. The Company believes these claims are

without merit and intends to vigorously defend itself.



o



The Company is subject to other legal proceedings which

arise in the ordinary course of its business. In the opinion of

Management, the amount of ultimate liability with respect to

these actions will not materially affect the financial position

of the Company or results of operations of the Company.

XCL-China Ltd.



The following summary financial information of XCL-China

Ltd., a wholly owned subsidiary, reflects its financial position

and its results of operations for the periods presented (in

thousands of dollars):



A S S E T S

----------Current assets

Oil and gas properties (full cost method):

Proved undeveloped properties, not being amortized

Unevaluated properties



Other assets



June 30,

1998

----$



188



26,954

40,875

-----67,829

-----597

-----$ 68,614

======



L I A B I L I T I E S A N D A C C U M U L A T E D D E F I C I T

- -----------------------------------------------------------------Total current liabilities

Due to parent

Accumulated deficit



$



5,202

65,960

(2,548)

------$ 68,614

=======



Six Months Ended

June 30,

----------------1998

1997

------$

618

$

599

--------$ (618)

$ (599)

=====

=====



Costs and operating expenses

Net loss

<PAGE>

REPORT OF INDEPENDENT ACCOUNTANTS



To the Board of Directors and Shareholders of



XCL-China Ltd.



We have audited the financial statements of XCL-China Ltd. listed

in the Index on page F-1. These financial statements are the

responsibility of the Company's management. Our responsibility is

to express an opinion on these financial statements based on our

audits.

We conducted our audits in accordance with generally accepted

auditing standards. Those standards require that we plan and

perform the audit to obtain reasonable assurance about whether

the financial statements are free of material misstatement.

An

audit includes examining, on a test basis, evidence supporting

the amounts and disclosures in the financial statements.

An

audit also includes assessing the accounting principles used and

significant estimates made by management, as well as evaluating

the overall financial statement presentation. We believe that

our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above

present fairly, in all material respects, the financial position

of XCL-China Ltd. as of December 31, 1997 and 1996, and the

results of their operations and their cash flows for each of the

three years in the period ended December 31, 1997, in conformity

with generally accepted accounting principles. In addition, in

our opinion, the financial statement schedule referred to above,

when considered in relation to the basic financial statements

taken as a whole, presents fairly, in all material respects, the

information required to be included therein.

The accompanying financial statements have been prepared assuming

that the Company will continue as a going concern. As discussed

in Note 2 to the financial statements, the Company has not

generated production revenues, is dependent on its parent to meet

its cash flow requirements and must, in conjunction with its

parent company, generate additional cash flows to satisfy its

development and exploratory obligations with respect to its oil

and gas properties. There is no assurance that the Company or its

parent will be able to generate the necessary funds to satisfy

these

contractual

obligations and to

ultimately

achieve

profitable operations, which creates substantial doubt about

their ability to continue as a going concern. Managements' plans

in regard to these matters are described in Note 2.

The

financial statements do not include any adjustments that might

result from the outcome of this uncertainty.

/S/ PRICEWATERHOUSECOOPERS LLP



Miami, Florida

April 10, 1998

</PAGE>

XCL-China Ltd.

BALANCE SHEETS

(Thousands of Dollars)

- -------------A S S E T S

----------Current assets:

Accounts receivable, net

Other



1997

---$



101

2

-----



1996

---$



122

45

-----



Total current assets



103

-----



167

-----



21,172



13,571



Property and equipment:

Oil and gas (full cost method):

Proved undeveloped properties, not

being amortized

Unevaluated properties



33,132

------54,304

167

-----54,471

(1)

-----54,470

-----668

-----$ 55,241

======



Other

Accumulated depreciation



Other assets

Total assets



21,238

-----34,809

138

-----34,947

------34,947

-----------$ 35,114

======



L I A B I L I T I E S A N D S H A R E H O L D E R S' E Q U I T Y

- ------------------------------------------------------------------Current liabilities:

Accounts payable and accrued costs



$



Due to joint venture partner

Total current liabilities

Due to parent

Commitments and contingencies (Notes 2 and 5)

Shareholders' equity:

Common stock-$.01 par value; authorized

5 million shares at December 31, 1997 and

1996; issued shares of 1,000 shares at

December 31, 1997 and 1996

Retained deficit

Total shareholders' deficit

Total liabilities and shareholders'

deficit



285



$



556



4,504



4,202



-----4,788

-----52,383



-----4,758

-----31,573



-(1,930)

------(1,930)

------$ 55,241

=======



-(1,217)

------(1,217)

------$ 35,114

======



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

<PAGE>

XCL-China, Ltd.

STATEMENTS OF OPERATIONS

(In Thousands)



Revenues



$



Year Ended December 31

---------------------1997

1996

1995

----------$

-$

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



Costs and operating expenses:

Depreciation

General and administrative costs



Operating loss

Other income (expense):

Interest expense, net of amounts

capitalized

Interest income



Net loss



1

578

---579

---(579)

----



-702

----702

----(702)

-----



-536

----536

----(536)

-----



(134)

-----(134)

----$ (713)

=====



-----------$ (702)

====



-49

----49

----$ (487)

====



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

<PAGE>

XCL-China

STATEMENTS OF SHAREHOLDERS' DEFICIT

(Thousands of Dollars)

Balance, December 31, 1994

Net loss



$



Balance, December 31, 1995

Net loss

Balance, December 31, 1996

Net loss

Balance, December 31, 1997



$



(28)

(487)

------(515)

(702)

------(1,217)

(713)

------(1,930)

=======



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

<PAGE>

XCL-China, Ltd.

STATEMENTS OF CASH FLOWS

(Thousands of Dollars)

Year Ended December 31

--------------------------1997

1996

1995

---------Cash flows from operating activities:

Net loss



$



(713)

-----



$



(702)

-----



$



(487)

-----



Adjustments to reconcile net loss to net

cash used in operating activities:

Depreciation

Change in assets and liabilities:

Accounts receivable

Accounts payable and accrued costs

Other, net

Total adjustments

Net cash (used in) provided

by operating activities

Cash flows from investing activities:

Capital expenditures

Other



1

21

30

(625)

----(573)

----(1,286)

----(15,889)



Cash flows from financing activities:

Loan proceeds

Payment of long-term debt

Due to parent

Net cash provided by financing

activities

Net increase (decrease) in cash and cash

equivalents

Cash and cash equivalents at beginning of year

Cash and cash equivalents at end of year



(58)

2,825

83

-----2,850

------



624

801

81

----1,506

-----



2,148

------



1,019

----(7,284)



249

------



(179)

------



(3,988)

------



(7,463)

------



6,100

(6,100)

17,175

------



--1,840

------



--4,468

------



17,175

------



1,840

------



4,468

------



-------$

-======



-------$

-=====



(15,889)

------



The accompanying notes are an integral part of these financial

statements.

XCL-China Ltd.

NOTES TO FINANCIAL STATEMENTS



--



(4,237)



------Net cash used in investing

activities



--



(1,976)

1,976

-----$

-======



(1)



Summary of Significant Accounting Policies:



Basis of Presentation:

--------------------The financial statements include the accounts of XCL-China

Ltd. (the "Company"), a wholly owned subsidiary of XCL Ltd. (the

"parent").

Use of Estimates in the Preparation of Financial Statements:

----------------------------------------------------------The preparation of the Company's financial statements, in

conformity

with

generally accepted accounting

principles,

requires management to make estimates and assumptions that affect

reported amounts of assets, liabilities, revenues and expenses

and disclosure of contingent assets and liabilities.

Actual

results could differ from those estimates.

Oil and Gas Properties:

---------------------The Company accounts for its oil and gas exploration and

production activities using the full cost method of accounting

for oil and gas properties. Accordingly, all costs associated

with acquisition, exploration, and development of oil and gas

reserves, including appropriate related costs, are capitalized.

The Company capitalizes internal costs that can be directly

identified with its acquisition, exploration and development

activities

and does not capitalize any costs related

to

production, general corporate overhead or similar activities.

The capitalized costs of oil and gas properties, including

the estimated future costs to develop proved reserves, are

amortized on the unit-of-production method based on estimates of

proved oil and gas reserves. The reserves in 1997 and 1996 were

estimated by independent petroleum engineers. Investments in

unproved properties and major development projects are not

amortized until proved reserves associated with the projects can

be determined or until impairment occurs. If the results of an

assessment indicate that properties are impaired, the amount of

the impairment is added to the capitalized costs to be depleted.

The

Company capitalizes interest on expenditures made

in

connection with exploration and development projects that are not

subject to current amortization. Interest is capitalized for the

period that activities are in progress to bring these projects to

their intended use.

The Company reviews the carrying value of its oil and gas

properties each quarter on a country-by-country basis, and limits

capitalized costs of oil and gas properties to the present value

of estimated future net revenues from proved reserves, discounted

at 10 percent, plus the lower of cost or fair value of unproved

properties as adjusted for related tax effects and deferred tax

reserves. If capitalized costs exceed this limit, the excess is

charged to depreciation and depletion expense.

Proceeds from the sale of proved and unproved properties are

accounted for as reductions to capitalized costs with no gain or

loss recognized unless such sales would significantly alter the

relationship between capitalized costs and proved reserves of oil

and gas. Abandonments of properties are accounted for

as

adjustments of capitalized costs with no loss recognized.

The Company accounts for site restoration, dismantlement and

abandonment costs in its estimated future costs of proved

reserves.

Accordingly, such costs are amortized on a unit of

production basis and reflected with accumulated depreciation,

depletion and amortization. The Company identifies and estimates

such costs based upon its assessment of applicable regulatory

requirements, its operating experience and oil and gas industry

practice in the areas within which its properties are located.

To date the Company has not been required to expend any material

amounts to satisfy such obligations. The Company does not expect

that future costs will have a material adverse effect on the

Company's operations, financial condition or cash flows.

The

standardized measure of discounted future net cash flows includes

a deduction for any such costs.

Capitalized Interest:



- -------------------During fiscal 1997, 1996 and 1995, interest and associated

costs of approximately $5.8 million, $2.8 million and $3.1

million, respectively were capitalized on significant investments

in

oil

and gas properties that are not being currently

depreciated, depleted, or amortized and on which exploration or

development activities are in progress.

Revenue Recognition:

------------------Oil and gas revenues will be recognized using the accrual

method at the price realized as production and delivery occurs.

Foreign Operations

-----------------The Company's future operations and earnings will depend

upon the results of the Company's operations in China. There can

be no assurance that the Company will be able to successfully

conduct such operations, and a failure to do so would have a

material adverse effect on the Company's financial position,

results of operations and cash flows. Also, the success of the

Company's operations will be subject to numerous contingencies,

some

of

which

are beyond management's

control.

These

contingencies include general and regional economic conditions,

prices for crude oil and natural gas, competition and changes in

regulation.

Since the Company is dependent on international

operations, specifically those in China, the Company will be

subject to various additional political, economic and other

uncertainties. Among other risks, the Company's operations will

be subject to the risks of restrictions on transfer of funds;

export duties, quotas and embargoes; domestic and international

customs and tariffs; and changing taxation policies, foreign

exchange restrictions, political conditions and governmental

regulations.

(2)



Liquidity and Management's Plan



The Company's parent, in connection with its 1995 decision

to dispose of its domestic properties, is devoting all of its

efforts toward the development of the Company's properties.

The

Company has historically relied on its parent to meet its cash

flow requirements. Although the parent has cash available in the

amount of approximately $32 million as of December 31, 1997

(including restricted cash of approximately $10 million) and a

positive working capital position, management anticipates that

the Company and its parent will need additional funds to meet all

of the development and exploratory obligations until sufficient

cash flows are generated from anticipated production to sustain

operations

and to fund future development and exploration

obligations.

The parent plans to generate the additional cash needed

through the sale or financing of its domestic assets held for

sale and the completion of additional equity, debt or joint

venture transactions. There is no assurance, however, that the

parent will be able to sell or finance its assets held for sale

or to complete other transactions in the future at commercially

reasonable terms, if at all, or that the Company will be able to

meet its future contractual obligations. If production from the

Company's properties commences in late 1998 or the first half of

1999, as anticipated, the Company's proportionate share of the

related cash flow will be available to help satisfy cash

requirements. However, there is likewise no assurance that such

development will be successful and production will commence, and

that such cash flow will be available.

(3)



Supplemental Cash Flow Information



There were no income taxes paid for the years ended December

31, 1997, 1996 and 1995.

(4)



Income Taxes



Foreign income taxes are accounted for under the tax

structure in that country, principally China. As of December 31,

1997, the Company does not have undistributed earnings available

to its parent because of accumulated losses.

Further, such



losses

have provided no tax benefit to the parent company and

accordingly, there has been no tax impact. When necessary the

Company will enter into an appropriate tax sharing arrangement

with its parent.

(5)



Other Commitments and Contingencies

Other commitments and contingencies include:

o



The Company acquired the rights to the exploration,

development and production of the Zhao Dong Block by executing a

Production Sharing Agreement with CNODC in February 1993. Under

the terms of the Production Sharing Agreement, the Company and

its partner are responsible for all exploration costs. If a

commercial discovery is made, and if CNODC exercises its option

to participate in the development of the field, all development

and operating costs and related oil and gas production will be

shared up to 51 percent by CNODC and the remainder by the

Company and its partner.

The Production Sharing Agreement includes the following

additional principal terms:

The Production Sharing Agreement is basically divided

into

three periods: the Exploration period,

the

Development period and the Production period. Work to

be performed and expenditures to be incurred during the

Exploration period, which consists of three phases

totaling seven years from May 1, 1993, are

the

exclusive responsibility of the Contractor (the Company

and

its

partner as a group). The

Contractor's

obligations in the three exploration phases are as

follows:

1.



During the first three years, the Contractor is

required to drill three wildcat wells, perform

seismic data acquisition and processing and expend

a minimum of $6 million. These obligations have

been met;



2.



During the next two years, the Contractor is

required to drill two wildcat wells, perform

seismic data acquisition and processing and expend

a minimum of $4 million (The Contractor has

elected to proceed with the second phase of the

Contract.

The

seismic

data

acquisition

requirement

for the second phase

has

been

satisfied.);



3.



During the last two years, the Contractor is

required to drill two wildcat wells and expend a

minimum of $4 million.



4.



The Production Period for any oil and/or gas

field covered by the Contract (the "Contract

Area") will be 15 consecutive years (each of 12

months), commencing for each such field on the

date of commencement of commercial production (as

determined under the terms of the Contract).

However, prior to the Production Period, and

during the Development Period, oil and/or gas may

be produced and sold during a long-term testing

period.



The Production Sharing Agreement may be terminated by

Contractor at the end of each phase of the Exploration

period, without further obligation.

(6)



Related Party Transactions



The Company has consistently borrowed money from its parent

for

the acquisition and development of its oil and

gas

properties. The amount due the parent as of December 31, 1997 is

approximately $52 million. All of the Common Stock of the

Company has been pledged as collateral for parent company debt

and the Company is a guarantor on certain Senior Secured Notes

described below.

Senior Secured Notes of Parent Company

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



the



On May 20, 1997, the parent company sold in an unregistered

offering

to qualified institutional buyers and

accredited

institutional investors 75,000 Note Units, each consisting of

$1,000 principal amount of 13.5% Senior Secured Notes due May 1,

2004 and one Common Stock Purchase Warrant to purchase 85 shares

of the parent's common stock, par value $0.01 per share (the

"Common Stock"), at an exercise price of $3.09 per share, first

exercisable after May 20, 1998.

Interest on the Notes is payable semi-annually on May 1 and

November 1, commencing November 1, 1997. The Notes will mature

on May 1, 2004. The Notes are not redeemable at the option of the

parent prior to May 1, 2002, except that the parent may redeem,

at its option prior to May 1, 2002, up to 35% of the original

aggregate principal amount of the Notes, at a redemption price of

113.5% of the aggregate principal amount of the Notes, plus

accrued and unpaid interest, if any, to the date of redemption,

with the net proceeds of any equity offering completed within 90

days prior to such redemption; provided that at least $48.75

million in aggregate principal amount of the Notes remain

outstanding.

On or after May 1, 2002, the Notes are redeemable

at the option of the parent, in whole or in part, at an initial

redemption price of 106.75% of the aggregate principal amount of

the Notes until May 1, 2003, and at par thereafter, plus accrued

and unpaid interest, if any, to the date of redemption.

The Senior Secured Notes restrict, among other things, the

parent's and its subsidiaries ability to incur additional debt,

incur liens, pay dividends, or make certain other restricted

payments.

It also limits the parent's ability to consummate

certain asset sales, enter into certain transactions

with

affiliates, enter into mergers or consolidations, or dispose of

substantially all the parent's assets. The parent's ability to

comply with such covenants may be affected by events beyond its

control. The breach of any of these covenants could result in a

default.

A default could allow holders of the Notes to declare

all amounts outstanding and accrued interest immediately due and

payable. A foreclosure on the stock of the Company could trigger

Apache's right of first refusal under the Participation Agreement

to purchase such stock or its option to purchase the parent's

interest in the Contract. There can be no assurance that the

assets of the parent and the Company, or any other Subsidiary

Guarantors would be sufficient to fully repay the Notes and the

parent's other indebtedness.

Supplemental Oil and Gas Information

The following supplementary information is

accordance with the requirements of Statement

Accounting Standards No. 69 - "Disclosures About

Producing Activities."



presented in

of Financial

Oil and Gas



Capitalized Costs

----------------Capitalized costs relating to the Company's proved

unevaluated oil and gas properties, are as follows (000's):



and



December 31

-----------------1997

1996

-------Proved and unevaluated properties

under development



$



54,304

=======



$



34,305

=======



The capitalized costs for the oil and gas properties

represent cumulative expenditures related to the Zhao Dong Block

Production

Sharing Agreement and will not be depreciated,

depleted or amortized until production is achieved.

The Company's investment in oil and gas properties as of

December 31, 1997, includes proved and unevaluated properties

which have been excluded from amortization. Such costs will be

evaluated in future periods based on management's assessment of

exploration activities, expiration dates of licenses, permits and

concessions, changes in economic conditions and other factors. As

these properties become evaluated or developed, their cost and

related estimated future revenue will be included in

the



calculation

follows:



of



the



DD&A



rate. Such



costs



Costs

for

proved and unevaluated

development were incurred as follows (000's):



Property acquisition costs

Capitalized interest costs



Total

----$ 40,616

13,688

-------



Total proved and

unevaluated properties

under development

$ 54,304

=======



were



incurred



properties



as



under



Year Ended December 31

-------------------------------------1994

1997

1996

1995

and Prior

-----------------$ 14,208 $ 4,223

$ 7,023 $ 15,162

5,791

2,767

2,596

2,534

--------------------$ 19,999

=======



$



6,990

======



$



9,619

======



$ 17,696

======



Capitalized Costs Incurred

-------------------------Total capitalized costs incurred by the Company with respect

to its oil and gas producing activities were as follows (000's):

Year Ended December 31

---------------------1997

1996

1995

---------Costs incurred:

Unproved properties acquired

Capitalized internal costs

Capitalized interest and amortized

debt costs

Exploration

Development

Total costs incurred



$



-2,466



5,791

6,833

4,909

------$ 19,999

=======



$



-822

2,767

3,401

-----$ 6,990

======



$



2,596

-1,590

------$ 9,619

======



Proved Oil and Gas Reserves (Unaudited)

The following table sets forth estimates of the Company's

net interests in proved and proved developed reserves of oil and

gas and changes in estimates of proved reserves.

Crude Oil (MBbls)

---------------1997

1996

------Proved reserves Beginning of year

Discoveries

Revisions of previous estimates

Production

Purchases (sales) of minerals in place

Transfer of property to assets held for sale

End of year



10,579

1,183

---------11,762

======



-10,579

---------10,579

======



-=====

-=====



-======

-======



Proved developed reserves Beginning of year

End of year

The Company's estimated quantities of oil and

December 31, 1997 were prepared by H.J. Gruy and

Inc., independent engineers.



gas as of

Associates,



Supplementary Information (Unaudited)

The supplementary information set forth below presents

estimates of discounted future net cash flows from proved oil and

gas reserves and changes in such estimates. This information has

been prepared in accordance with requirements prescribed by the

Financial Accounting Standards Board (FASB).

Inherent in the

underlying calculations of such data are many variables and

assumptions, the most significant of which are briefly described

below:



5,298

135



Future cash flows from proved oil and gas reserves were

computed on the basis of (a) contractual prices for oil and gas including escalations for gas - in effect at year-end, or (b) in

the case of properties being commercially developed but not

covered by contracts, the estimated market price for gas and the

posted price for oil in effect at year-end.

Probable and

possible reserves - a portion of which, experience has indicated,

generally become proved once further development work has been

conducted - are not considered. Additionally, estimated future

cash flows are dependent upon the assumed quantities of oil and

gas delivered and purchased from the Company. Such deliverability

estimates are highly complex and are not only based on the

physical

characteristics of a property but

also

include

assumptions relative to purchaser demand. Future prices actually

received may differ from the estimates in the standardized

measure.

Future net cash flows have been reduced by applicable

estimated

operating

costs, production

taxes

and

future

development costs, all of which are based on current costs.

Future net cash flows are further reduced by future income

taxes which are calculated by applying the statutory federal

income tax rate to pretax future net cash flows after utilization

of available tax carryforwards.

To reflect the estimated timing of future net cash flows,

such amounts have been discounted by the Securities and Exchange

Commission prescribed annual rate of 10 percent.

In view of the uncertainties inherent in developing this

supplementary information, it is emphasized that the information

represents approximate amounts which may be imprecise and extreme

caution should accompany its use and interpretation.

Standardized Measure of Discounted Future Net Cash Flows Related

to Proved Oil and Gas Reserves

The standardized measure of discounted future net cash flows

from proved oil and gas reserves, determined in accordance with

rules prescribed by FASB No. 69 is summarized below, and does not

purport to present the fair market value of the Company's oil and

gas assets, but does present the present value of estimated

future cash flows that would result under the assumptions used.:

The Company previously excluded from this table, the effect of

income taxes because it believed it had a tax holiday in China.

Subsequent to December 31, 1997, the Company determined that it

would be subject to future income taxes at the maximum rate of

33% in China. Accordingly, the table below has been revised to

include estimates of such income taxes.



Future cash inflows

Future costs:

Production, including taxes

Development

Future net inflows before income taxes

Future income taxes (1)

Future net cash flows

10% discount factor

Transfer of properties to assets held for sale

Standardized measure of discounted net cash flows



Year Ended December 31

-------------------1997

1996

------(Thousands of Dollars)

$ 205,765

$ 222,797

(45,623)

(41,093)

------119,049

(22,916)

------96,133

(42,285)

-------$ 53,848

=======



(39,033)

(40,904)

------142,860

(35,658)

-------107,202

(44,596)

--------$ 62,606

=======



- ------------------(1) Future income taxws are computed by applying the maximum tax rate in China

applicable to foreign-funded enterprises of 33%.

Changes in Standardized Measure of Discounted Future Net Cash



Flow From Proven Reserve Quantities

Year Ended December 31

---------------------1997

1996

------(Thousands of Dollars)

$

62,606

$

--



Standardized measure-beginning of year

Increases (decreases):

Sales and transfers, net of production costs

-Net change in sales and transfer prices, net of

production costs

(16,396)

Extensions, discoveries and improved recovery,

net of future costs

-Changes in estimated future development costs

(219)

Development costs incurred during the period that

reduced future development costs

-Revisions of quantity estimates

-Accretion of discount

-Purchase (sales) of reserves in place

-Changes in production rates (timing) and other

-Reclassification of reserves to assets held for sale

-Net change in income taxes

7,857

-----Standardized measure-end of year

$ 53,848

======



Changes

in and Disagreements on Accounting and

Financial

Disclosure.

- ----------------------------------------------------------------There have been no changes in and there are no disagreements

with the Company's accountants on accounting and financial

disclosure.

<PAGE>

No dealer, salesperson or any other person has been

authorized to give any information or to make any representations

in connection with the offer contained herein other than those

contained in this Prospectus, and, if given or made, such

information and representations must not be relied upon as having

been authorized by the Company or the Initial Purchaser.

This

Prospectus does not constitute an offer to sell or a solicitation

of an offer to buy any security other than those to which it

relates nor does it constitute an offer to sell,

or

a

solicitation of an offer to buy, to any person

in

any

jurisdiction in which such offer or solicitation

is

not

authorized, or in which the person making the

offer

or

solicitation is not qualified to do so, or to any person to whom

it is unlawful to make such offer or solicitation. Neither the

delivery of this Prospectus nor any sale made hereunder shall,

under any circumstances, create any implication that there has

been no change in the affairs of the Company since the date

hereof or that the information contained herein is correct as of

any time subsequent to the date hereof.

-----------------------TABLE OF CONTENTS

Page

Available Information

Disclosure Regarding Forward-Looking Statements

Prospectus Summary

Risk Factors

Financial Restructuring

Use of Proceeds

Capitalization

Price Range of Common Stock

Dividend Policy

Oil and Gas Exploration and Production

Properties and Reserves

Selected Consolidated Financial Data

Management's Discussion and Analysis of Financial

Condition and Results of Operations

Significant Events Affecting the Company

Since June 30, 1998

Business

Management



--79,062

-------(16,456)

------$ 62,606

=======



Security Ownership of Certain Beneficial

Owners and Management

Description of Existing Debt

Description of Capital Stock

Material United States Income Tax Considerations

Selling Security Holders

Legal Matters

Experts

Engineers

Glossary of Terms

Index to Financial Statements



[LOGO]



XCL Ltd.



1,219,199 Shares 9.50%

Amended Series A, Cumulative

Convertible Preferred Stock

33,592,721 Shares Common Stock

_____________________________

Prospectus

_____________________________



___________, 1998



<PAGE>

PART II

Information Not Required in the Prospectus

Item 13.



Other Expenses of Issuance and Distribution



Expenses

in

connection with the issuance

and

distribution of the securities being registered are set forth in

the following table. All amounts except the registration fee are

estimated.

Expenses

-------Registration Fee Securities and Exchange Commission

AMEX Filing Fee

Transfer Agent Fees and Expenses

Accounting Fees and Expenses

Legal Fees and Expenses

Blue Sky Fees and Expenses

Miscellaneous

TOTAL



$ 80,585

17,500

-20,000

30,000

-4,000

------$151,862

=======



The Company will bear all of the

registration of the Securities being offered.

Item 14.



expenses



of



the



Indemnification of Directors and Officers



The Company's Amended and Restated

Incorporation (the "Certificate") provides that:



Certificate



of



(A)

No director of the Company will be personally

liable to the Company or its stockholders for monetary damages

for breach of fiduciary duty as a director, except for liability

(i) for any breach of the director's duty of loyalty to the

Company or its stockholders, (ii) for acts or omissions not in

good faith or which involve intentional misconduct or a knowing

violation of law, (iii) under Section 174 of the Delaware General

Corporation Law, or (iv) for any transaction from which the

director derived an improper personal benefit.

(B)

Each person who was or is made a party or is

threatened to be made a party to or involved in any action suit

or

proceeding

whether civil, criminal, administrative

or

investigative (hereinafter a "proceeding"), by reason of the fact

that he or she is or was a director, officer or employee of the

Company or is or was serving at the request of the Company as a

director, officer, employee or agent of another corporation or of

a

partnership, joint venture, trust or other

enterprise,

including service with respect to an employee benefit plan,

whether the basis of such proceeding is alleged action in an

official capacity as a director, officer, employee or agent or in

any other capacity while serving as a director, officer, employee

or agent, will be indemnified and held harmless by the Company to

the fullest extent authorized by the Delaware General Corporation

Law, as the same exists or may hereafter be amended (but in the

case of any such amendment, only to the extent that such

amendment permits the Company to provide broader indemnification

rights than said law permitted the Company to provide prior to

such

amendment), against all expense, liability and

loss

(including attorneys' fees, judgments, fines, including excise

taxes with respect to an employee benefit plan, or penalties and

amounts paid in settlement) reasonably incurred or suffered by

such person in connection therewith and such indemnification will

continue as to a person who has ceased to be a director, officer,

employee or agent and will inure to the benefit of his or her

heirs, executors and administrators; provided, however, that,

except as described in (C) below, the Company will indemnify any

such

person seeking indemnification in connection with

a

proceeding (or part hereof) initiated by such person only if such

proceeding (or part thereof) was authorized by the board of

directors of the Company. The right to indemnification described

in this paragraph B includes the right to be paid by the Company

the expenses incurred in defending any such proceeding in advance

of its final disposition; provided, however, that if the Delaware

General Corporation Law requires, the payment of such expenses

incurred by a director or officer in his or her capacity as a

director or officer (and not in any other capacity in which

service was or is rendered by such person while a director or

officer, including, without limitation, service to an employee

benefit plan) in advance of the final disposition

of

a

proceeding, will be made only upon delivery to the Company of an

undertaking, by or on behalf of such director or officer, to

repay all amounts so advanced if it will ultimately be determined

that such director or officer is not entitled to be indemnified

under the Certificate or otherwise.

(C)

If a claim described in paragraph (B) above is

not paid in full by the Company within thirty (30) after written

claim has been received by the Company, the claimant may at any

time thereafter bring suit against the Company to recover the

unpaid amount of the claim and, if successful in whole or in

part, the claimant will be entitled to be paid also the expense

of prosecuting such claim. It will be a defense to any such

action (other than an action brought to enforce a claim for

expenses incurred in defending any proceeding in advance of its

final disposition where the required undertaking, if any is

required, has been tendered to the Company) that the claimant has

not met the standards of conduct which make it permissible under

the Delaware General Corporation Law for the Company to indemnify

the claimant for the amount claimed, but the burden of proving

such defense will be on the Company. Neither the failure of the

Company (including its board of directors, independent legal



counsel, or its stockholders) to have made a determination prior

to the commencement of such action that indemnification of the

claimant is proper in the circumstances because he or she has met

the applicable standard of conduct set forth in the Delaware

General Corporation Law, nor an actual determination by the

Company (including its board of directors, independent legal

counsel, or its stockholders) that the claimant has not met such

applicable standard of conduct, will be a defense to the action

or create a presumption that the claimant has not met the

applicable standard of conduct.

(D)

The right to indemnification and the payment of

expenses incurred in defending a proceeding in advance of its

final disposition conferred in the Certificate will not be

exclusive of any right which any person may have or hereafter

acquire under any statute, provision of the Certificate, the

Amended and Restated Bylaws of the Company (the "Bylaws"),

agreement, vote of stockholders or disinterested directors or

otherwise.

(E)

The Company may maintain insurance, at its

expense, to protect itself and any director, officer, employee or

agent of the Company or another corporation, partnership, joint

venture, trust or other enterprise, including an employee benefit

plan, against any such expense, liability or loss, whether or not

the Company would have the power to indemnify such person against

such expense, liability or loss under the Delaware General

Corporation Law.

(F)

Upon resolution passed by the board of

directors, the Company may establish a trust or other designated

account, grant a security interest or use other means (including,

without limitation, a letter of credit) to ensure the payment of

certain of its obligations arising under the indemnification

provisions contained in the Certificate.

(G)

If any part of the indemnification provisions

contained in the Certificate will be found, in any action, suit

or proceeding or appeal therefrom or in any other circumstances

or as to any particular officer, director or employee to be

unenforceable, ineffective or invalid for any reason,

the

enforceability, effect and validity of the remaining parts or of

such parts in other circumstances will not be affected, except as

otherwise required by applicable law.

The Bylaws provide that:

(i)

the Company will indemnify to the full

extent permitted by, and in the manner permissible

under, the laws of the State of Delaware any person

made, or threatened to be made, a party to an action or

proceeding, whether criminal, civil, administrative or

investigative, by reason of the fact that he, his

testator or intestate is or was a director or officer

of the Company or any predecessor of the Company, or

served any other enterprise as a director or officer at

the request of the Company or any predecessor of the

Company.

(ii)

the rights of indemnification described

in paragraph (i) above will be deemed to be a contract

between the Company and each director and officer who

serves in such capacity at any time while

such

provision is in effect, and any repeal or modification

thereof will not affect any rights or obligations then

existing or any action, suit or proceeding theretofore

brought based in whole or in part upon any such state

of facts;

(iii)

the rights of indemnification described

in paragraphs (i) and (ii) above will not be deemed

exclusive of any other rights to which any director or

officer may be entitled apart from the provisions of

Article VIII of the Bylaws (governing indemnification);

and

(iv)

the board of directors in its discretion

will have power on behalf of the Company to indemnify

any person, other than a director or officer, made a

party to any action, suit or proceeding by reason of



the fact that he, his testator or intestate, is or was

an employee of the Company.

Insofar as indemnification for liabilities arising

under the Securities Act may be permitted to directors, officers

or persons controlling the registrant pursuant to the foregoing

provisions, the Company has been informed that in the opinion of

the Securities and Exchange Commission such indemnification is

against public policy as expressed in the Securities Act and is

therefore unenforceable.

Item 15.



Recent Sales of Unregistered Securities



Common Stock and Common Stock Purchase Warrants/Debt Securities

- --------------------------------------------------------------The following issuances which occurred prior to December 17, 1997

have not been adjusted to reflect the Company`s one-for-fifteen

reverse stock split effected on December 17, 1997.

O



Effective September 17, 1998, the Company sold 351,015 (post

split) shares of Common Stock to Cumberland Partners through the

exercise of a stock purchase warrant exercisable at $2.50 per

share. The Company received $877,537 in payment of the exercise

price.

The securities issued in this transaction were not

registered under the U.S. Securities Act of 1933, as amended (the

"Securities Act"), in reliance upon the exemption provided by

Section 4(2) thereof.



O



Effective August 19, 1998, the Company agreed to issue

65,622 (post split) shares of Common Stock to William Wang, a

resident of Taiwan, in respect of $222,500 payable in shares of

Common Stock pursuant to the terms of an agreement between the

Company and Mr. Wang dated October 1, 1997.

The securities

issued in this transaction were not registered under the

Securities Act in reliance upon the exemption provided by

Regulation S.



O



Effective June 30, 1998, the Company agreed to issue 35,000

(post split) shares of Common Stock and 17,000 (post-split)

Common Stock purchase warrants to Mr. Patrick B. Collins, as

consideration under a consulting agreement dated June 15, 1998.

The warrants are exercisable at $3.75 per share and expire on

June 30, 2003. The securities issued in this transaction were

not registered under the Securities Act in reliance upon the

exemption provided by Section 4(2) thereof.



O



On March 11, 1998, the Company sold an aggregate of 128,887

(post split) shares of Common Stock, through the exercise of

stock purchase warrants to four partnerships of KAIM NonTraditional, L.P. The warrants were exercisable at $1.875 per

share and the Company received $241,663 in payment of the

exercise price. The securities issued in this transaction were

not registered under the Securities Act in reliance upon the

exemption provided by Section 4(2) thereof.



O



On March 11, 1998, the Company sold an aggregate of 455,809

(post split) shares of Common Stock, through the exercise of

stock purchase warrants to five partnerships of KAIM NonTraditional, L.P. The warrants were exercisable at $0.15 per

share and the Company received $68,371 in payment of the exercise

price.

The securities issued in this transaction were not

registered under the Securities Act in reliance upon the

exemption provided by Section 4(2) thereof.



O



On January 23, 1998, the Company sold 11,333 (post split)

shares of Common Stock, through the exercise of stock purchase

warrants to Mr. Hans Ulrich Nadig. The warrants were exercisable

at $1.875 per share and the Company received $21,250 in payment

of the exercise price. The securities issued in this transaction

were not registered under the Securities Act in reliance upon the

exemption provided by Section 4(2) thereof.



O



On January 19, 1998, the Company issued 55,625 (post split)

shares of Common Stock, to William Wang, a resident of Taiwan, in

respect of $222,500 payable in shares of Common Stock, pursuant

to the terms of an agreement between the Company and Mr. Wang

dated October 1, 1997. The securities issued in this transaction

were not registered under the Securities Act in reliance upon the

exemption provided by Regulation S thereof.



O



In December 1997, the Company issued 86,190 (post split)

shares of Common Stock to certain holders of the Secured

Subordinated Notes in respect of $233,082.73 interest payable

April 1, 1997, including penalty interest thereon. The securities

issued in this transaction were not registered under the

Securities Act in reliance upon the exemption provided by Section

4(2) with respect to 21,547 shares and Regulation S with respect

to 64,643 shares.



O



In December 1997, the Company issued 133,385 (post split)

shares of Common Stock to the holders of the Secured Subordinated

Notes in respect of $506,634.66 interest payable October 1, 1997,

including penalty interest thereon. The securities issued in this

transaction were not registered under the Securities Act in

reliance upon the exemption provided by Section 4(2) with respect

to 90,510 shares and Regulation S with respect to 42,875 shares.



O



On November 3, 1997, the Company issued an aggregate of

12,906 shares of Amended Series A Preferred Stock in respect of

dividends payable thereon in additional shares of Amended Series

A Preferred Stock due November 1, 1997. The securities issued in

this transaction were not registered under the Securities Act in

reliance upon the exemption provided by Section 4(2) thereof.



O



In November 1997, the Company issued 400,000 shares of

Common Stock and 200,000 Stock Purchase Warrants at an exercise

price of $0.25 per share on or before February 20, 2002 to

Patrick B. Collins as compensation under a Consulting Agreement

dated February 20, 1997. The securities issued in

this

transaction were not registered under the Securities Act in

reliance upon the exemption provided by Section 4(2) thereof.



O



On October 28 and 29, 1997, pursuant to an agreement

effective October 1, 1997, the Company issued to designees of

William Wang, who were all non-U.S. persons, an aggregate of

800,000 shares of Common Stock as compensation and to settle

certain instruments relating to prior compensation arrangements

between the Company and William Wang, a resident of Taiwan who

has performed services for the Company since 1991. The securities

issued in this transaction were not registered under the

Securities Act in reliance upon the exemption provided by

Regulation S thereof.



O



On October 21, 1997, the Company sold 1,000,000 shares of

Common Stock, and on October 30, 1997, the Company sold 500,000

shares of Common Stock, both transactions through the exercise of

stock purchase warrants, to Providence Capital Limited of the

Cayman Islands. The warrants were exercisable at $0.1875 per

share and the Company received $281,250 in payment of the

exercise price. The securities issued in this transaction were

not registered under the Securities Act in reliance upon the

exemption provided by Regulation S thereof.



O



On October 3, 1997, the Company sold 360,000 shares of

Common Stock, through the exercise of stock purchase warrants, to

Bank Hofmann AG of Zurich, Switzerland. The warrants were

exercisable at $0.125 per share and the Company received $45,000

in payment of the exercise price. The securities issued in this

transaction were not registered under the Securities Act in

reliance upon the exemption provided by Regulation S thereof.



O



On October 3, 1997, the Company issued an aggregate of

450,000 shares of Common Stock in settlement of litigation

initiated by Ms. Kathy McIlhenny, a former employee of the

Company.

Ms. McIlhenny received 300,000 shares and

her

attorneys, Jacques F. Bezou and Robert H. Matthews, received

90,000 and 60,000 shares respectively. The securities issued in

this transaction were not registered under the Securities Act in

reliance upon the exemption provided by Section 4(2) thereof.



O



On July 1, 1997, the Company issued 3 million stock purchase

warrants to Providence Capital Ltd. as compensation pursuant to a

Consulting Agreement entered into effective July 1, 1997, whereby

providence Capital Ltd. will assist the Company in locating

sources of financing in capital markets in Canada. The warrants

are exercisable at $0.1875 per share and expire August 13, 2001.

The securities issued in this transaction were not registered

under the Securities Act in reliance upon the exemption provided

by Regulation S thereof.



O



On August 19, 1997, the Company sold in a series of private

placements in compliance with Regulation S under the Securities

Act, an aggregate of 638,000 shares of Common Stock through the

exercise of warrants previously granted to Providence Capital

Ltd. The warrants were exercisable at $0.125 per share and the

Company received $79,750 in payment of the exercise price. The

warrants were exercised outside the U.S. by persons or entities

who certified that they were non-U.S. persons as defined in

Regulation S and the shares were all delivered against payment

outside the U.S. in accordance with such Regulation.



O



As set forth below, the Company sold in a series of private

placement in compliance with Regulation S under the Securities

Act, an aggregate of 870,000 shares of Common Stock through the

exercise of warrants previously granted to Sreedeswar Holdings,

Inc. These warrants were initially issued on December 22, 1995,

in connection with a series of Unit offerings conducted through

Rauscher Pierce & Clark, Inc., and its wholly-owned subsidiary,

Rauscher Pierce & Clark Ltd., as the Placement Agent, in

compliance with Regulation S of the Securities Act. The Company

agreed to reduce the exercise price of such warrants provided the

warrants were immediately exercised. Pursuant to such agreement

the initial warrant exercise prices of $0.25 per share were

reduced to $0.21 per share, net, with the Placement Agent

accepting $0.01 per share rather than 8% of the exercise price as

set forth in the Placement Agreement.

Exercise Date

------------May 22, 1997



Warrants Exercised

-----------------870,000



Shares Issued

------------870,000



Net Consideration

----------------$182,700



In all instances the warrants were exercised outside the U.S.

by persons or entities who certified that they were non-U.S.

person as defined in Regulation S and the shares were all

delivered against payment outside the U.S. in accordance with

such Regulation.

O



On May 20, 1997, the Company consummated (i) a private

offering of 75,000 units (the "Debt Units"), each consisting of

$1,000 principal amount of 13.50% Senior Secured Notes due May 1,

2004 and one Common Stock Purchase Warrant to purchase 1,280

shares of the Common Stock and (ii) a private offering of 294,118

units (the "Equity Units," and together with the Debt Units, the

"Units"), each consisting of one share of Amended Series A

Preferred Stock and one Warrant to purchase 327 shares of the

Company's common stock. The Units were sold to the Initial

Purchaser in transactions not registered under the Securities Act

in reliance upon Section 4(2) of the Securities Act and thereupon

offered and sold by the Initial Purchaser only to certain

qualified institutional buyers and institutional accredited

investors. The aggregate offering price of the Debt Units was

$75,000,000 and the aggregate offering price of the Equity Units

was $25,000,030. The aggregate discount to the Initial Purchaser

with respect to the Debt Units was $3,000,000 and with respect to

the Equity Units was $1,500,000.



O



On April 8, 1997, the Company sold an aggregate of 276,000

shares of Common Stock to Je Hyun Lee, a non-U.S. person, for

which it received consideration of $51,750. The securities issued

in this transaction were not registered under the Securities Act

in reliance upon the exemption provided by Regulation S thereof.



O



As set forth below, the Company sold in a private placement

in compliance with Regulation S under the Securities Act, an

aggregate of 3,000,000 shares of Common Stock through the

exercise of warrants previously granted to Providence Capital

Ltd. These warrants were initially issued on December 31, 1996

as

incentive to exercise 4,168,000 warrants acquired in

connection with series of Unit offerings conducted through

Rauscher Pierce & Clark, Inc., and its wholly-owned subsidiary,

Rauscher Pierce & Clark Ltd., as the Placement Agent, in

compliance with Regulation S of the Securities Act.

Further, on April 22, 1997, the Company sold in a private

placement in compliance with Regulation S under the Securities

Act, 66,900 shares of Common Stock through the exercise of

warrants previously granted to Sreedeswar Holdings,

Inc.

These warrants were initially issued on December 22, 1995, in

connection with a series of Unit offerings conducted through



Rauscher

Pierce

&

Clark, Inc., and

its

wholly-owned

subsidiary, Rauscher Pierce & Clark Ltd., as the Placement

Agent, in compliance with Regulation S of the Securities Act.

The Company agreed to reduce the exercise price of such

warrants provided the warrants were immediately exercised.

Pursuant to such agreement the initial warrant exercise prices

of $0.25 per share were reduced to $0.21 per share, net, with

the Placement Agent accepting $0.01 per share rather than 8%

of the exercise price as set forth in the Placement Agreement.

Exercise Date

------------April 18, 1997

April 22, 1997

April 30, 1997



Warrants Exercised

-----------------440,289

66,900

2,559,711



Shares Issued

------------440,289

66,900

2,559,711



Net Consideration

----------------$ 55,036

$ 14,049

$319,964



In all instances the warrants were exercised outside the U.S.

by persons or entities who certified that they were non-U.S.

persons as defined in Regulation S and the shares were all

delivered against payment outside the U.S. in accordance with

such Regulation.

O



On April 10, 1997, in connection with obtaining a loan for

XCL-China Ltd. of $3.1 million, the Company granted an aggregate

of 10,092,980 warrants to a group of four limited partnerships

managed by Kayne Anderson Investment Management, Inc. ("KAIM")

(6,837,180); J. Edgar Monroe Foundation (325,580); Estate of J.

Edgar Monroe (976,740); Boland Machine & Mfg. Co., Inc.

(325,580); and Construction Specialists, Inc. d/b/a Con-Spec,

Inc. (1,627,900), entitling such lenders the right to acquire

10,092,980 shares of Common Stock at $0.01 per share, exercisable

on or before April 9, 2002. All proceeds of this financing were

applied to reduce the Company's indebtedness to Apache incurred

in connection with Zhao Dong Block operations. The securities

issued in this transaction were not registered under the

Securities Act in reliance upon the exemption provided by Section

4(2) thereof.



O



Stock Purchase Warrants dated April 10, 1997, were issued to

ING (U.S.) Capital Corporation, as consideration for entering

into a Forbearance Agreement with the Company. Each warrant is

exercisable at $0.01 per share on or before April 9, 2002,

entitling ING to purchase up to 7,000,000 shares of Common Stock.

The securities issued in this transaction were not registered

under the Securities Act in reliance upon the exemption provided

by Section 4(2) thereof.



O



On March 26, 1997, the Company sold 3,200,000 shares of

Common Stock to Je Hyun Lee, a non-U.S. person, for consideration

of $600,000. The securities issued in this transaction were not

registered under the Securities Act in reliance upon the

exemption provided by Regulation S thereof.



O



As set forth below, the Company sold in a series of private

placements in compliance with Regulation S under the Securities

Act, an aggregate of 73,000 shares of Common Stock through the

exercise of warrants previously granted to Sreedeswar Holdings,

Inc. These warrants were initially issued on December 22, 1995,

in connection with a series of Unit offerings conducted through

Rauscher Pierce & Clark, Inc., and its wholly-owned subsidiary,

Rauscher Pierce & Clark Ltd., as the Placement Agent, in

compliance with Regulation S of the Securities Act. The Company

agreed to reduce the exercise price of such warrants provided the

warrants were immediately exercised. Pursuant to such agreement

the initial warrant exercise prices of $0.25 per share were

reduced to $0.21 per share, net, with the Placement Agent

accepting $0.01 per share rather than 8% of the exercise price as

set forth in the Placement Agreement.

Exercise Date

------------March 21, 1997



Warrants Exercised

-----------------73,000



Shares Issued

------------73,000



Net Consideration

----------------$ 15,330



In all instances the warrants were exercised outside the U.S.

by persons or entities who certified that they were non-U.S.

persons as defined in Regulation S and the shares were all

delivered against payment outside the U.S. in accordance with

such Regulation.

O



During



February



1997,



the



Company



sold



its



remaining



interest (41.089%) in the Seller Notes securing the Lutcher Moore

Tract ($217,961 in principal) to accredited investors for

$193,916 net after discount. In connection with the sale, the

Company issued stock purchase warrants to Donald A. and Joanne R.

Westerberg and T. Jerald Hanchey pursuant to which the purchasers

can acquire 1,874,467 shares of Common Stock at an exercise price

of $0.25 per share, expiring on December 31, 1999.

The

securities issued by the Company in this transaction were not

registered under the Securities Act in reliance upon the

exemption provided by Section 4(2) thereof.

O



As set forth below, the Company sold in a series of private

placements in compliance with Regulation S under the Securities

Act, an aggregate of 1,630,100 shares of Common Stock through the

exercise of warrants previously granted to Sreedeswar Holdings,

Inc. These warrants were initially issued on December 22, 1995,

in connection with a series of Unit offerings conducted through

Rauscher Pierce & Clark, Inc., and its wholly-owned subsidiary,

Rauscher Pierce & Clark Ltd., as the Placement Agent, in

compliance with Regulation S of the Securities Act. The Company

agreed to reduce the exercise price of such warrants provided the

warrants were immediately exercised. Pursuant to such agreement

the initial warrant exercise prices of $0.25 per share were

reduced to $0.21 per share, net, with the Placement Agent

accepting $0.01 per share rather than 8% of the exercise price as

set forth in the Placement Agreement.

Exercise Date

------------February

February

February

February



Warrants Exercised

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



4, 1997

11, 1997

20, 1997

24, 1997



1,000,000

340,200

184,800

105,100



Shares Issued

------------1,000,000

340,200

184,800

105,100



Net Consideration

----------------$210,000

$ 71,442

$ 38,808

$ 22,071



In all instances the warrants were exercised outside the U.S.

by persons or entities who certified that they were non-U.S.

persons as defined in Regulation S and the shares were all

delivered against payment outside the U.S. in accordance with

such Regulation.

O



As set forth below, the Company sold in a series of private

placements in compliance with Regulation S under the Securities

Act, an aggregate of 4,168,000 shares of Common Stock through the

exercise of warrants previously granted to Janz Financial Corp.

Ltd., now known as Providence Capital Ltd., or a designee

thereof, who certified that it was not a U.S. person as defined

in Regulation S. These warrants were initially issued on March

8, 1996, and August 14, 1996, in connection with a series of Unit

offerings conducted through Rauscher Pierce & Clark, Inc., and

its wholly-owned subsidiary, Rauscher Pierce & Clark Ltd., as the

Placement Agent, in compliance with Regulation S of the

Securities Act.

By agreement dated November 19, 1996, the

Company agreed to reduce the exercise prices of such warrants

provided the warrants were immediately exercised. Pursuant to

such agreement the initial warrant exercise prices of $0.35 and

$0.25 per share were reduced to $0.125 per share.

Exercise Date

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



December 27, 1996

December 31, 1996

December 31, 1996

January 8, 1997

January 9, 1997



Warrants Exercised

-----------------664,000

664,000

800,000

530,000

1,510,000



Shares Issued

------------664,000

664,000

800,000

530,000

1,510,000



Net Consideration

----------------$ 83,000

$ 83,000

$100,000

$ 66,250

$188,750



In all instances the warrants were exercised outside the U.S.

by persons or entities who certified that they were non-U.S.

persons as defined in Regulation S and the shares were all

delivered against payment outside the U.S. in accordance with

such Regulation.

O



In December 1996 and January 1997, the Company issued Stock

Purchase Warrants dated December 31, 1996 (2,128,000 warrants)

and January 8, 1997 (2,040,000 warrants) to purchase up to an

aggregate of 4,168,000 shares of Common Stock at $0.125 per share

on or before August 13, 2001 to Providence Capital Ltd. as

additional consideration for the immediate exercise of 4,168,000

warrants described above at the reduced exercise price. The



securities issued in this transaction were not registered under

the Securities Act in reliance upon the exemption provided by

Regulation S thereof.

O



In November 1996, the Company issued 6,271,288 shares of

Common Stock to holders of its Secured Subordinated Notes in

respect of $1,064,415.08 of interest payable October 1, 1996,

including penalty interest thereon. The securities issued in

this transaction were not registered under the Securities Act in

reliance upon the exemption provided by Section 4(2) with respect

to 5,330,594 shares and Regulation S with respect to 940,694

shares.



O



In November 1996, the Company issued Stock Purchase Warrants

dated November 26, 1996, in connection with a sale of a 58.911%

interest in a 50% interest in certain promissory notes ($314,500

in principal) securing the Lutcher Moore Tract held by one of the

Company's wholly-owned subsidiaries for $250,000 in cash, net

after discount, entitling the following holders thereto to

purchase up to 2,666,666 shares of Common Stock at $0.125 per

share on or before December 31, 1999:

Warrant Holder

Opportunity Associates, L.P.

Kayne Anderson Non-Traditional

Investments, L.P.

Arbco Associates, L.P.

Offense Group Associates, L.P.

Foremost Insurance Company

Nobel Insurance Company

Evanston Insurance Company

Topa Insurance Company



Warrants

133,333

666,666

800,000

333,333

266,667

133,333

133,333

200,000



The

securities issued in this transaction

were

registered under the Securities Act in reliance upon

exemption provided by Section 4(2) thereof.



not

the



O



On October 30, 1996, the Company issued 33,125 shares of

Common Stock and warrants to purchase an additional 33,125 shares

of Common Stock to Mr. A. Rosenbloom issued in lieu of $14,326

cash compensation. The shares of Common Stock and the warrants

were subsequently returned to the Company by the recipient for

personal business reasons. The securities issued in this

transaction were not registered under the Securities Act in

reliance upon the exemption provided by Section 4(2) thereof.



O



On October 30, 1996, the Company issued 1,325,000 shares of

Common Stock and warrants to purchase an additional 2,466,875

shares of Common Stock to Mr. Mitch Leigh in lieu

of

approximately $580,000 in cash compensation under a consulting

agreement dated July 10, 1996. In February 1997, effective

October 1996, Mr. Leigh cancelled the consulting agreement and

returned the above-referenced shares of Common Stock and warrants

to the Company. The securities issued in this transaction were

not registered under the Securities Act in reliance upon the

exemption provided by Section 4(2) thereof.



O



In August 1996, the Company sold 1,500,000 shares of Common

Stock in a private placement transaction to Provincial Securities

Ltd. for net consideration of $200,000. The securities issued in

this transaction were not registered under the Securities Act in

reliance upon the exemption provided by Regulation S thereof.



O



In August 1996, the Company issued Common Stock Purchase

Warrants to Terrenex Acquisitions Corp. dated August 16, 1996,

entitling the holder thereof to purchase up to 300,000 shares of

Common Stock at $0.25 per share on or before December 31, 1998 as

compensation for locating a purchaser for 1,500,000 shares of

Common Stock sold to Provincial Securities Ltd. The securities

issued in this transaction were not registered under the

Securities Act in reliance upon the exemption provided by

Regulation S thereof.



O



In August 1996, the Company issued 2,800,000 shares of

Common Stock and 2,800,000 Common Stock Purchase Warrants to Janz

Financial Corp. Ltd. ("Janz"), who placed the units with their

clients. Each unit was comprised of one share of Common Stock

and one five-year warrant to purchase one share of Common Stock.

The Company received $402,000 in proceeds from the placement. The



securities issued in this transaction were not registered under

the Securities Act in reliance upon the exemption provided by

Regulation S thereof.

O



In August 1996, the Company issued to Janz, as compensation

for the placement of the 2,800,000 units described above, 280,000

Common Stock Purchase Warrants at an exercise price of $0.25 per

share until August 13, 2001. The securities issued in this

transaction were not registered under the Securities Act in

reliance upon the exemption provided by Regulation S thereof.



O



In July 1996, the Company issued 1,500,000 Common Stock

Purchase Warrants exercisable at $.25 per share expiring five

years after the date of issuance, to Arthur Rosenbloom as

consideration for past fundraising services. The securities

issued in this transaction were not registered under the

Securities Act in reliance upon the exemption provided by Section

4(2) thereof.



O



In July 1996, the Company issued 50,000 shares of Common

Stock

held as treasury stock to an accredited non-U.S.

institutional investor, The Securities Management Trust Limited

A/C K, in a brokered transaction, for net proceeds after fees and

discounts of $12,875. The securities issued in this transaction

were not registered under the Securities Act in reliance upon the

exemption provided by Regulation S thereof.



O



In June 1996, the Company issued 920,000 shares of Common

Stock

held as treasury stock to an accredited non-U.S.

institutional investor, The Securities Management Trust Limited

A/C K, in a series of brokered transactions, for net proceeds

after fees and discounts of $133,900. The securities issued in

this transaction were not registered under the Securities Act in

reliance upon the exemption provided by Regulation S thereof.



O



In May 1996, the Company issued an aggregate of 4,442,689

shares of Common Stock to the holders of its Secured Subordinated

Notes in consideration for $1,060,261.27 in interest payable

April 1, 1996, including penalty interest thereon. The securities

issued in this transaction were not registered under the

Securities Act in reliance upon the exemption provided by Section

4(2) with respect to 3,776,285 shares and Regulation S with

respect to 666,404 shares.



O



On May 16, 1996, the Company issued 72,880 shares of Common

Stock to EnCap Investments, L.C. as consideration for a finders

fee of 4% ($22,775) earned in connection with the Regulation S

unit offering in Europe conducted by Rauscher Pierce & Clark, as

placement agent. The fee was based on the offering price of

$0.3125 per share. The securities issued in this transaction were

not registered under the Securities Act in reliance upon the

exemption provided by Section 4(2) thereof.



O



On the following dates, the Company

numbers of Common Stock Purchase Warrants

Clark in consideration for acting as

Regulation S Units offerings conducted in

Closing Date



issued the following

to Rauscher Pierce &

placement agent for

Europe:



Warrants



December 22, 1995



696,000



March 8, 1996



204,000



April 23, 1996



180,000



The

securities issued in this transaction

were

registered under the Securities Act in reliance upon

exemption provided by Regulation S thereof.

O



not

the



On the following dates the Company issued units, each unit

consisting of one share of Common Stock and Stock Purchase

Warrants to acquire one share of Common Stock, in connection with

a Regulation S unit offering conducted through Rauscher Pierce &

Clark, as placement agent, as follows:

Closing Date

December 22, 1995

March 8, 1996



Consideration

$1,800,000

$ 400,000



Common Stock

6,960,000

2,040,000



Warrants

6,960,000

2,040,000



April 23, 1996



$



349,000



1,800,000



1,800,000



The

securities issued in this transaction

were

registered under the Securities Act in reliance upon

exemption provided by Regulation S thereof.



not

the



O



On February 9, 1996, the Company sold from treasury stock

416,667 units, each unit consisting of one share of Common Stock

and one warrant to purchase Common Stock, to Longhorn Partners,

at a unit price of $0.30 per unit. The warrants are exercisable

on or before December 28, 2000 at an exercise price of $0.50 per

share. The securities issued in this transaction were not

registered under the Securities Act in reliance upon the

exemption provided by Section 4(2) thereof.



O



On February 9, 1996, the Company issued to EnCap Investments

L.C. 50,000 shares of Common Stock held as treasury stock as

compensation for assisting the Company in transactions related to

the Zhao Dong Block. The securities issued in this transaction

were not registered under the Securities Act in reliance upon the

exemption provided by Section 4(2) thereof.



O



On February 9, 1996, the Company issued 317,264 shares of

Common Stock to EnCap Investments, L.C. as consideration for a

finders fee of 4% ($99,145) in connection with the Regulation S

unit offering in Europe conducted by Rauscher Pierce & Clark, as

placement agent. The fee was based on the offering price of

$0.3125 per share. The securities issued in this transaction were

not registered under the Securities Act in reliance upon the

exemption provided by Section 4(2) thereof.



O



In January 1996, the Company issued 2,063,686 shares of

Common Stock to the holders of the Company's Secured Subordinated

Notes in respect of $1,091,184.11 of interest payable October 1,

1995, including penalty interest thereon. The securities issued

in this transaction were not registered under the Securities Act

in reliance upon the exemption provided by Section 4(2) with

respect to 1,754,133 shares and Regulation S with respect to

309,553 shares.



O



In January 1996, the Company issued to Target Benefit

Pension Trust (66,667) and Butler Partners (416,667) Common Stock

Purchase Warrants exercisable at $.50 per share and expiring

December 28, 2000 in consideration for their agreement to not

sell shares of Common Stock acquired by them from certain

institutional investors for a 90-day period following the

acquisition. The securities issued in this transaction were not

registered under the Securities Act in reliance upon the

exemption provided by Section 4(2) thereof.



O



In January 1996, the Company issued to the Trust of Mitch

Leigh FBO David Leigh (216,663) and FBO Rebecca Leigh (216,667)

Common Stock Purchase Warrants exercisable at $.50 per share

expiring January 2, 2001 in connection with a January 1996, in

consideration for their agreement not to sell shares of common

Stock acquired by them from certain institutional investors for a

90-day period following the acquisition. The securities issued in

this transaction were not registered under the Securities Act in

reliance upon the exemption provided by Section 4(2) thereof.



O



On December 6, 1995, the Company sold to John Chandler, from

shares of Common Stock reserved for payment to William Wang,

186,896 shares of Common Stock at $0.35 per share. The proceeds

of $65,414 were applied to reduction of Mr. Wang's receivable

with the Company. The securities issued in this transaction were

not registered under the Securities Act in reliance upon the

exemption provided by Section 4(2) thereof.



O



In December 1995, the Company issued to Messrs. Steven

Gottlieb (333,334); Ron Savarese (83,334) and Tushar Ramani

(333,334) Common Stock Purchase Warrants exercisable at $.50 per

share in consideration for their agreement to not sell shares of

Common Stock acquired by them from certain institutional

investors for a 90-day period following the acquisition.

The

securities issued in this transaction were not registered under

the Securities Act in reliance upon the exemption provided by

Section 4(2) thereof.



O



On

unit



September 21, 1995, the Company sold 75,000 units, each

comprised of one share of Common Stock and warrant to



purchase Common Stock to Arthur Rosenbloom for a purchase price

of $32,438 at $0.4325 per unit. The securities issued in this

transaction were not registered under the Securities Act in

reliance upon the exemption provided by Section 4(2) thereof.

O



On September 21, 1995, the Company sold 3,000,000 units,

each unit comprised of one share of Common Stock and warrants to

purchase Common Stock to Mitch Leigh for a purchase price of

$1,297,500 at $0.4325 per unit. The securities issued in this

transaction were not registered under the Securities Act in

reliance upon the exemption provided by Section 4(2) thereof.



O



On September 21, 1995, the Company issued 50,000 shares of

Common Stock and 100,000 warrants to purchase Common Stock to

Arthur Rosenbloom in lieu of $22,125 of cash compensation for

placing 3,000,000 units (described below). In February 1997, Mr.

Rosenbloom returned these securities with the value of such

securities applied to Mr. Rosenbloom's subscription for Series F

Preferred Stock issued in February 1997. The securities issued in

this transaction were not registered under the Securities Act in

reliance upon the exemption provided by Section 4(2) thereof.



O



In August 1995, the Company issued an aggregate of 4,266,861

shares of Common Stock to its certain holders of Series A

Preferred Stock in respect of $1.2 million in dividends payable

December 31, 1994 and $1.3 million in dividends payable June 30,

1995. The securities issued in this transaction were not

registered under the Securities Act in reliance upon the

exemptions provided by Section 4(2) and Regulation S thereof.



O



In June 1995, the Company issued 1,640,602 shares of Common

Stock to the holders of the Secured Subordinated Notes in respect

of $1,074,664.07 interest payable April 1, 1995, including

penalty interest thereon. The securities issued in

this

transaction were not registered under the Securities Act in

reliance upon the exemption provided by Section 4(2) with respect

to 1,394,511 shares and Regulation S with respect to 246,091

shares.

Series A Preferred Stock

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



During 1990, the Company completed a rights offering of

600,000 units of 50 U.K. Pounds Sterling per "unit," each unit

consisting of 1 share of Series A, Cumulative Convertible

Preferred Stock, par value $1.00 per share ("Series A Preferred

Stock") and 10 warrants to purchase Common Stock which expired

unexercised pursuant to their terms. Until November 10, 1997 the

Series A Preferred Stock was listed on the London Stock Exchange,

and: ranked senior to Common Stock and pari passu with the

Company's Series B, Series E and Series F Preferred Stock with

respect to payment of dividends and distributions on liquidation;

had a liquidation preference of 50 U.K. Pounds Sterling per share

plus accrued and unpaid dividends; was not redeemable in certain

limited circumstances; was nonvoting as a class, except in certain

circumstances, including the right to cast 21 votes for each share

of Series A Preferred Stock held on all resolutions proposed at a

meeting of shareholders if, at the date of notice convening a meeting

of shareholders, the dividend on the Series A Preferred Stock was

six months or more in arrears.

The Series A Preferred Stock was

convertible, at the holder's option, on the basis of 21 shares of

Common Stock for every one share of Series A Preferred Stock,

subject

to adjustment and bore a cumulative dividend fixed at an

annual rate of 4.50 U.K. Pounds Sterling per share, payable semiannually in cash, or, at the Company's election, in additional

shares of Series A Preferred Stock.

During the second quarter of 1996, the Company issued

450,261 shares of Common Stock upon conversion of 21,441 shares

of Series A Preferred Stock, pursuant to the terms thereof.

During March 1997 an additional 39 shares of Series A Preferred

Stock were converted into 819 shares of Common Stock.

During February 1997, the Company sold 13,458 shares of

Series A Preferred Stock to accredited investors for $157,240.

The

proceeds were used to pay the withholding taxes and

fractional interests with respect to the December 31, 1995

dividend payment. The securities issued by the Company in this

transaction were not registered under the Securities Act in

reliance upon the exemption provided by Section 4(2) thereof. In



March 1997, the Company issued an additional 50,137 shares of

Series A Preferred Stock to holders of Series A Preferred Stock

in payment of this dividend, therefore fulfilling its obligation

for such dividend period. Effective November 10, 1997, the

Company recapitalized and combined the Series A Preferred Stock

into an aggregate of 726,907 shares of Amended Series A Preferred

Stock (including approximately $900,000 in unpaid dividends

declared for June 30, 1995 and accrued and unpaid dividends from

June 30, 1996 through November 9, 1997).

Series B Preferred Stock/Amended Series B Preferred Stock

-----------------------------------------------------------The Series B, Cumulative Convertible Preferred Stock,

par value $1.00 per share (the "Series B Preferred Stock") bears

a cumulative fixed dividend at an annual rate of $10 per share,

payable semiannually, and is entitled to 50 votes per share on

all matters on which Common Stockholders are entitled to vote and

separately as a class on certain matters; ranks senior to the

Common Stock and pari passu with the Series A and Series E

Preferred Stocks of the Company with respect to the payment of

dividends and distributions on liquidation; and has a liquidation

preference of $100 per share plus accumulated dividends.

The Company had the option through May 1994, to pay the

dividend in shares of Common Stock, in which case the annual

dividend rate was $12 per share, with the holder being entitled

to require the Company to use its best efforts to sell such

shares on their behalf and to reimburse such holder for the

difference, if any, between such net proceeds and $11 per share

per annum.

The Company is currently entitled to pay the

redemption price of the Series B Preferred Stock in shares of

Common Stock.

Effective June 30, 1994, the terms of the Series B

Preferred Stock were amended to permit the Company to issue

shares of Common Stock in lieu of cash dividends for so long as

the

Series

B

Preferred Stock remains

outstanding.

In

consideration for this amendment, the Series B Preferred Stock

was further amended: (i) to reduce the exercise price of the

remaining 2.5 million warrants outstanding from $2.00 to $1.50

per share and to increase the number of shares of Common Stock

covered by such warrants to 3.325 million shares and (ii) to

extend the option of the holders to redeem their shares of Series

B Preferred Stock, which were only redeemable on the third,

fourth and fifth anniversaries of the dates of their issuance and

automatically upon exercise of the remaining warrants, upon

ninety days notice to the Company, at any time and from time to

time, after August 31, 1994, with the Company retaining the right

to pay the redemption price in Common Stock.

In May 1995, the holder of the Series B Preferred Stock

exercised its redemption rights. In July 1997, the holder

commenced a lawsuit against the Company and its then-directors

regarding the redemption of the shares. Effective December 31,

1997, the Company and the holder of the Series B Preferred Stock

entered into an interim settlement with respect to the action,

conditioned upon the closing of the final settlement on or before

February 27, 1998 which was later extended to March 6, 1998. The

closing of the final settlement took place on March 3, 1998, and

on that date the holder of the Series B Preferred Stock sold the

stock and accompanying warrants to Arbco Associates, L.P., Kayne

Anderson

Non-Traditional Investments, L.P.,

Offense

Group

Associates, L.P. and Opportunity Associates, L.P., each

a

California limited partnership whose general partner is KAIM NonTraditional, L.P.

The purchasers exchanged the

Series

B

Preferred Stock and accompanying warrants for an aggregate of

44,465 shares of Amended Series B Preferred Stock and warrants to

purchase 250,000 shares of Common Stock, subject to adjustment,

and received 2,620 shares of Amended Series B Preferred Stock in

payment of all accrued and unpaid dividends on the shares of

Series B Preferred Stock exchanged by them.

On June 30, 1998, the Company issued 1,320 shares of

Amended Series B Preferred Stock in respect of an in-kind

dividend payable on that date.

Series E Preferred Stock

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



During the third quarter of 1995 and first quarter of

1996, the Company completed a private placement of up to an

aggregate of 50,000 shares of a new series of Preferred Stock

designated the Series E, Cumulative Convertible Preferred Stock,

$1.00 par value per share ("Series E Preferred Stock").

The

Company placed 44,129 shares of Series E Preferred Stock for

which it received approximately $1.9 million in cash and 2.8

million shares of its unregistered Common stock valued at $1.4

million in consideration. During 1996, the Company issued 2,525

shares of Series E Preferred Stock in payment of the December 31,

1995 and June 30, 1996 dividends. During 1997, the Company

issued 5,261 shares of Series E Preferred Stock in payment of the

December 31, 1996 and June 30, 1997 dividends.

Effective

November 10, 1997, the Company recapitalized and combined the

Series E Preferred Stock into an aggregate of 63,706 shares of

Amended Series A Preferred Stock (including accrued and unpaid

dividends paid in kind).

Series F Preferred Stock

-----------------------In December 1996, XCL authorized the issuance of up to

50,000 shares of a new series of Preferred Stock designated the

Series F, Cumulative Convertible Preferred Stock, $1.00 par value

per

share

("Series F Preferred Stock") to two

existing

stockholders of XCL. During February 1997, the Company issued a

total of 21,057 shares of Series F Preferred Stock to Mitch

Leigh, Abby Leigh and Arthur Rosenbloom in consideration of

$225,000, assignment of 1,408,125 shares of Common Stock and

2,500,000 warrants to purchase Common Stock and the release by

the purchasers of certain claims against the Company arising from

the Company's inability to perform under the terms of existing

agreements.

Each share of Series F Preferred

Stock

is

convertible into 400 shares of Common Stock. In July 1997, the

Company issued 1,261 shares of Series F Preferred Stock in

payment of the June 30, 1997 dividends. In January 1998, the

forced conversion feature of the Series F Preferred Stock was

amended and effective January 16, 1998, the Company exercised its

right to force conversion of the Series F Preferred Stock into

633,893 (post split) shares of Common Stock including accrued and

unpaid dividends thereon.

All of the aforementioned securities were issued in

transactions

intended to qualify for

an

exemption

from

registration under the Securities Act afforded by Section 4(2)

thereof

and

Regulation D and/or Regulation S promulgated

thereunder.

Item 16.



Exhibits and Financial Schedules



The following instruments and documents are included as

Exhibits to this Registration Statement. Exhibits incorporated

by reference are so indicated by parenthetical information.

Exhibit No.

3.1



Exhibit



Amended and Restated Certificate of Incorporation of the

Company. (S)(i)



3.2



Amended and Restated By-Laws of the Company.



4.1



Forms of Common Stock Certificates.



(A)(i)



(R)(i)



4.2



Form of Warrant dated January 31, 1994 to purchase

2,500,000 shares of Common Stock at an exercise price of

$1.00 per share, subject to adjustment, issued to INCC.

(D)(i)



4.3



Form of Registrar and Stock Transfer Agency Agreement,

effective March 18, 1991, entered into between the Company

and Manufacturers Hanover Trust Company (predecessor to

Chemical Bank), whereby Chemical Bank (now known as

ChaseMellon Shareholder Services) serves as the Company's

Registrar and U.S. Transfer Agent. (E)



4.4



Copy of Warrant Agreement and Stock Purchase Warrant

dated March 1, 1994 to purchase 500,000 shares of Common

Stock at an exercise price of $1.00 per share, subject to

adjustment, issued to EnCap Investments, L.C. (D)(ii)



4.5



Copy of Warrant Agreement and form of Stock Purchase

Warrant dated March 1, 1994 to purchase an aggregate 600,000

shares of Common Stock at an exercise price of $1.00 per

share, subject to adjustment, issued to principals of San

Jacinto Securities, Inc. in connection with its financial

consulting agreement with the Company. (D)(iii)



4.6



Form of Warrant Agreement and Stock Purchase Warrant

dated April 1, 1994, to purchase an aggregate 6,440,000

shares of Common Stock at an exercise price of $1.25 per

share, subject to adjustment, issued to executives of the

Company surrendering all of their rights under their

employment contracts with the Company. (C)(i)



4.7



Form of Warrant Agreement and Stock Purchase Warrant

dated April 1, 1994, to purchase an aggregate 878,900 shares

of Common Stock at an exercise price of $1.25 per share,

subject to adjustment, issued to executives of the Company

in consideration for salary reductions sustained under their

employment contracts with the Company. (C)(ii)



4.8



Form of Warrant Agreement and Stock Purchase Warrant

dated April 1, 1994, to purchase 200,000 shares of Common

Stock at an exercise price of $1.25 per share, subject to

adjustment, issued to Thomas H. Hudson.

(C)(iii)



4.9



Form of Warrant Agreement and Stock Purchase Warrant

dated May 25, 1994, to purchase an aggregate 100,000 shares

of Common Stock at an exercise price of $1.25 per share,

subject to adjustment, issued to the holders of Purchase

Notes B, in consideration of amendment to

payment terms of

such Notes. (C)(iv)



4.10



Form of Warrant Agreement and Stock Purchase Warrant

dated May 25, 1994, to purchase an aggregate 100,000 shares

of Common Stock at an exercise price of $1.25 per share,

subject to adjustment, issued to the holders of Purchase

Notes B, in consideration for the granting of an option to

further extend payment terms of such Notes.

(C)(v)



4.11



Form of Purchase Agreement between the Company and each

of the Purchasers of Units in the Regulation S Unit Offering

conducted by Rauscher Pierce & Clark with closings as

follows:

December 22, 1995

March 8, 1996

April 23, 1996



4.12



(J)(i)



Form of Warrant Agreement between the Company and each

of the Purchasers of Units in the Regulation S Unit Offering

conducted by Rauscher Pierce & Clark, as follows:

Closing Date

December 22, 1995

March 8, 1996

April 23, 1996



4.13



116 Units

34 Units

30 Units



Warrants

6,960,000

2,040,000

1,800,000



Exercise Price

$.50

$.35

$.35 (J)(ii)



Form of Warrant Agreement between the Company and

Rauscher Pierce & Clark in consideration for acting

placement agent in the Regulation S Units Offering, as

follows:

Closing Date

December 22, 1995

March 8, 1996

April 23, 1996



Warrants

696,000

204,000

180,000



Exercise Price

$.50

$.35

$.35 (J)(iii)



4.14



Form of a series of Stock Purchase Warrants issued to

Janz Financial Corp. Ltd. dated August 14, 1996, entitling

the holders thereof to purchase up to 3,080,000 shares of

Common Stock at $0.25 per share on or before August 13,

2001. (M)(i)



4.15



Stock Purchase Agreement between the Company and

Provincial Securities Ltd. dated August 16, 1996, whereby

Provincial purchased 1,500,000 shares of Common Stock in a

Regulation S transaction. (M)(ii)



as



4.16



Stock Purchase Warrant issued to Terrenex Acquisitions

Corp. dated August 16, 1996, entitling the holder thereof to

purchase up to 3,000,000 shares of Common Stock at $0.25 per

share on or before December 31, 1998. (M)(iii)



4.17



Form of a series of Stock Purchase Warrants dated

November 26, 1996, entitling the following holders thereto

to purchase up to 2,666,666 shares of Common Stock at $0.125

per share on or before December 31, 1999:

Warrant Holder



Warrants



Opportunity Associates, L.P.

Kayne Anderson Non-Traditional

Investments, L.P.

Arbco Associates, L.P

Offense Group Associates, L.P.

Foremost Insurance Company

Nobel Insurance Company

Evanston Insurance Company

Topa Insurance Company



133,333

666,666

800,000

333,333

266,667

133,333

133,333

200,000 (N)(i)



4.18



Form of a series of Stock Purchase Warrants dated

December 31, 1996 (2,128,000 warrants) and January 8, 1997

(2,040,000 warrants) to purchase up to an aggregate of

4,168,000 shares of Common Stock at $0.125 per share on or

before August 13, 2001. (N)(ii)



4.19



Form of Stock Purchase Warrants dated February 6, 1997,

entitling the following holders to purchase an aggregate of

1,874,467 shares of Common Stock at $0.25 per share on or

before December 31, 1999:

Warrant Holder

Donald A. and Joanne R. Westerberg

T. Jerald Hanchey



4.20



Warrants

241,660

1,632,807 (N)(iii)



Form of a series of Stock Purchase Warrants dated April

10, 1997, issued as a part of a unit offered with Unsecured

Notes of XCL-China Ltd., exercisable at $0.01 per share on

or before April 9, 2002, entitling the following holders to

purchase up to an aggregate of 10,092,980 shares of Common

Stock:

Warrant Holder

Kayne Anderson Offshore L.P.

Offense Group Associates, L.P.

Kayne Anderson Non-Traditional

Investments, L.P.

Opportunity Associates, L.P.

Arbco Associates, L.P.

J. Edgar Monroe Foundation

Estate of J. Edgar Monroe

Boland Machine & Mfg. Co., Inc.

Construction Specialists, Inc.

d/b/a Con-Spec, Inc.



Warrants

651,160

1,627,900

1,627,900

1,302,320

1,627,900

325,580

976,740

325,580

1,627,900



(N)(iv)



4.21



Form of Purchase Agreement dated May 13, 1997, between

the Company and Jefferies & Company, Inc. (the "Initial

Purchaser") with respect to 75,000 Units each consisting of

$1,000 principal amount of 13.5% Senior Secured Notes due

May 1, 2004, Series A and one warrant to purchase 1,280

shares of the Company's Common Stock with an exercise price

of $0.2063 per share ("Note Warrants"). (O)(i)



4.22



Form of Purchase Agreement dated May 13, 1997, between

the Company and Jefferies & Company, Inc. (the "Initial

Purchaser") with respect to 294,118 Units each consisting of

one share of Amended Series A, Cumulative Convertible

Preferred Stock ("Amended Series A Preferred Stock") and one

warrant to purchase 327 shares of the Company's Common Stock

with an exercise price of $0.2063 per share ("Equity

Warrants"). (O)(ii)



4.23



Form of Warrant Agreement and Warrant Certificate dated

May 20, 1997, between the Company and Jefferies & Company,

Inc., as the Initial Purchaser, with respect to the Note



Warrants. (O)(iii)

4.24



Form

May 20,

Inc., as

Warrants.



of Warrant Agreement and Warrant Certificate dated

1997, between the Company and Jefferies & Company,

the Initial Purchaser, with respect to the Equity

(O)(iv)



4.25



Form of Designation of Amended Series A Preferred Stock

dated May 19, 1997. (O)(v)



4.26



Form

(O)(vi)



4.27



Form of Global Unit Certificate for 75,000 Units

consisting of 13.5% Senior Secured Notes due May 1, 2004 and

Warrants to Purchase Shares of Common Stock. (O)(vii)



4.28



Form of Global Unit Certificate for 293,765 Units

consisting of Amended Series A Preferred Stock and Warrants

to Purchase Shares of Common Stock. (O)(viii)



4.29



Form of Warrant Certificate dated May 20, 1997, issued

to Jefferies & Company, Inc., with respect to 12,755

warrants to purchase shares of Common Stock of the Company

at an exercise price of $0.2063 per share. (O)(ix)



4.30



Form of Stock Purchase Agreement dated effective as of

October 1, 1997, between the Company and William Wang,

whereby the Company issued 800,000 shares of Common Stock to

Mr. Wang, as partial compensation pursuant to a Consulting

Agreement. (Q)(i)



4.31



Form of Stock Purchase Warrants dated effective as of

February 20, 1997, issued to Mr. Patrick B. Collins with

respect to 200,000 warrants to purchase shares of Common

Stock of the Company at an exercise price of $0.25 per

share, issued as partial compensation pursuant to a

Consulting Agreement. (Q)(ii)



4.32



Certificate of Amendment to the Certificate of

Designation of Series F, Cumulative Convertible Preferred

Stock dated January 6, 1998. (R)(ii)



4.33



Form of Stock Purchase Warrants dated January 16, 1998,

issued to Arthur Rosenbloom (6,389), Abby Leigh (12,600) and

Mitch Leigh (134,343) to purchase shares of Common Stock of

the Company at an exercise price of $0.15 per share, on or

before December 31, 2001. (R)(iii)



4.34



Certificate of Designation of Amended Series B,

Cumulative Convertible Preferred Stock dated March 4, 1998.

(R)(iv)



4.35



Correction to Certificate of Designation of Amended

Series B, Cumulative Convertible Preferred Stock dated March

5, 1998. (R)(v)



4.36



Second Correction to Certificate of Designation of

Amended Series B Preferred Stock dated March 19, 1998.

(R)(vi)



4.37



Form of Stock certificate representing shares of Amended

Series B Preferred Stock. (S)(ii)



4.38



Form of Agreement dated March 3, 1998 between the

Company and Arbco Associates, L.P., Kayne Anderson NonTraditional Investments, L.P., Offense Group Associates,

L.P. and Opportunity Associates, L.P. for the exchange of

Series B Preferred Stock and associated warrants into

Amended Series B Preferred Stock and warrants. (S)(iii)



4.39



Form of Stock Purchase Warrants dated March 3, 1998

between the Company and the following entities:



of



Amended Series A Preferred Stock certificate.



Holder

Arbco Associates, L.P.

Kayne Anderson Non-Traditional

Investments, L.P.

Offense Group Associates, L.P.



Warrants

85,107

79,787

61,170



Opportunity Associates, L.P.



23,936 (S)(iv)



4.40



Form of Stock Purchase Warrant dated effective as of

June 30, 1998, issued to Mr. Patrick B. Collins with respect

to 17,000 warrants to purchase shares of Common Stock of the

Company at an exercise price of $3.75 per share, issued as

partial compensation pursuant to a Consulting Agreement.*



4.41



Form of Warrant Exchange Agreement and Stock Purchase

Warrant dated September 15, 1998 to purchase an aggregate of

351,015 shares of Common Stock at an exercise price of $2.50

per share, subject to adjustment, issued to Cumberland

Partners in exchange for certain warrants held by Cumberland

Partners.*



5.1



Opinion of Satterlee Stephens Burke & Burke LLP (to be

filed by Amendment).



10.1



Contract for Petroleum Exploration, Development and

Production on Zhao Dong Block in Bohai Bay Shallow Water Sea

Area of The People's Republic of China between China

National Oil and Gas Exploration and Development Corporation

and XCL-China Ltd., dated February 10, 1993. (B)



10.2



Form of Net Revenue Interest Assignment dated February

23, 1994, between the Company and the purchasers of the

Company's Series D, Cumulative Convertible Preferred Stock.

(D)(iv)



10.3



Modification Agreement for Petroleum Contract on Zhao

Dong Block in Bohai Bay Shallow Water Sea Area of The

People's Republic of China dated March 11, 1994, between the

Company, China National Oil and Gas Exploration and

Development Corporation and Apache China Corporation LDC.

(D)(v)



10.4



Consulting agreement between the Company and Sir Michael

Palliser dated April 1, 1994. (F)(i)



10.5



Consulting agreement between the Company and Mr. Arthur

W. Hummel, Jr. dated April 1, 1994. (F)(ii)



10.6



Letter of Intent between the Company and CNPC United

Lube Oil Corporation for a joint venture for the manufacture

and sale of lubricating oil dated January 14, 1995. (G)(i)



10.7



Farmout Agreement dated May 10, 1995, between XCL China

Ltd., a wholly owned subsidiary of the Company and Apache

Corporation whereby Apache will acquire an additional

interest in the Zhao Dong Block, Offshore People's Republic

of China. (G)(ii)



10.8



Modification Agreement of Non-Negotiable Promissory

Note and Waiver Agreement between Lutcher & Moore

Cypress Lumber Company and L.M. Holding Associates, L.P.

dated June 15, 1995. (H)(i)



10.9



Third Amendment to Credit Agreement between LutcherMoore Development Corp., Lutcher & Moore Cypress Lumber

Company, The First National Bank of Lake Charles, Mary

Elizabeth Mecom, The Estate of John W. Mecom, The Mary

Elizabeth Mecom Irrevocable Trust, Matilda Gray Stream, The

Opal Gray Trust, Harold H. Stream III,

The

Succession of Edward M. Carmouche, Virginia Martin

Carmouche and L.M. Holding Associates, L.P. dated June 15,

1995. (H)(ii)



10.10



Second

Amendment to Appointment of Agent

for

Collection and Agreement to Application of Funds between

Lutcher-Moore Development Corp., Lutcher & Moore Cypress

Lumber Company, L.M. Holding Associates, L.P. and The

First National Bank of Lake Charles, dated June 15,

1995. (H)(iii)



10.11



Contract of Chinese Foreign Joint Venture dated July

17, 1995, between United Lube Oil Corporation and XCL

China

Ltd. for the manufacturing and selling

of

lubricating oil and related products. (H)(iv)



10.12



Letter



of



Intent dated July 17, 1995



between



CNPC



United Lube Oil Corporation and XCL Ltd. for discussion of

further projects. (H)(v)

10.13



Copy of Letter Agreement dated March 31, 1995, between

the Company and China National Administration of Coal

Geology for the exploration and development of coal bed

methane in Liao Ling Tiefa and Shanxi Hanchang Mining

Areas. (I)(i)



10.14



Memorandum of Understanding dated December 14, 1995,

between XCL Ltd. and China National Administration of Coal

Geology. (J)(iv)



10.15



Form of Fourth Amendment to Credit Agreement between

Lutcher-Moore Development Corp., Lutcher & Moore Cypress

Lumber Company, The First National Bank of Lake Charles,

Mary Elizabeth Mecom, The Estate of John W. Mecom, The

Mary Elizabeth Mecom Irrevocable Trust, Matilda Gray

Stream, The Opal Gray Trust, Harold H. Stream III, The

Succession of Edward M. Carmouche, Virginia Martin

Carmouche and L.M. Holding Associates, L.P. dated January

16, 1996. (J)(v)



10.16



Form of Third Amendment to Appointment of Agent for

Collection and Agreement to application of Funds between

Lutcher-Moore Development Corp., Lutcher & Moore Cypress

Lumber Company, L.M. Holding Associates, L.P. and The

First National Bank of Lake Charles, dated January 16,

1996. (J)(vi)



10.17



Copy of Purchase and Sale Agreement dated March 8,

1996, between XCL-Texas, Inc. and Tesoro E&P Company, L.P.

for the sale of the Gonzales Gas Unit located in south

Texas. (J)(vii)



10.18



Copy of Limited Waiver between the Company and

Internationale Nederlanden (U.S.) Capital Corporation

dated April 3, 1996. (J)(viii)



10.19



Copy of Purchase and Sale Agreement dated April 22,

1996, between XCL-Texas, Inc. and Dan A. Hughes Company

for the sale of the Lopez Gas Units located in south Texas.

(K)



10.20



Form of Sale of Mineral Servitude dated June 18, 1996,

whereby the Company sold its 75 percent mineral interest in

the Phoenix Lake Tract to the Stream Family Limited Partners

and Virginia Martin Carmouche Gayle. (L)(i)



10.21



Form of Fifth Amendment to Credit Agreement between

Lutcher-Moore Development Corp., Lutcher & Moore Cypress

Lumber Company, The First National Bank of Lake Charles,

Mary Elizabeth Mecom, The Estate of John W. Mecom, The

Mary Elizabeth Mecom Irrevocable Trust, Matilda Gray

Stream, The Opal Gray Trust, Harold H. Stream III, The

Succession of Edward M. Carmouche, Virginia Martin

Carmouche and L.M. Holding Associates, L.P. dated August

8, 1996. (N)(v)



10.22



Form of Assignment and Sale between XCL Acquisitions,

Inc. and purchasers of an interest in certain promissory

notes held by XCL Acquisitions, Inc. as follows:

Date



Purchaser



Principal Amount



Purchase Price



November 19, 1996

November 19, 1996

November

November

November

November

November

November

February



19,

19,

19,

19,

19,

19,

10,



February 10,

(N)(vi)

10.23



Opportunity Associates, L.P.

$15,627.39

Kayne Anderson Non-Traditional

Investments, L.P.

$78,126.36

1996 Offense Group Associates, L.P. $39,063.18

1996 Arbco Associates, L.P.

$93,743.14

1996 Nobel Insurance Company

$15,627.39

1996 Evanston Insurance Company

$15,627.39

1996 Topa Insurance Company

$23,435.79

1996 Foremost Insurance Company

$31,249.48

1997 Donald A. and Joanne R.

Westerberg

$25,000.00

1997 T. Jerald Hanchey

$168,915.74



Form of Sixth Amendment to Credit Agreement between



$12,499.98

$62,499.98

$31,249.99

$75,000.04

$12,499.98

$12,499.98

$18,750.01

$25,000.04

$28,100.00

$189,861.29



Lutcher-Moore Development Corp., Lutcher & Moore Cypress

Lumber Company, The First National Bank of Lake Charles, The

Estate of Mary Elizabeth Mecom, The Estate of John W.

Mecom, The Mary Elizabeth Mecom Irrevocable Trust,

Matilda Gray Stream, The Opal Gray Trust, Harold H.

Stream III, The Succession of Edward M. Carmouche,

Virginia Martin Carmouche and L.M. Holding Associates,

L.P. dated January 28, 1997. (N)(vii)

10.24



Form of Act of Sale between the Company and The

Schumacher Group of Louisiana, Inc. dated March 31, 1997,

wherein the Company sold its office building. (N)(viii)



10.25



Amendment No. 1 to the May 1, 1995 Agreement with

Apache Corp. dated April 3, 1997, effective December 13,

1996. (N)(ix)



10.26



Form of Guaranty dated April 9, 1997 by XCL-China Ltd.

in favor of ING (U.S.) Capital Corporation executed in

connection with the sale of certain Unsecured Notes issued

by XCL-China Ltd. (N)(x)



10.27



Form of First Amendment to Stock Pledge Agreement dated

April 9, 1997, between the Company and ING (U.S.) Capital

Corporation adding XCL Land Ltd. to the Stock Pledge

Agreement dated as of January 31, 1994. (N)(xi)



10.28



Form of Agreement dated April 9, 1997, between ING

(U.S.) Capital Corporation, XCL-China and holders of the

Senior Unsecured Notes, subordinating the Guaranty granted

by XCL-China in favor of ING to the Unsecured Notes.

(N)(xii)



10.29



Form of Forbearance Agreement dated April 9, 1997

between the Company and ING (U.S.) Capital Corporation.

(N)(xiii)



10.30



Form of a series of Unsecured Notes dated April 10,

1997, between the Company and the following entities:

Note Holder

Kayne Anderson Offshore, L.P.

Offense Group Associates, L.P.

Kayne Anderson Non-Traditional

Investments, L.P.

Opportunity Associates, L.P.

Arbco Associates, L.P.

J. Edgar Monroe Foundation

Estate of J. Edgar Monroe

Boland Machine & Mfg. Co., Inc.

Construction Specialists, Inc.

d/b/a Con-Spec, Inc.



10.31



Principal Amount

$200,000

$500,000

$500,000

$400,000

$500,000

$100,000

$300,000

$100,000

$500,000 (N)(xiv)



Form of Subscription Agreement dated April 10, 1997, by

and between XCL-China, Ltd., the Company and the subscribers

of Units, each unit comprised of $100,000 in Unsecured Notes

and 325,580 warrants. (N)(xv)



10.32



Form of Intercompany Subordination Agreement dated

April 10, 1997, between the Company, XCL-Texas, Ltd., XCL

Land Ltd., The Exploration Company of Louisiana, Inc., XCLAcquisitions, Inc., XCL-China Coal Methane Ltd., XCL-China

LubeOil Ltd., XCL-China Ltd., and holders of the Unsecured

Notes. (N)(xvi)



10.33



Form of Indenture dated as of May 20, 1997, between the

Company, as Issuer and Fleet National Bank, as Trustee

("Indenture"). (O)(x)



10.34



Form of 13.5% Senior Secured Note due May 1, 2004,

Series A issued May 20, 1997 to Jefferies & Company, Inc. as

the Initial Purchaser (Exhibit A to the Indenture). (O)(xi)



10.35



Form of Pledge Agreement dated as of May 20, 1997,

between the Company and Fleet National Bank, as Trustee

(Exhibit C to the Indenture). (O)(xii)



10.36



Form of Cash Collateral and Disbursement Agreement

dated as of May 20, 1997, between the Company and Fleet

National Bank, as Trustee and Disbursement Agent, and Herman

J.

Schellstede

& Associates, Inc., as Representative

(Exhibit F to the Indenture). (O)(xiii)



10.37



Form of Intercreditor Agreement dated as of May 20,

1997, between the Company, ING (U.S.) Capital Corporation,

the holders of the Secured Subordinated Notes due April 5,

2000 and Fleet National Bank, as trustee for the holders of

the 13.5% Senior Secured Notes due May 1, 2004 (Exhibit G to

the Indenture). (O)(xiv)



10.38



Registration Rights Agreement dated as of May 20, 1997,

by and between the Company and Jefferies & Company, Inc.

with respect to the 13.5% Senior Secured Notes due May 1,

2004 and 75,000 Common Stock Purchase Warrants (Exhibit H to

the Indenture). (O)(xv)



10.39



Form of Security

Statement and Perfection

1997, by the Company in

Trustee (Exhibit I to the



10.40



Registration Rights Agreement dated as of May 20, 1997,

by and between the Company and Jefferies & Company, Inc.

with respect to the 9.5% Amended Series A Preferred Stock

and Common Stock Purchase Warrants. (O)(xvii)



10.41



Form of Restated Forbearance Agreement dated effective

as of May 20, 1997, between the Company, XCL-Texas, Inc. and

ING (U.S.) Capital Corporation. (O)(xviii)



10.42



Form of Seventh Amendment to Credit Agreement between

Lutcher-Moore Development Corp., Lutcher & Moore Cypress

Lumber Company, The First National Bank of Lake Charles, The

Estate of Mary Elizabeth Mecom, The Estate of John W.

Mecom, The Mary Elizabeth Mecom Irrevocable Trust,

Matilda Gray Stream, The Opal Gray Trust, Harold H.

Stream III, The Succession of Edward M. Carmouche,

Virginia Martin Carmouche and L.M. Holding Associates,

L.P. dated May 8, 1997. (P)(i)



10.43



Form of Eighth Amendment to Credit Agreement between

Lutcher-Moore Development Corp., Lutcher & Moore Cypress

Lumber Company, The First National Bank of Lake Charles, The

Estate of Mary Elizabeth Mecom, The Estate of John W.

Mecom, The Mary Elizabeth Mecom Irrevocable Trust,

Matilda Gray Stream, The Opal Gray Trust, Harold H.

Stream III, The Succession of Edward M. Carmouche,

Virginia Martin Carmouche and L.M. Holding Associates,

L.P. dated July 29, 1997. (P)(ii)



10.44



Form of Consulting Agreement dated February 20, 1997,

between the Company and Mr. Patrick B. Collins, whereby Mr.

Collins performs certain accounting advisory services.

(Q)(ii)



10.45



Form of Consulting Agreement dated effective as of June

1, 1997, between the Company and Mr. R. Thomas Fetters, Jr.,

a director of the Company, whereby Mr. Fetters performs

certain geological consulting services. (Q)(iii)



10.46



Form of Agreement dated October 1, 1997, between the

Company and Mr. William Wang, whereby Mr. Wang performs

certain consulting services with respect to its investments

in China. (Q)(iv)



10.47



Form of Services Agreement dated August 1, 1997,

between the Company and Mr. Benjamin B. Blanchet, an officer

of the Company. (Q)(v)



10.48



Form of Promissory Note dated August 1, 1997, in a

principal amount of $100,000, made by Mr. Benjamin B.

Blanchet in favor of the Company. (Q)(vi)



10.49



Form of Consulting Agreement dated June 15, 1998,

between the Company and Mr. Patrick B. Collins, whereby Mr.

Collins performs certain accounting advisory services.*



Agreement, Pledge and Financing

Certificate dated as of May 20,

favor of Fleet National Bank, as

Indenture). (O)(xvi)



10.50



Amended and Restated Long Term Stock Incentive Plan

effective June 1, 1997. (T)(i)



10.51



Form of Restricted Stock Award Agreement.*



10.52



Form of Nonqualified Stock Option Agreement.*



10.53



Appreciation Option for M. W. Miller, Jr. (T)(ii)



10.54



Zhang Dong Petroleum



21.1



Sharing Contract.*



Subsidiaries of the Company

XCL-China Ltd.

XCL-China LubeOil Ltd.

XCL-China Coal Methane Ltd.

XCL-Cathay Ltd.

XCL-Texas Inc.

XCL-Acquisitions, Inc.

The Exploration Company of Louisiana, Inc.

XCL Land Ltd.



23.1



Consent of PricewaterhouseCoopers LLP*



23.2



Consent of H.J. Gruy and Associates, Inc.*



23.3

Consent of Satterlee Stephens Burke & Burke LLP

(included in Exhibit 5.1)

24.1



Power of Attorney (U)



99.1

Reserve report dated January 1, 1998, prepared by H.J.

Gruy and Associates, Inc. (V)

_________________________

*Filed herewith.

(A)



Incorporated by reference to the Registration Statement

on Form 8-B filed on July 28, 1988, where it appears as

Exhibits 3(c).



(B)



Incorporated by reference to a Registration Statement on

Form S-3 (File No. 33-68552) where it appears as Exhibit

10.1.



(C)



Incorporated by reference to Post-Effective Amendment No.

2 to Registration Statement on Form S-3 (File No. 33-68552)

where it appears as: (i) Exhibit 4.29; (ii) Exhibit 4.30;

and (iii) through (v) Exhibits 4.34 through 4.36,

respectively.



(D)



Incorporated by reference to Amendment No. 1 to Annual

Report on Form 10-K filed April 15, 1994, where it appears

as: (i) Exhibit 4.32; (ii) Exhibit 4.36; (iii) Exhibit

4.37; (iv) through (v) Exhibit 10.41 through Exhibit 10.47,

respectively; and (v) Exhibit 10.49.



(E)



Incorporated by reference to an Annual Report on Form 10K for the fiscal year ended December 31, 1990, filed April

1, 1991, where it appears as Exhibit 10.27.



(F)



Incorporated by reference to Amendment No. 1 to an Annual

Report on Form 10-K/A No. 1 for the fiscal year ended

December 31, 1994, filed April 17, 1995, where it appears

as: (i) through (ii) Exhibits 10.22 through 10.23,

respectively.



(G)



Incorporated by reference to Quarterly Report on Form

10-Q for the quarter ended March 31, 1995, filed May

15, 1995, where it appears as: (i) Exhibit 10.26; and (ii)

Exhibit 10.28.



(H)



Incorporated by reference to Quarterly Report on Form

10-Q for the quarter ended June 30, 1995, filed August 14,

1995, where it appears as: (i) through (v) Exhibits 10.29

through 10.33, respectively.



(I)



Incorporated by reference to Quarterly Report on Form

10-Q for the quarter ended September 30, 1995, filed

November 13, 1995, where it appears as Exhibit 10.35.



(J)



Incorporated by reference to Annual Report on Form 10-K

for the year ended December 31, 1995, filed April 15, 1996,

where it appears as: (i) through (iii) Exhibits 4.28

through 4.30, respectively; and (iv) Exhibit 10.31 and

(v) through (vii) Exhibits 10.33 through 10.36,

respectively.



(K)



Incorporated by reference to Quarterly Report on Form 10Q for the quarter ended March 31, 1996, filed May 15, 1996,

where it appears as Exhibit 10.37.



(L)



Incorporated by reference to Quarterly Report on Form 10Q for the quarter ended June 30, 1996, filed August 14,

1996, where it appears as Exhibit 10.38.



(M)



Incorporated by reference to Quarterly Report on Form 10Q for the quarter ended September 30, 1996, filed November

14, 1996, where it appears as (i) through (iii) Exhibits

4.32 through 4.34.



(N)



Incorporated by reference to Annual Report on Form 10-K

for the year ended December 31, 1996, filed April 15, 1997,

where it appears as (i) through (iii) Exhibits 4.35 through

4.38; (iv) Exhibit 4.40; and (v) through (xvi) Exhibits

10.39 through 10.50.



(O)



Incorporated by reference to Current Report on Form 8-K

dated May 20, 1997, filed June 3, 1997, where it appears as

(i) through (ix) Exhibits 4.1 through 4.9 and (x) through

(xviii) Exhibits 10.51 through 10.59.



(P)



Incorporated by reference to Quarterly Report on Form 10Q for the quarter ended June 30, 1997, filed August 14,

1997, where it appears as (i) and (ii) Exhibits 10.60 and

10.61.



(Q)



Incorporated by reference to Quarterly Report on Form 10Q for the quarter ended September 30, 1997, filed November

14, 1997, where it appears as (i) Exhibit 4.52; and (ii)

through (vi) Exhibits 10.61 through 10.66.



(R)



Incorporated by reference to Annual Report on Form 10-K

for the year ended December 31, 1997, filed April 15, 1998,

where it appears as (i) Exhibit 4.1; (ii) through (vi)

Exhibits 4.32 through 4.36, respectively.



(S)



Incorporated by reference to Amendment No. 1 to Annual

Report on Form 10-K for the year ended December 31, 1997,

filed April 22, 1998, where it appears as (i) Exhibit 3.1;

and (ii) through (iv) Exhibits 4.37 through 4.39,

respectively.



(T)



Incorporated by reference to Proxy Statement dated

November 20, 1997 filed November 6, 1997, where it appears

as (i) Appendix C; and (ii) Appendix D, respectively.



(U)



Incorporated by reference to Registration Statement on

Form S-1 filed May 6, 1998, where it appears as Exhibit

24.1.



(V)



Incorporated by reference to Amendment No. 2 to the

Annual Report on Form 10-K for the year ended December 31,

1997, filed on October 23, 1998, where it appears as Exhibit



Item 17.



Undertakings

The undersigned registrant hereby undertakes:



(1) To file, during any period in which offers or sales

are being made, a post-effective amendment to this registration

statement:

(i) To include any prospectus required

10(a)(3) of the Securities Act of 1933;



by



Section



(ii) To reflect in the prospectus any facts or events

arising after the effective date of the registration statement

(or the most recent post-effective amendment thereof) which,

individually or in the aggregate, represent a fundamental change

in the information set forth in the registration statement.

Notwithstanding the foregoing, any increase or decrease in volume

of securities offered (if the total dollar value of securities

offered would not exceed that which was registered) and any

deviation from the low or high and of the estimated maximum

offering range may be reflected in the form of prospectus filed

with the Commission pursuant to Rule 424(b) if, in the aggregate,

the changes in volume and price represent no more than 20 percent

change in the maximum aggregate offering price set forth in the

"Calculation

of Registration Fee" table in the

effective

registration statement;

(iii) To include any material information with respect

to the plan of distribution not previously disclosed in the

registration statement or any material change to such information

in the registration statement.

(2) That, for the purpose of determining any liability

under the Securities Act of 1933, each such post-effective

amendment shall be deemed to be a new registration statement

relating to the securities offered therein, and the offering of

such securities at that time shall be deemed to be the initial

bona fide offering thereof.

(3) To remove from registration by means of a

effective amendment any of the securities being registered

remain unsold at the termination of the offering.



postwhich



Insofar as indemnification for liabilities arising under the

Securities Act may be permitted to directors, officers and

controlling persons of the undersigned registrant pursuant to the

provisions described under Item 14 above, or otherwise, the

undersigned registrant has been advised that, in the opinion of

the Securities and Exchange Commission, such indemnification is

against public policy as expressed in the Securities Act and is,

therefore, unenforceable.

In the event that a claim

for

indemnification against such liabilities (other than the payment

by the undersigned registrant of expenses incurred or paid by a

director, officer or controlling person of the undersigned

registrant in the successful defense of any action, suit or

proceeding) is asserted by such director, officer or controlling

person in connection with the securities being registered, the

undersigned registrant will, unless, in the opinion of its

counsel, the matter has been settled by controlling precedent,

submit to a court of appropriate jurisdiction the question

whether such indemnification by it is against public policy as

expressed in the Securities Act and will be governed by the final

adjudication of such issue.

SIGNATURES

Pursuant to the requirements of the Securities Act of

1933, the Registrant has duly caused this Amendment No. 2 to the

Registration Statement on Form S-1 to be signed on its behalf by

the undersigned, thereunto duly authorized, in the City of

Lafayette, State of Louisiana on the 23rd day of October, 1998.

XCL LTD.

/s/ Benjamin B. Blanchet

By:___________________________

Benjamin B. Blanchet

Executive Vice President



Pursuant to the requirements of the Securities Act of 1933,

this Amendment No. 2 to the Registration Statement on Form S-1

has been signed by the following persons in the capacities and on

the dates indicated.

Signature

--------/s/ Marsden W. Miller, Jr.



Title

------



Date

----



- -------------------------Marsden W. Miller, Jr.

Chairman of the Board and Chief

Executive Officer (principal

executive officer) and Acting

Chief Financial Officer

(principal financial and

accounting officer)



October 23, 1998



/s/ John T. Chandler

- -----------------------John T. Chandler



Vice Chairman of the Board



October 23, 1998



Executive Vice President

and Director



October 23, 1998



/s/ Benjamin B. Blanchet

- -----------------------Benjamin B. Blanchet

/s/ R. Thomas Fetters, Jr. *

____________________________

R. Thomas Fetters, Jr.



Director



October 23, 1998



/s/ Fred Hofheinz*

- ---------------------------Fred Hofheinz



Director



October 23, 1998



/s/ Francis J. Reinhardt, Jr. *

- -----------------------------Francis J. Reinhardt, Jr.



Director



October 23, 1998



/s/ Arthur W. Hummel, Jr. *

- ----------------------------Arthur W. Hummel, Jr.



Director



October 23, 1998



/s/ Michael Palliser*

- ------------------------Sir Michael Palliser



Director



October 23, 1998



- -------------------------Peter F. Ross



Director



------------, 1998



- ------------* By Benjamin B. Blanchet, Attorney In Fact

</TEXT>

</DOCUMENT>

<DOCUMENT>

<TYPE>EX-4.40

<SEQUENCE>2

<TEXT>



XCL LTD.

WARRANT CERTIFICATE

THE WARRANTS REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN

REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS

AMENDED (THE "ACT"), OR ANY OTHER FEDERAL OR STATE SECURITIES OR

BLUE SKY LAWS OF ANY OTHER DOMESTIC OR FOREIGN JURISDICTION. NO

OFFER, SALE, TRANSFER, PLEDGE OR OTHER DISPOSITION (COLLECTIVELY,

A "DISPOSAL") OF THE WARRANTS REPRESENTED BY THIS CERTIFICATE MAY

BE MADE UNLESS (i) REGISTERED UNDER THE ACT AND ANY APPLICABLE

STATE SECURITIES OR BLUE SKY LAWS OR (ii) XCL LTD. (THE "CO

MPANY") RECEIVES A WRITTEN OPINION OF UNITED STATES LEGAL COUNSEL

IN FORM AND SUBSTANCE SATISFACTORY TO IT TO THE EFFECT THAT SUCH

DISPOSAL IS EXEMPT FROM SUCH REGISTRATION REQUIREMENTS.

No. PBC-9

WARRANTS TO PURCHASE

COMMON STOCK OF XCL LTD.

Initial Issuance on June 30, 1998

Void after 5:00 p.m. New York Time, June 30, 2003



THIS CERTIFIES THAT, for value received, PATRICK B. COLLINS

or registered assigns (the "Holder") is the registered holder of

warrants (the "Warrants") to purchase from XCL Ltd., a Delaware

corporation (the "Company"), at any time or from time to time

beginning on June 30, 1998 and until 5:00 p.m., New York time, on

June 30, 2003 (the "Expiration Date"), subject to the conditions

set forth herein, at the initial exercise price of $3.75 per

share (the "Initial Exercise Price"), subject to adjustment as

set forth herein (the "Exercise Price"), up to an aggregate of

seventeen thousand (17,000) fully paid and non-assessable common

shares, par value $0.01 per share (the "Common Stock"), of the

Company (the "Shares") upon surrender of this warrant certificate

(the "Certificate") and payment of the Exercise Price multiplied

by the number of Shares in respect of which Warrants are then

being exercised (the "Purchase Price") at the principal office of

the Company presently located at 110 Rue Jean Lafitte, Lafayette,

LA 70508, United States of America.

1.



Exercise of Warrants.



(a)

The exercise of any Warrants represented

this Certificate is subject to the conditions set forth below

paragraph 4, "Compliance with U.S. Securities Laws."



by

in



(b)

Subject to compliance with all of

the

conditions set forth herein, the Holder shall have the right at

any time and from time to time after June 30, 1998 to purchase

from the Company the number of Shares which the Holder may at the

time be entitled to purchase pursuant hereto, upon surrender of

this Certificate to the Company at its principal office, together

with the form of election to purchase attached hereto duly com

pleted and signed, and upon payment to the Company of the

Purchase Price.

No Warrant may be exercised after 5:00 p.m., New York time,

on the Expiration Date, after which time all Warrants evidenced

hereby shall be void.

(c)

Payment of the Purchase Price shall be made in

cash, by wire transfer of immediately available funds or by

certified check or banker's draft payable to the order of the Com

pany, or any combination of the foregoing.

(d)

The Warrants represented by this Certificate

are exercisable at the option of the Holder, in whole or in part

(but not as to fractional Shares). Upon the exercise of less

than all of the Warrants evidenced by this Certificate, the

Company shall forthwith issue to the Holder a new certificate of

like tenor representing the number of unexercised Warrants.

(e)

Subject to compliance with all of

the

conditions set forth herein, upon surrender of this Certificate

to the Company at its principal office, together with the form of

election to purchase attached hereto duly completed and signed,

and upon payment of the Purchase Price, the Company shall cause

to be delivered promptly to or upon the written order of the

Holder and in such name or names as the Holder may designate, a

share certificate or share certificates for the number of whole

Shares purchased upon the exercise of the Warrants. Such share

certificate or share certificates representing the Shares shall

be free of any restrictive legend. The Company shall ensure that

no "stop transfer" or similar instruction or order with respect

to the Shares purchased upon exercise of the Warrants shall be in

effect at ChaseMellon Shareholders Services, IRG Plc or any suc

cessor transfer agent for the Common Stock of the Company (the

"Transfer Agent").

2.



Elimination of Fractional Interests.

The Company

shall

not

be required to issue certificates representing

fractions of Shares and shall not be required to issue scrip in

lieu of fractional interests. Instead of any fractional Shares

that would otherwise be issuable to the Holder, the Company shall

pay to the Holder a cash adjustment in respect of such fractional

interest in an amount equal to such fractional interest of the

then-current Market Price per share (as defined in Section 7(f)

hereof).

3.

Payment of Taxes. The Company will pay all documen

tary stamp taxes, if any, attributable to the issuance and

delivery of the Shares upon the exercise of the Warrants;



provided, however, that the Company shall not be required to pay

any taxes which may be payable in respect of any transfer

involved in the issuance or delivery of any Warrant or any Shares

in any name other than that of the Holder, which transfer taxes

shall be paid by the Holder, and until payment of such transfer

taxes, if any, the Company shall not be required to issue such

Shares.

4.

Compliance with U.S. Securities Laws. The Warrants

have not been, and will not be, registered under the United

States Securities Act of 1933, as amended (the "Securities Act"),

or any other federal or state securities or blue sky laws. No

offer, sale, transfer, pledge or other disposition (collectively,

a "Disposal") of the Warrants represented by this Certificate may

be made unless (i) registered under the Act and any applicable

State securities or blue sky laws or (ii) the Company receives a

written opinion of United States legal counsel in form and

substance satisfactory to it to the effect that such Disposal is

exempt from such registration requirements..

5.



Transfer of Warrants.



(a)

The Warrants shall be transferable only on the

books of the Company maintained at the Company's principal office

upon delivery of this Certificate with the form of assignment

attached hereto duly completed and signed by the Holder or by its

duly authorized attorney or representative, accompanied by proper

evidence of succession, assignment or authority to transfer. The

Company may, in its discretion, require, as a condition to any

transfer of Warrants, a signature guarantee, which may be

provided by a commercial bank or trust company, by a broker or

dealer which is a member of the National Association

of

Securities Dealers, Inc., or by a member of a United States

national

securities exchange, The Securities

and

Futures

Authority Limited in the United Kingdom, or The London Stock

Exchange Limited in London, England. Upon any registration of

transfer, the Company shall deliver a new warrant certificate or

warrant certificates of like tenor and evidencing in

the

aggregate a like number of Warrants to the person entitled

thereto in exchange for this Certificate, subject to

the

limitations provided herein, without any charge except for any

tax or other governmental charge imposed in connection therewith.

(b)

Notwithstanding anything in this Certifi-cate

to the contrary, neither any of the Warrants nor any of the

Shares issuable upon exercise of any of the Warrants shall be

transferable, except upon compliance by the Holder with any

applicable provisions of the Securities Act and any applicable

state securities or blue sky laws.

6.



Exchange and Replacement of Warrant

Certificates; Loss or Mutilation of

Warrant Certificates.



(a)

This Certificate is exchangeable without cost,

upon the surrender hereof by the Holder at the principal office

of the Company, for new warrant certificates of like tenor and

date representing in the aggregate the right to purchase the same

number of Shares in such denominations as shall be designated by

the Holder at the time of such surrender. Any transfer not made

in such compliance shall be null and void and shall be given no

effect hereunder.

(b)

Upon receipt by the Company of evidence

reasonably satisfactory to it of the loss, theft, destruction or

mutilation of this Certificate and, in case of such loss, theft

or destruction, of indemnity and security reasonably satisfactory

to it, and reimbursement to the Company of all reasonable

expenses incidental thereto, and upon surrender and cancellation

of this Certificate, if mutilated, the Company will make and

deliver a new warrant certificate of like tenor, in lieu thereof.

7.

Initial Exercise Price; Adjustment of Exercise

Price and Number of Shares.

(a)

The Warrants initially are exercisable at the

Initial Exercise Price per Share, subject to adjustment from time

to time as provided herein. No adjustments will be made for cash



dividends, if any, paid to shareholders of record prior

date on which the Warrants are exercised.



to



the



(b)

In case the Company shall at any time after the

date of this Certificate (i) declare a dividend on the shares of

Common Stock payable in shares of Common Stock, or (ii) subdivide

or split up the outstanding shares of Common Stock, the amount of

Shares to be delivered upon exercise of any Warrant will be

appropriately increased so that the Holder will be entitled to

receive the amount of Shares that such Holder would have owned

immediately

following such actions had such Warrant

been

exercised immediately prior thereto, and the Exercise Price in

effect immediately prior to the record date for such dividend or

the effective date for such subdivision shall be proportionately

decreased, all effective immediately after the record date for

such dividend or the effective date for such subdivision or split

up.

Such adjustments shall be made successively whenever any

event listed above shall occur.

(c)

In case the Company shall at any time after the

date of this Certificate combine the outstanding shares of Common

Stock into a smaller number of shares the amount of Shares to be

delivered upon exercise of any Warrant will be appropriately

decreased so that the Holder will be entitled to receive the

amount of Shares that such Holder would have owned immediately

following such action had such Warrant been exercised immediately

prior thereto, and the Exercise Price in effect immediately prior

to the record date for such combination shall be proportionately

increased, effective immediately after the record date for such

combination. Such adjustment shall be made successively whenever

any such combinations shall occur.

(d)

In the event that the Company shall at any time

after the date of this Certificate (i) issue or sell any shares

of Common Stock (other than the Shares) or securities convertible

or exchangeable into Common Stock without consideration or at a

price per share (or having a conversion price per share, if a

security convertible into Common Stock) less than the Market

Value per share of Common Stock (as defined in Section 7(f)

hereof), or (ii) issue or sell options, rights or warrants to

subscribe for or purchase Common Stock at a price per share less

than the Market Price per share of Common Stock (as defined in

Section 7(f) hereof), the Exercise Price to be in effect after

the date of such issuance shall be determined by multiplying the

Exercise Price in effect on the day immediately preceding the

relevant issuance or record date, as the case may be, used in

determining such Market Value or Market Price, by a fraction, the

numerator of which shall be the number of shares of Common Stock

outstanding on such issuance or record date plus the number of

shares of Common Stock which the aggregate offering price of the

total number of shares of Common Stock so to be issued or to be

offered for subscription or purchase (or the aggregate initial

conversion price of the convertible securities so to be offered)

would purchase at such Market Value or Market Price, as the case

may be, and the denominator of which shall be the number of

shares of Common Stock outstanding on such issuance or record

date plus the number of additional shares of Common Stock to be

issued or to be offered for subscription or purchase (or into

which the convertible securities so to be offered are initially

convertible); such adjustment shall become effective immediately

after the close of business on such issuance or record date;

provided, however, that no such adjustment shall be made for the

issuance of (s) options to purchase shares of Common Stock

granted pursuant to the Company's employee stock option plans

approved by shareholders of the Company (and the shares of Common

Stock issuable upon exercise of such options) (provided that

option exercise prices shall not be less than the Market Value of

the Common Stock (as defined in Section 7(f) hereof) on the date

of the grant of such options), (t) the Company's warrants to

purchase shares of Common Stock (and the shares of Common Stock

issuable upon exercise of such warrants), outstanding on the date

hereof, (u) the Company's shares of Amended Series A, Cumulative

Convertible Preferred Stock (and the shares of such Preferred

Stock issued in lieu of dividend payments thereunder and the

shares of Common Stock issuable upon conversion or redemption of

such Preferred Stock), outstanding on the date hereof, or (v) the

Company's shares of Amended Series B, Cumulative Convertible

Preferred Stock (and the shares of Common Stock issued in lieu of

dividend payments thereunder and the shares of Common Stock

issuable upon conversion or redemption of such Preferred Stock),



outstanding on the date hereof. In case such subscription price

may be paid in a consideration, part or all of which shall be in

a form other than cash, the value of such consideration shall be

as determined reasonably and in good faith by the Board of

Directors of the Company. Shares of Common Stock owned by or

held

for the account of the Company or any wholly-owned

subsidiary shall not be deemed outstanding for the purpose of any

such computation.

Such adjustment shall be made successively

whenever the date of such issuance is fixed (which date of

issuance shall be the record date for such issuance if a record

date therefor is fixed); and, in the event that such shares or

options, rights or warrants are not so issued, the Exercise Price

shall again be adjusted to be the Exercise Price which would then

be in effect if the date of such issuance had not been fixed.

(e)

In case the Company shall make a distribution

to all holders of Common Stock (including any such distribution

made in connection with a consolidation or merger in which the

Company is the continuing corporation) of evidences of its

indebtedness, securities other than Common Stock or assets (other

than cash dividends or cash distributions payable out

of

consolidated earnings or earned surplus or dividends payable in

Common Stock), the Exercise Price to be in effect after such date

of distribution shall be determined by multiplying the Exercise

Price in effect on the date immediately preceding the record date

for the determination of the shareholders entitled to receive

such distribution by a fraction, the numerator of which shall be

the Market Price per share of Common Stock (as defined in Section

7(f) hereof) on such date, less the then-fair market value (as

determined reasonably and in good faith by the Board of Directors

of the Company of the portion of the assets, securities or

evidences of indebtedness so to be distributed applicable to one

share of Common Stock and the denominator of which shall be such

Market Price per share of Common Stock, such adjustment to be

effective immediately after the distribution resulting in such

adjustment. Such adjustment shall be made successively whenever

a date for such distribution is fixed (which date of distribution

shall be the record date for such distribution if a record date

therefor is fixed); and, if such distribution is not so made, the

Exercise Price shall again be adjusted to be the Exercise Price

which would then be in effect if such date of distribution had

not been fixed.

(f)

For the purposes of any computation under this

Section 7, the "Market Price per share" of Common Stock on any

date shall be deemed to be the average of the closing bid price

for the 20 consecutive trading days ending on the record date for

the determination of the shareholders entitled to receive any

rights, dividends or distributions described in this Section 7,

and the "Market Value per share" of Common Stock on any date

shall be deemed to be the closing bid price on the date of the

issuance of the securities for which such computation is being

made, as reported on the principal United States securities

exchange on which the Common Stock is listed or admitted to

trading or if the Common Stock is not then listed on any United

States stock exchange, the average of the closing sales price on

each such day during such 20 day period, in the case of the

Market Price computation, or on such date of issuance, in the

case of the Market Value computation, in the over-the-counter

market as reported by the National Association of Securities

Dealers' Automated Quotation System ("NASDAQ"), or, if not so

reported, the average of the closing bid and asked prices on each

such day during such 20 day period in the case of the Market

Price computation, or on such date of issuance, in the case of

the Market Value computation, as reported in the "pink sheets"

published by the National Quotation Bureau, Inc. or any successor

thereof, or, if not so quoted, the average of the middle market

quotations for such 20 day period in the case of the Market Price

computation, or on such date of issuance, in the case of the

Market Value computation, as reported on the daily official list

of the prices of stock listed on The London Stock Exchange

Limited ("The Stock Exchange Daily Official List").

"Trading

day" means any day on which the Common Stock is available for

trading on the applicable securities exchange or

in

the

applicable securities market. In the case of Market Price or

Market Value computations based on The Stock Exchange Daily

Official List, the Market Price or Market Value shall be

converted into United States dollars at the then spot market

exchange rate of pounds sterling (UK) into United States dollars

as quoted by Chemical Bank or any successor bank thereto on the



date of determination. If a quotation of such exchange rate is

not so available, the exchange rate shall be the exchange rate of

pounds sterling in United States dollars as quoted in The Wall

Street Journal on the date of determination.

(g)

No adjustment in the Exercise Price shall be

required unless such adjustment would require an increase or

decrease of at least $.02 in such price; provided that any

adjustments which by reason of this Section 7(g) are not required

to be made shall be carried forward and taken into account in any

subsequent adjustment; provided, further that such adjustment

shall be made in all events (regardless of whether or not the

amount thereof or the cumulative amount thereof amounts to $.02

(or more) upon the happening of one or more of the events

specified in Sections 7(b), (c) or (i). All calculations under

this Section 7 shall be made to the nearest cent.

(h)

If at any time, as a result of an adjustment

made pursuant to Section 7(b) or (c) hereof, the Holder of any

Warrant thereafter exercised shall become entitled to receive any

shares of the Company other than shares of Common Stock,

thereafter the number of such other shares so receivable upon

exercise of any Warrant shall be subject to adjustment from time

to time in a manner and on terms as nearly equivalent as

practicable to the provisions with respect to the

Shares

contained in this Section 7, and the provisions of

this

Certificate with respect to the Shares shall apply on like terms

to such other shares.

(i)

In the case of (l) any capital reorganization

of the Company, or of (2) any reclassification of the shares of

Common Stock (other than a subdivision or combination

of

outstanding shares of Common Stock), or (3) any consolidation or

merger of the Company, or (4) the sale, lease or other transfer

of all or substantially all of the properties and assets of the

Company as, or substantially as, an entirety to any other person

or entity, each Warrant shall after such capital reorganization,

reclassification of the shares of Common Stock, consolidation, or

sale be exercisable, upon the terms and conditions specified in

this Certificate, for the number of shares of stock or other

securities or assets to which a holder of the number of Shares

purchasable (immediately prior to the effectiveness of such

capital reorganization, reclassification of shares of Common

Stock, consolidation, or sale) upon exercise of a Warrant would

have

been

entitled

upon

such

capital

reorganization,

reclassification of shares of Common Stock, consolidation, merger

or sale; and in any such case, if necessary, the provisions set

forth in this Section 7 with respect to the rights thereafter of

the

Holder shall be appropriately adjusted (as determined

reasonably and in good faith by the Board of Directors of the

Company) so as to be applicable, as nearly as may reasonably be,

to any shares of stock or other securities or assets thereafter

deliverable on the exercise of a Warrant. The Company shall not

effect any such consolidation or sale, unless prior to or

simultaneously with the consummation thereof, the successor

corporation, partnership or other entity (if other than the

Company) resulting from such consolidation or the corporation,

partnership or other entity purchasing such assets or the

appropriate entity shall assume, by written instrument, the

obligation to deliver to the Holder of each Warrant the shares of

stock, securities or assets to which, in accordance with the

foregoing provisions, such Holder may be entitled and all other

obligations of the Company under this Certificate. For purposes

of this Section 7(i) a merger to which the Company is a party but

in which the Common Stock outstanding immediately prior thereto

is changed into securities of another corporation shall be deemed

a consolidation with such other corporation being the successor

and resulting corporation.

(j)

Irrespective of any adjustments in the Exercise

Price or the number or kind of shares purchasable upon the

exercise of the Warrant, Warrant Certificates theretofore or

thereafter issued may continue to express the same Exercise Price

per share and number and kind of Shares as are stated on the

Warrant Certificates initially issuable pursuant to this Warrant.

(k)

The Company may, in its sole discretion, at any

time and from time to time before the Expiration Date, reduce the

Exercise Price to any lower amount by notice to the Holders, in

the manner provided in Section 12.



8.

Notices to Warrant Holders. Nothing contained in

this Certificate shall be construed as conferring upon the Holder

the right to vote or to consent or to receive notice as a stock

holder in respect of any meetings of stockholders for the

election of directors or any other matter, or as having any

rights whatsoever as a stockholder of the Company. If, however,

at any time prior to the exercise or expiration of the Warrants,

any of the following events shall occur:

(i)



the holders of shares of the Common Stock shall

be entitled to receive a dividend or distribution

payable otherwise than in cash, or a cash dividend

or

distribution payable otherwise than out of

current or retained earnings, as indicated by the

accounting treatment of such dividend

or

dis

tribution on the books of the Company; or



(ii) the Company shall offer to all the holders of its

Common Stock any additional shares of capital stock

of the Company or securities convertible into or

exchangeable for shares of capital stock of the

Company, or any option, right or warrant to sub

scribe therefor; or

(iii)

a dissolution, liquidation or winding-up of the

Company (other than in connection with a consoli

dation or merger) or a sale of all or substantially

all of its property, assets and business as an

entirety shall be approved by the Company's Board

of Directors; or

(iv)

there shall be any capital reorganization or

reclassification of the capital stock

of

the

Company (other than a change in the number of

outstanding shares of Common Stock or a change in

the

par

value

of

the

Common

Stock),

or

consolidation or merger of the Company with another

entity;

then, in any one or more of said events, the Company shall give

written notice of such event at least fifteen (15) days prior to

the date fixed as a record date or the date of closing the

transfer books for the determination of the stockholders entitled

to such dividend, distribution, convertible or exchangeable secur

ities or subscription rights, options or warrants, or entitled to

vote on such proposed dissolution, liquidation, winding-up or

sale. Such notice shall specify such record date or the date of

closing the transfer books, as the case may be. Failure to give

such notice or any defect therein shall not affect the validity

of any action taken in connection with the declaration or payment

of any such dividend or distribution, or the issuance of any

convertible or exchangeable securities or subscription rights,

options or warrants, or any proposed dissolution, liquidation,

winding-up or sale.

9.



Reservation and Listing of Securities.



(a)

The Company covenants and agrees that at all

times during the period after June 30, 1998, the Company shall

reserve and keep available, free from preemptive rights, out of

its authorized and unissued shares of Common Stock or out of its

authorized and issued shares of Common Stock held in its

treasury, solely for the purpose of issuance upon exercise of the

Warrants, such number of Shares as shall be issuable upon the

exercise of the Warrants.

(b)

The Company covenants and agrees that, upon

exercise of the Warrants in accordance with their terms and

payment of the Purchase Price, all Shares issued or sold upon

such exercise shall not be subject to the preemptive rights of

any stockholder and when issued and delivered in accordance with

the terms of the Warrants shall be duly and validly issued, fully

paid and non-assessable, and the Holder shall receive good and

valid title to such Shares free and clear from any adverse claim

(as defined in the applicable Uniform Commercial Code), except

such as have been created by the Holder.

the



(c)

As long as the Warrants shall be outstanding,

Company shall use its reasonable efforts to cause all Shares



issuable upon the exercise of the Warrants to be quoted by or

listed on any national securities exchange or other securities

listing service on which the shares of Common Stock of the

Company are then listed.

10.

Survival. All agreements, covenants, representations

and warranties herein shall survive the execution and delivery of

this Certificate and any investigation at any time made by or on

behalf of any party hereto and the exercise, sale and purchase of

the Warrants and the Shares (and any other securities or

properties) issuable on exercise hereof.

11.

Remedies. The Company agrees that the remedies at

law of the Holder, in the event of any default or threatened

default by the Company in the performance of or compliance with

any of the terms hereof, may not be adequate and such terms may,

in addition to and not in lieu of any other remedy, be

specifically enforced by a decree of specific performance of any

agreement contained herein or by an injunction against

a

violation of any of the terms hereof or otherwise.

12.

Registered Holder. The Company may deem and treat

the registered Holder hereof as the absolute owner of this

Certificate and the Warrants represented hereby (notwithstanding

any notation of ownership or other writing hereon made by

anyone), for the purpose of any exercise of the Warrants, of any

notice, and of any distribution to the Holder hereof, and for all

other purposes, and the Company shall not be affected by any

notice to the contrary.

13.

Notices. All notices and other communications from

the Company to the Holder of the Warrants represented by this

Certificate shall be in writing and shall be deemed to have been

duly given if and when personally delivered, two (2) business

days after sent by overnight courier or ten (10) days after

mailed by certified, registered or international recorded mail,

postage prepaid and return receipt requested, or when transmitted

by telefax, telex or telegraph and confirmed by sending a similar

mailed writing, if to the Holder, to the last address of such

Holder as it shall appear on the books of the Company maintained

at the Company's principal office or to such other address as the

Holder may have specified to the Company in writing.

14.

Headings. The headings contained herein are for

convenience of reference only and are not part

of

this

Certificate.

Governing Law. This Certificate shall be deemed to be a

contract made under the laws of the State of Delaware and for all

purposes shall be governed by, and construed in accordance with,

the laws of said state, without regard to the conflict of laws

provisions thereof.

IN WITNESS WHEREOF, the Company has caused this Amended and

Restated Warrant Certificate to be duly executed by its duly

authorized officers under its corporate seal.

Dated: June 30, 1998

XCL LTD.

By:

Name:

Title:



___________________________

___________________________

___________________________



Attest:

____________________________

Corporate Secretary

XCL LTD.

FORM OF ELECTION TO PURCHASE

(To be executed by the registered Holder



if such Holder desires to exercise Warrants)

The undersigned registered Holder hereby irrevocably elects

to exercise the right of purchase represented by this Warrant

Certificate for, and to purchase,

Shares hereunder,

and herewith tenders in payment for such Shares cash, a wire

transfer, a certified check or a banker's draft payable to the

order of XCL Ltd. in the amount of

, all

in accordance with the terms hereof. The undersigned requests

that a share certificate for such Shares be registered in the

name of and delivered to:

(Please Print Name and Address)



and, if said number of Shares shall not be all the Shares purchas

able hereunder, that a new Warrant Certificate for the balance

remaining of the Shares purchasable hereunder be registered in

the name of the undersigned Warrant Holder or his Assignee as

below indicated and delivered to the address stated below.

DATED: ________________________

Name of Warrant Holder:

(Please Print)

Address:



Signature:

Note:



The



above signature must correspond in all respects

with the name of the Holder as specified on the

face

of

this

Warrant

Certificate,

without

alteration or enlargement or any change whatsoever,

unless the Warrants represented by this Warrant

Certificate have been assigned.



XCL LTD.

FORM OF ASSIGNMENT

(To be executed by the registered Holder if such Holder

desires to transfer the Warrant Certificate)

FOR VALUE RECEIVED,

assigns and transfers to:



the undersigned



hereby



sells,



(Please Print Name and Address of Transferee)



Warrants to purchase up to

Shares represented by this

Warrant Certificate, together with all right, title and interest

therein, and does hereby irrevocably constitute and appoint

, Attorney, to transfer such Warrants on the books of the

Company, with full power of substitution in the premises.

The

undersigned requests that if said number of Shares shall not be

all of the Shares purchasable under this Warrant Certificate that

a new Warrant Certificate for the balance remaining of the Shares

purchasable under this Warrant Certificate be registered in the

name of the undersigned Warrant Holder and delivered to the regis

tered address of said Warrant Holder.

DATED:

Signature of registered Holder:

Note:



The



above signature must correspond in all respects

with the name of the Holder as specified on the



face

of

this

Warrant

Certificate,

without

alteration or enlargement or any change whatsoever.

The above signature of the registered Holder must

be

guaranteed by a commercial bank or

trust

company, by a broker or dealer which is a member of

the National Association of Securities Dealers,

Inc. or by a member of a national securities

exchange,

The Securities and Futures Authority

Limited in the United Kingdom or The London Stock

Exchange Limited in London, England. Notarized or

witnessed

signatures

are

not

acceptable

as

guaranteed signatures.

Signature Guaranteed:

Authorized Officer

Name of Institution

</TEXT>

</DOCUMENT>

<DOCUMENT>

<TYPE>EX-4.41

<SEQUENCE>3

<TEXT>



September 15, 1998

XCL Ltd.

110 Rue Jean Lafitte, 2nd Floor

Lafayette, LA 70508

Ladies and Gentlemen:

In connection with the proposed exchange (the "Exchange") of

warrants, each dated May 20, 1998 (the "Old Warrants"), to

purchase an aggregate of 351,015 shares of the common stock, par

value $.01 per share ("Common Stock"), of XCL Ltd.

(the

"Company") for one new warrant to purchase an aggregate of

351,015 shares of Common Stock (the "Warrant Shares") at an

exercise price of $2.50 per share, subject to adjustment (the

"Exercise Price"), which expires on September 30, 1998, in

substantially the form attached hereto as Exhibit A (the "New

Warrant",

and

together

with

the

Warrant

Shares,

the

"Securities"), we confirm that:

1.



We have received a copy of the Company's Annual

Report on Form 10-K for the fiscal year ended December

31, 1997; the Company's Quarterly Report on Form 10-Q

for the fiscal quarter ended June 30, 1998 and the

Preliminary Prospectus dated May 8, 1998 as filed with

the Securities and Exchange Commission (the "SEC") as

part of the Registration Statement on Form S-1 (File

No. 333-51937) (the "Preliminary Prospectus") (which

Preliminary Prospectus is subject to SEC comment and

amendment) and such other information as we deem

necessary in order to make our investment decision to

participate

in the Exchange and to acquire

the

Securities.

We acknowledge that we have read and

agreed to the matters stated in the sections entitled

"Disclosure Regarding Forward Looking Information",

"Risk Factors" and "Selling Security Holders" of such

Preliminary

Prospectus which are incorporated

by

reference herein and that we are aware of the high

degree of risk attendant to an investment in the

Securities.

We have had the opportunity to

ask

questions and receive answers from the management of

the Company concerning the terms and conditions of the

Exchange and the Securities and the Company, its

business, financial condition and prospects and to

obtain any additional information which the Company

possesses or can acquire without unreasonable effort or

expense that is necessary to verify the accuracy of the



information that has been furnished to us.

2.



We understand that any subsequent transfer of the

Securities is subject to certain restrictions and

conditions set forth in the New Warrant and the

undersigned agrees to be bound by, and not to resell,

pledge or otherwise transfer the Securities except in

compliance with, such restrictions and conditions and

the Securities Act of 1933, as amended (the "Securities

Act") and all applicable State securities laws and the

rules

and

regulations

promulgated

thereunder,

including, without limitation, Regulation M promulgated

under the Securities Act.



3.



We understand that the Exchange and the issuance of

the Securities have not been registered under the

Securities Act, and that the Securities may not be

offered or sold within the United States or to, or for

the account or benefit of, U.S. persons except as

permitted in the following sentence. We agree, on our

own behalf and on behalf of any accounts for which we

are acting as hereinafter stated, that if we should

sell any Securities, we will do so only (i) to the

Company or any subsidiary thereof, (ii) inside the

United States in accordance with Rule 144A under the

Securities Act to a "qualified institutional buyer" (as

defined in Rule 144A under the Securities Act) that,

prior to such transfer furnishes (or has furnished on

its behalf by a U.S. broker-dealer) to the Warrant

Agent (as defined in the New Warrant) if other than the

Company, and to the Company, a signed letter containing

certain

representations, warranties and agreements

relating to the restrictions on transfer of

the

Securities (the form of which letter can be obtained

from the Company), (iii) outside the United States in

accordance with Rule 904 of Regulation S promulgated

under the Securities Act, (iv) pursuant to an exemption

from registration provided by Rule 144 under the

Securities Act (if available), or (v) pursuant to an

effective registration statement under the Securities

Act, and we further agree to provide to any person

purchasing any of the Securities from us a notice

advising such purchaser that resales of the Securities

are restricted as stated herein and in the New Warrant.



4.



We understand that, on any proposed resale of the

Securities, and on any proposed exercise of the New

Warrant by a "foreign person", we (or such foreign

person) will be required to furnish to the Company and

the Warrant Agent (if other than the Company), such

certifications, legal opinions and other information as

they may reasonably require to confirm that

the

proposed sale or exercise complies with the foregoing

restrictions. We further understand that the Securities

acquired by us will bear a legend to the foregoing

effect.



5.



We are an institutional "accredited investor" (as

defined in Rule 501(a)(1), (2), (3) or

(7)

of

Regulation D under the Securities Act) and have such

knowledge and experience in financial and business

matters as to be capable of evaluating the merits and

risks of our investment in the Securities, and we and

any accounts for which we are acting are each able to

bear the economic risk of our or their investment, as

the case may be.



6.



We



are acquiring the Securities for our account

for one or more accounts (each of which is

institutional "accredited investor") as to each

which we exercise sole investment discretion.



or

an

of



7.



We acknowledge and agree that the New Warrant will be

issued against delivery of the Old Warrants

(or

evidence

satisfactory to the

Company

of

their

guaranteed delivery) free and clear of all liens,

charges and encumbrances. We acknowledge and agree that

any

income tax consequences attributable to

the

Exchange and the acquisition of the Securities shall be

borne by the acquirer of the Securities. We represent



and warrant to the Company that no broker-dealer or

other third party has been retained to act as agent for

or represent the undersigned in connection with the

Exchange and that no commission or other remuneration

is being paid or given, or is required to be paid or

given, directly or indirectly, in connection with the

Exchange. We agree, and each subsequent holder of the

New Warrant will agree to execute and deliver to the

Company

all such further notices, documentation and

certifications as may be required to be filed under

applicable securities and Federal and State income tax

laws, rules and regulations relating or attributable to

the Exchange, the issuance of the Securities or as the

Company may reasonably request

8.



The Company hereby represents, warrants and agrees

with you as follows: (i) in the event that on or prior

to March 15, 1999 the Company makes an offer to the

holders of warrants of the same class or issue as the

Old Warrants to either (x) exchange their warrants for

new warrants with an exercise price which is lower than

the Exercise Price of the New Warrant or (y) reduce the

exercise price of their warrants, or increase the

number of shares subject to such warrants, or both,

either by amendment of the terms of such warrants or

pursuant to the unilateral powers granted the Company

under the terms of such warrants, resulting in such

warrant holders being offered the right to acquire

shares of Common Stock at an effective price per share

below the Exercise Price of the New Warrant, then the

Company shall offer the holder of the New Warrant the

right to acquire that number of shares of Common Stock

at a purchase price of $.01 per share which would

result in an effective reduction in the Exercise Price

of the New Warrant so that it equals such reduced

effective exercise price offered such other warrant

holders;

and (ii) the Warrant Shares

shall

be

considered "Registrable Securities", for purposes of

that certain Registration Rights Agreement dated May

20, 1997 (the benefits of which the Company hereby

agrees to extend to the holder of the New Warrant),

which the Company hereby agrees to include in the

Registration Statement on Form S-1 referred to in

paragraph

1

above pursuant to

the

"Piggy-Back

Registration Rights" provisions of Section 8(a) of

such Agreement which are incorporated by reference

herein.



You, the Warrant Agent and others are entitled to rely upon

this letter and are irrevocably authorized to produce this letter

or a copy hereof to any interested party in any administrative or

legal proceeding or official inquiry with respect to the matters

covered hereby.

Very truly yours,

CUMBERLAND PARTNERS

By:________________________________

Name:___________________________

Title:____________________________

XCL LTD. HEREBY AFFIRMS

THE REPRESENTATIONS,

WARRANTIES AND AGREEMENTS

SET FORTH IN PARAGRAPH 8, ABOVE.

XCL LTD.

BY:___________________________

ITS: Executive Vice President

DATE:

September 16, 1998

EXHIBIT A

XCL LTD.

WARRANT CERTIFICATE



THE WARRANTS REPRESENTED BY THIS CERTIFICATE AND THE SHARES OF

COMMON STOCK ISSUABLE UPON EXERCISE OF THE WARRANTS

(THE

"SHARES") HAVE NOT BEEN REGISTERED UNDER THE UNITED STATES SECUR

ITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR ANY OTHER

SEC

URITIES OR BLUE SKY LAWS OF ANY OTHER DOMESTIC OR FOREIGN

JURISDICTION.

NO OFFER, SALE, TRANSFER, PLEDGE

OR

OTHER

DISPOSITION

(COLLECTIVELY, A "DISPOSAL") OF

THE

WARRANTS

REPRESENTED BY THIS CERTIFICATE AND THE SHARES MAY BE MADE UNLESS

(i) REGISTERED UNDER THE ACT AND ANY APPLICABLE STATE SECURITIES

OR BLUE SKY LAWS OR (ii) XCL LTD. (THE "COMPANY") RECEIVES A

WRITTEN OPINION OF UNITED STATES LEGAL COUNSEL IN FORM AND

SUBSTANCE SATISFACTORY TO IT TO THE EFFECT THAT SUCH DISPOSAL IS

EXEMPT FROM SUCH REGISTRATION REQUIREMENTS.

No.

WARRANTS TO PURCHASE

COMMON STOCK OF XCL LTD.

Initial Issuance on September 15, 1998

Void after 5:00 p.m. New York Time, September 30, 1998

THIS CERTIFIES THAT, for value received, Cumberland Partners

or registered assigns (the "Holder") is the registered holder of

warrants (the "Warrants") to purchase from XCL Ltd., a Delaware

corporation (the "Company"), at any time or from time to time

beginning on September 15, 1998 and until 5:00 p.m., New York

time, on September 30, 1998 (the "Expiration Date"), subject to

the conditions set forth herein, at the initial exercise price of

$2.50 per share (the "Initial Exercise Price"), subject to adjust

ment as set forth herein (the "Exercise Price"), up to an aggre

gate of Three Hundred Fifty One Thousand Fifteen (351,015) fully

paid and non-assessable common shares, par value $0.01 per share

(the "Common Stock"), of the Company (the "Shares", and together

with the Warrants, the "Securities") upon surrender of this

warrant certificate (the "Certificate") and payment of the

Exercise Price multiplied by the number of Shares in respect of

which Warrants are then being exercised (the "Purchase Price") at

the principal office of the Company presently located at 110 Rue

Jean Lafitte, Lafayette, LA 70508, United States of America.

1.



Exercise of Warrants.



(a)

The exercise of any Warrants represented

this Certificate is subject to the conditions set forth below

Section 3, "Compliance with Securities Laws."



by

in



(b)

Subject to compliance with all of

the

conditions set forth herein, the Holder shall have the right at

any time and from time to time after September 15, 1998 to pur

chase from the Company the number of Shares which the Holder may

at the time be entitled to purchase pursuant hereto, upon

surrender of this Certificate to the Company at its principal

office, together with the form of election to purchase attached

hereto duly completed and signed, and upon payment to the Company

of the Purchase Price.

No Warrant may be exercised after 5:00 p.m., New York time,

on the Expiration Date, after which time all Warrants evidenced

hereby shall be void.

(c)

Payment of the Purchase Price shall be made in

cash, by wire transfer of immediately available funds or by

certified check or banker's draft payable to the order of the Com

pany, or any combination of the foregoing.

(d)

The Warrants represented by this Certificate are

exercisable at the option of the Holder, in whole or in part (but

not as to fractional Shares). Upon the exercise of less than all

of the Warrants evidenced by this Certificate, the Company shall

forthwith issue to the Holder a new certificate of like tenor

representing the number of unexercised Warrants.

(e)

Subject to compliance with all of

the

conditions set forth herein, upon surrender of this Certificate

to the Company at its principal office, together with the form of



election to purchase attached hereto duly completed and signed,

and upon payment of the Purchase Price, the Company shall cause

to be delivered promptly to or upon the written order of the

Holder and in such name or names as the Holder may designate, a

share certificate or share certificates for the number of whole

Shares purchased upon the exercise of the Warrants. Such share

certificate or share certificates representing the Shares shall

be free of any restrictive legend. The Company shall ensure that

no "stop transfer" or similar instruction or order with respect

to the Shares purchased upon exercise of the Warrants shall be in

effect at ChaseMellon Shareholders Services, IRG Plc or any suc

cessor transfer agent for the Common Stock of the Company (the

"Transfer Agent").

2.

Payment of Taxes. The Company will pay all documen

tary stamp taxes, if any, attributable to the issuance and

delivery of the Securities; provided, however, that the Company

shall not be required to pay any taxes which may be payable in

respect of any transfer involved in the issuance or delivery of

any Securities or any Shares in any name other than that of the

Holder, which transfer taxes shall be paid by the Holder, and

until payment of such transfer taxes, if any, the Company shall

not be required to issue such Securities.

3.

Compliance with Securities Laws. The Securities

have not been, and are not required

to be, registered under the

United States Securities Act of 1933, as amended (the "Act"), or

any other securities or blue sky laws of any other domestic or

foreign jurisdiction (collectively, the "Securities Laws"). No

offer, sale, transfer, pledge or other disposition (collectively,

a "Disposal") of the Securities may be made unless (i) registered

under the Act and any other applicable Securities Laws or (ii)

the Company receives a written opinion of United States legal

counsel in form and substance satisfactory to it to the effect

that such Disposal is exempt from such registration requirements.

4.



Transfer of Warrants.



(a)

The Warrants shall be transferable only on

the books of the Company maintained at the Company's principal

office upon delivery of this Certificate with the form of

assignment attached hereto duly completed and signed by the

Holder or by its duly authorized attorney or representative,

accompanied by proper evidence of succession, assignment or

authority to transfer.

The Company may, in its discretion,

require, as a condition to any transfer of Warrants, a signature

guarantee, which may be provided by a commercial bank or trust

company, by a broker or dealer which is a member of the National

Association of Securities Dealers, Inc., or by a member of a

United States national securities exchange, The Securities and

Futures Authority Limited in the United Kingdom, or The London

Stock Exchange Limited in London, England. Upon any registration

of transfer, the Company shall deliver a new warrant certificate

or warrant certificates of like tenor and evidencing in the

aggregate a like number of Warrants to the person entitled

thereto in exchange for this Certificate, subject to

the

limitations provided herein, without any charge except for any

tax or other governmental charge imposed in connection therewith.

(b)

Notwithstanding

anything

in

this

Certificate to the contrary, neither any of the Warrants nor any

of the Shares issuable upon exercise of any of the Warrants shall

be transferable, except upon compliance by the Holder with any

applicable provisions of the Act and any other applicable

Securities Laws.

5.



Exchange and Replacement of Warrant

Certificates; Loss or Mutilation of

Warrant Certificates.



(a)

This Certificate is exchangeable without cost,

upon the surrender hereof by the Holder at the principal office

of the Company, for new warrant certificates of like tenor and

date representing in the aggregate the right to purchase the same

number of Shares in such denominations as shall be designated by



the Holder at the time of such surrender. Any transfer not made

in such compliance shall be null and void and shall be given no

effect hereunder.

(b)

Upon receipt by the Company of evidence

reasonably satisfactory to it of the loss, theft, destruction or

mutilation of this Certificate and, in case of such loss, theft

or destruction, of indemnity and security reasonably satisfactory

to it, and reimbursement to the Company of all reasonable

expenses incidental thereto, and upon surrender and cancellation

of this Certificate, if mutilated, the Company will make and

deliver a new warrant certificate of like tenor, in lieu thereof.

6.



Adjustment of Exercise Price and Number of

Shares Issuable.



The number and kind of Shares purchasable upon the exercise

of each Warrant and the Exercise Price shall be subject to

adjustment from time to time as follows:

(a)

Stock Splits, Combinations, etc. In case

the Company shall hereafter (A) pay a dividend or make a

distribution on its Common Stock in shares of its capital

stock (whether shares of Common Stock or of capital stock of

any other class), (B) subdivide its outstanding shares of

Common Stock or (C) combine its outstanding shares of Common

Stock into a smaller number of shares, the (a) number of

Shares purchasable upon exercise of each Warrant immediately

prior thereto shall be adjusted so that the holder of any

Warrant thereafter exercised shall be entitled to receive

the number of Shares which such holder would have owned

immediately following such action had such Warrant been

exercised immediately prior thereto, and (b) the Exercise

Price shall be adjusted by multiplying such Exercise Price

immediately prior to such adjustment by a fraction, the

numerator of which shall be the number of Shares purchasable

upon the exercise of each Warrant immediately prior to such

adjustment, and the denominator of which shall be the number

of Shares purchasable immediately thereafter. An adjustment

made pursuant to this Section 6(a) shall become effective

immediately after the record date in the case of a dividend

and shall become effective immediately after the effective

date

in

the case of a subdivision, combination

or

reclassification.

If, as a result of an adjustment made

pursuant to this Section 6(a), the holder of any Warrant

thereafter exercised shall become entitled to receive shares

of two or more classes of capital stock of the Company, the

Board of Directors of the Company (whose determination shall

be

conclusive) shall determine the allocation of the

adjusted Exercise Price between or among shares of such

classes of capital stock.

(b)

Reclassification, Combinations, Mergers,

etc.

In case of any reclassification or change

of

outstanding shares of Common Stock (other than as set forth

in paragraph (a) above and other than a change in par value,

or from par value to no par value, or from no par value to

par value), or in case of any consolidation or merger of the

Company with or into another corporation or other entity

(other than a merger in which the Company is the continuing

corporation

and

which

does

not

result

in

any

reclassification or change of the then outstanding shares of

Common Stock or other capital stock of the Company (other

than a change in par value, or from par value to no par

value, or from no par value to par value or as a result of a

subdivision or combination)) or in case of any sale or

conveyance to another corporation or other entity of all or

substantially all of the assets of the Company, then, as a

condition of such reclassification, change, consolidation,

merger, sale or conveyance, the Company or such a successor

or purchasing corporation or other entity, as the case may

be, shall forthwith make lawful and adequate

provision

whereby the holder of such Warrant then outstanding shall

have the right thereafter to receive on exercise of such

Warrant the kind and amount of shares of stock and other

securities

and

property

receivable

upon

such

reclassification, change, consolidation, merger, sale or

conveyance by a holder of the number of shares of Common

Stock issuable upon exercise of such Warrant immediately



prior

to such reclassification, change, consolidation,

merger,

sale or conveyance and enter into a warrant

amendment so providing. Such provisions shall

include

provision

for adjustments which shall be

as

nearly

equivalent as may be practicable to the adjustments provided

for in this Section 6.

If the issuer of securities

deliverable upon exercise of Warrants under the supplemental

warrant agreement is an affiliate of the formed, surviving

or transferee corporation or other entity, that issuer shall

join in the supplemental warrant agreement.

The above

provisions of this Section 6 (b) shall similarly apply to

successive reclassifications and changes of shares of Common

Stock and to successive consolidations, mergers, sales or

conveyances.

In case of any such reclassification, merger,

consolidation or disposition of assets, the successor or

acquiring corporation or other entity (if other than the

Company)

shall expressly assume the due and punctual

observance and performance of each and every covenant and

condition of this Warrant to be performed and observed by

the

Company

and all the obligations and liabilities

hereunder, subject to such modifications as may be deemed

appropriate (as determined by resolution of the Board of

Directors

of the Company) in order to

provide

for

adjustments of shares of the Common Stock for which each

Warrant is exercisable, which shall be as nearly equivalent

as practicable to the adjustments provided for in this

Section 6.

The foregoing provisions of this Section 6(b)

shall

similarly

apply to successive

reorganizations,

reclassifications, mergers, consolidations or dispositions

of assets.

(c)

Issuance of Options or Convertible

Securities. In the event the Company shall, at any time or

from time to time after the date hereof, issue, sell,

distribute or otherwise grant in any manner (including by

assumption) to all holders of the Common Stock any rights to

subscribe for or to purchase, or any warrants or options for

the purchase of, Common Stock or any stock or securities

convertible into or exchangeable for Common Stock (any such

rights, warrants or options being herein called "Options"

and any such convertible or exchangeable stock or securities

being

herein called "Convertible Securities") or

any

Convertible Securities (other than upon exercise of any

Option), whether or not such Options or the rights to

convert

or

exchange such Convertible Securities

are

immediately exercisable, and the price per share at which

Common Stock is issuable upon the exercise of such Options

or upon the conversion or exchange of such Convertible

Securities (determined by dividing (i) the aggregate amount,

if

any,

received or receivable by the

Company

as

consideration for the issuance, sale, distribution

or

granting of such Options or any such Convertible Security,

plus

the

minimum

aggregate

amount

of

additional

consideration, if any, payable to the Company upon the

exercise of all such Options or upon conversion or exchange

of all such Convertible Securities, plus, in the case of

Options to acquire Convertible Securities, the minimum

aggregate amount of additional consideration, if

any,

payable upon the conversion or exchange of all

such

Convertible Securities, by (ii) the total maximum number of

shares of Common Stock issuable upon the exercise of all

such Options or upon the conversion or exchange of all such

Convertible Securities or upon the conversion or exchange of

all Convertible Securities issuable upon the exercise of all

Options) shall be less than the current Market Price per

Share of Common Stock (determined pursuant to Section 6(f))

on the record date for the issuance, sale, distribution or

granting of such Options (any such event being herein called

a "Distribution") then, effective upon such Distribution,

the Exercise Price shall be reduced to the price (calculated

to

the

nearest 1/1,000 of one cent) determined

by

multiplying the Exercise Price in effect immediately prior

to such Distribution by a fraction, the numerator of which

shall be the sum of (i) the number of shares of Common Stock

outstanding (exclusive of any treasury shares) immediately

prior to such Distribution multiplied by the current Market

Price per Share of Common Stock (determined pursuant to

Section 6(f)) on the date of such Distribution plus (ii) the



consideration, if any, received by the Company upon such

Distribution, and the denominator of which shall be the

product of (A) the total number of shares of Common Stock

outstanding (exclusive of any treasury shares) immediately

after such Distribution multiplied by (B) the current Market

Price per Share of Common Stock (determined pursuant to

Section 6(f)) on the record date for such Distribution. For

purposes of the foregoing, the total maximum number of

shares of Common Stock issuable upon exercise of all such

Options or upon the conversion or exchange of all such

Convertible Securities or upon the conversion or exchange of

the total maximum amount of the Convertible Securities

issuable upon the exercise of all such Options shall be

deemed to have been issued as of the date of

such

Distribution

and thereafter shall be

deemed

to

be

outstanding and the Company shall be deemed to have received

as consideration therefor such price per share, determined

as provided above. Except as provided in Sections 6(i) and

(j) below, no additional adjustment of the Exercise Price

shall be made upon the actual exercise of such Options or

upon conversion or exchange of the Convertible Securities or

upon

the

conversion or exchange of the

Convertible

Securities issuable upon the exercise of such Options.

Notwithstanding anything in this Section 6 to the contrary,

neither the payment of dividends on any shares of Amended

Series A Preferred Stock in additional shares of Amended

Series A Preferred Stock, nor the issuance of shares of

Common Stock on conversion of the Amended Series A Preferred

Stock, nor the issuance of shares of Common Stock in payment

of any dividends due on any shares of Preferred Stock of the

Company outstanding on the Issue Date, nor on redemption of

any such shares, nor in payment of any interest due under

the Company's Secured Subordinated Notes, nor upon exercise

of any options granted to management pursuant to an employee

benefit plan approved by stockholders of the Company, nor

upon the exercise of any outstanding Warrants (including

Warrants issued in the Concurrent Debt Offering (as defined

below)), shall require any adjustment to either the Exercise

Price of the Warrants or the number of shares issuable upon

exercise of the Warrants.

(d)

Dividends and Distributions. In the event

the Company shall, at any time or from time to time after

the date hereof, distribute to all the holders of Common

Stock any dividends or other distribution of cash, evidences

of its indebtedness, other securities or other properties or

assets (in each case other than (i) dividends payable in

Common Stock, Options or Convertible Securities and (ii) any

cash dividend from current or retained earnings), or any

options, warrants or other rights to subscribe for or

purchase any of the foregoing, then (A) the Exercise Price

shall be decreased to a price determined by multiplying the

Exercise Price then in effect by a fraction, the numerator

of which shall be the current Market Price per Share of

Common Stock (determined pursuant to Section 6(f)) on the

record date for such distribution less the sum of (X) the

cash portion, if any, of such distribution per share of

Common Stock outstanding (exclusive of any treasury shares)

on the record date for such distribution plus (Y) the then

fair market value (as determined in good faith by the Board

of Directors of the Company) per share of Common Stock

outstanding (exclusive of any treasury shares) on the record

date for such distribution of that portion, if any, of such

distribution consisting of evidences of indebtedness, other

securities, properties, assets (other than cash), options,

warrants or subscription or purchase rights, and

the

denominator of which shall be such current market price per

share

of Common Stock and (B) the number of Shares

purchasable upon the exercise of each Warrant shall be

increased to a number determined by multiplying the number

of shares of Common Stock so purchasable immediately prior

to the record date for such distribution by a fraction, the

numerator of which shall be the Exercise Price in effect

immediately prior to the adjustment required by clause (A)

of this sentence and the denominator of which shall be the

Exercise Price in effect immediately after such adjustment.

The adjustments required by this Section 6(d) shall be made

whenever any such distribution occurs retroactive to the

record date for the determination of stockholders entitled

to receive such distribution.



(e)

Self-Tenders. In case of the consummation

of a tender or exchange offer (other than an odd-lot tender

offer) made by the Company or any subsidiary of the Company

for all or any portion of the Common Stock to the extent

that the cash and value of any other consideration included

in such payment per share of Common Stock exceeds the first

reported sales price per share of Common Stock on the

trading day next succeeding the last time tenders or

exchanges may be made pursuant to the tender or exchange

offer (the "Expiration Time"), the Exercise Price shall be

reduced so that the same shall equal the price determined by

multiplying the Exercise Price in effect immediately prior

to the Expiration Time by a fraction, the numerator of which

shall be the number of shares of Common Stock outstanding

(including any tendered or exchanged shares)

at

the

Expiration Time multiplied by the first reported sales price

of the Common Stock on the trading day next succeeding the

Expiration Time, and the denominator of which shall be the

sum of (A) the fair market value (determined by the Board of

Directors of the Company, whose determination shall be

conclusive and described in a resolution of the Board of

Directors)

of the aggregate consideration payable

to

stockholders based on the acceptance (up to any maximum

specified in the terms of the tender or exchange offer) of

all shares validly tendered or exchanged and not withdrawn

as of the Expiration Time (the shares deemed so accepted, up

to any such maximum, being referred to as the "Purchased

Shares") and (B) the product of the number of shares of

Common Stock outstanding (less any Purchased Shares) on the

Expiration Time and the first reported sales price of the

Common Stock on the trading day next succeeding

the

Expiration

Time,

such reduction to become

effective

immediately prior to the opening of business on the day

following the Expiration Time.

(f)

Current Market Price. For the purpose of

any computation of current market price, the current "Market

Price per Share of Common Stock" at any date shall be (x)

for purposes of Section 7 herein (dealing with fractional

interests), the closing price on the trading day immediately

prior to the exercise of the applicable Warrant and (y) in

all other cases, the average of the daily closing prices for

the shorter of (i) the 20 consecutive trading days ending on

the last full trading day on the exchange or market

specified in the second succeeding sentence prior to the

Time of Determination (as defined below) and (ii) the period

commencing on the date next succeeding the first public

announcement of the issuance, sale, distribution or granting

in question through such last full trading day prior to the

Time of Determination. The term "Time of Determination" as

used herein shall be the time and date of the earlier to

occur of (A) the date as of which the current market price

is to be computed and (B) the last full trading day on such

exchange or market before the commencement of "ex-dividend"

trading in the Common Stock relating to the event giving

rise to the adjustment required by paragraph (a), (b), (c)

or (d).

The closing price for any day shall be the last

reported sale price regular way or, in case no such reported

sale takes place on such day, the average of the closing bid

and asked prices regular way for such day, in each case (1)

on the principal national securities exchange on which the

shares of Common Stock are listed or to which such shares

are admitted to trading or (2) if the Common Stock is not

listed or admitted to trading on a national securities

exchange, in the over-the-counter market as reported by the

Nasdaq NMS or any comparable system or (3) if the Common

Stock is not listed on the Nasdaq NMS or a comparable

system, as furnished by two members of the American Stock

Exchange, Inc. selected from time to time in good faith by

the Board of Directors of the Company for that purpose.

In

the absence of all of the foregoing, or if for any other

reason the current Market Price per Share cannot

be

determined pursuant to the foregoing provisions of this

Section 6(f), the current Market Price per Share shall be

the fair market value thereof as determined in good faith by

the Board of Directors of the Company.

shall



(g)

Certain Distributions. If the Company

pay a dividend or make any other distribution payable



in Options or Convertible Securities, then, for purposes of

paragraph (c) above, such Options or Convertible Securities

shall be deemed to have been issued or sold without

consideration.

(h)

Consideration Received. If any shares of

Common Stock, Options or Convertible Securities shall be

issued, sold or distributed for a consideration other than

cash, the amount of the consideration other than cash

received by the Company in respect thereof shall be deemed

to be the then fair market value of such consideration (as

determined in good faith by the Board of Directors of the

Company). If any Options shall be issued in connection with

the issuance and sale of other securities of the Company,

together comprising one integral transaction in which no

specific consideration is allocated to such Options by the

parties thereto, such Options shall be deemed to have been

issued without consideration; provided, however, that if

such Options have an exercise price equal to or greater than

the current Market Price per Share of the Common Stock on

the date of issuance of such Options, then such Options

shall be deemed to have been issued for consideration equal

to such exercise price.

(i)

Deferral of Certain Adjustments.

No

adjustment to the Exercise Price (including the related

adjustment to the number of Shares purchasable upon the

exercise of each Warrant) shall be required hereunder unless

such adjustment, together with other adjustments carried

forward as provided below, would result in an increase or

decrease of at least one percent (1%) of the Exercise Price;

provided, however, that any adjustments which by reason of

this paragraph (i) are not required to be made shall be

carried forward and taken into account in any subsequent

adjustment. No adjustment need be made for a change in the

par value of the Common Stock. All calculations under this

Section 6 shall be made to the nearest 1/1,000 of one cent

or to the nearest l/1,000th of a Share, as the case may be.

(j)

Changes in Options and Convertible

Securities.

If the exercise price provided for in any

Options referred to in Section 6(c) above, the additional

consideration, if any, payable upon the conversion or

exchange of any Convertible Securities referred to in

Section 6(c) above, or the rate at which any Convertible

Securities referred to in Section 6(c) above are convertible

into or exchangeable for Common Stock shall change at any

time (other than under or by reason of provisions designed

to protect against dilution upon an event which results in a

related adjustment pursuant to this Section 6), the Exercise

Price then in effect and the number of Shares purchasable

upon the exercise of each Warrant shall forthwith be

readjusted (effective only with respect to any exercise of

any Warrant after such readjustment) to the Exercise Price

and number of Shares so purchasable that would then be in

effect had the adjustment made upon the issuance, sale,

distribution or granting of such Options or Convertible

Securities been made based upon such changed purchase price,

additional consideration or conversion rate, as the case may

be, but only with respect to such Options and Convertible

Securities as then remain outstanding.

(k)



Expiration of Options and Convertible

Securities.

If, at any time after any adjustment to the

number of Shares purchasable upon the exercise of each

Warrant shall have been made pursuant to Sections 6(c) or

(j) above or this Section 6(k), any Options or Convertible

Securities shall have expired unexercised, the number of

such Shares so purchasable shall, upon such Expiration, be

readjusted and shall thereafter be such as they would have

been had they been originally adjusted (or had the original

adjustment not been required, as the case may be) as if (i)

the only shares of Common Stock deemed to have been issued

in connection with such Options or Convertible Securities

were the shares of Common Stock, if any, actually issued or

sold upon the exercise of such Options or Convertible

Securities and (ii) such shares of Common Stock, if any,

were issued or sold for the consideration actually received

by the Company upon such exercise plus the aggregate

consideration, if any, actually received by the Company for



the issuance, sale, distribution or granting of all such

Options or Convertible Securities, whether or not exercised;

provided, however, that no such readjustment shall have the

effect

of

decreasing the number of such shares

so

purchasable by an amount (calculated by adjusting such

decrease to account for all other adjustments made pursuant

to this Section 6 following the date of the original

adjustment referred to above) in excess of the amount of the

adjustment initially made in respect of the issuance, sale,

distribution or granting of such Options or Convertible

Securities.

(l)

Other Adjustments. In the event that at

any time, as a result of an adjustment made pursuant to this

Section 6, holders of Warrants shall become entitled to

receive any securities of the Company other than shares of

Common Stock, including shares of Amended Series A Preferred

Stock as provided in Section 6(o) below, thereafter the

number of such other securities so receivable upon exercise

of each Warrant and the Exercise Price applicable to such

exercise shall be subject to adjustment from time to time in

a manner and on terms as nearly equivalent as practicable to

the provisions with respect to the Shares of Common Stock

contained in this Section 6.

(m)

Other Action Affecting Common Stock.

In

case at any time or from time to time the Company shall take

any action in respect of its outstanding shares of Common

Stock, then the number of Shares for which each Warrant is

exercisable shall be adjusted in such manner as may be

equitable in the circumstances. If the Company shall at any

time and from time to time issue or sell (i) any shares of

any class of common stock other than Common Stock, (ii) any

evidences of its indebtedness, shares of stock or other

securities which are convertible into or exchangeable for

such shares of common stock, with or without the payment of

additional consideration in cash or property, or (iii) any

warrants or other rights to subscribe for or purchase any

such shares of common stock or any such evidences, shares of

stock or other securities referred to in (ii) above, then in

each such case such issuance shall be deemed to be of, or in

respect of, Common Stock for purposes of this Section 6;

provided, however, that, without limiting the generality of

the foregoing, if the Company shall take a record of the

holders of its Common Stock for the purpose of entitling

them to receive a dividend payable in, or other distribution

of, common stock other than Common Stock, including shares

of non-voting common stock, then the number of Shares for

which each Warrant is exercisable immediately after the

occurrence of any such event shall be adjusted to equal the

aggregate number of shares of such common stock and of

Common Stock which a record holder of the same number of

Shares for which each Warrant is exercisable immediately

prior to the occurrence of such event would own or be

entitled to receive after the happening of such event.

(n)

Statement of Warrant

Certificates.

Irrespective of any adjustment in the number or kind of

Shares issuable upon the exercise of each Warrant or the

Exercise

Price,

Warrant Certificates

theretofore

or

thereafter issued shall continue to express the same number

and kind of Shares and Exercise Price as are stated in the

Warrant Certificates initially issuable pursuant to this

Agreement.

(o)

Increased Shares or Reduced Exercise Price.

From time to time, the Company may, for a period of not less than

20 days, in its discretion, increase the number of Shares

purchasable upon the exercise of this Warrant, without making any

adjustment to the Exercise Price, or reduce the Exercise Price,

without making any adjustment to the number of Shares purchasable

upon the exercise of this Warrant. The Company hereby represents,

warrants and agrees with you as follows: (i) in the event that on

or prior to the expiration of this Warrant the Company makes an

offer to the holders of warrants dated May 20, 1997 issued

pursuant to a Warrant Agreement dated such date ("Old Warrants")

to either (x) exchange their Old Warrants for new warrants with

an exercise price which is lower than the Exercise Price of this

Warrant or (y) reduce the exercise price of the Old Warrants, or

increase the number of shares subject to such Warrants, or both,



either by amendment of the terms of such Warrants or pursuant to

the unilateral powers granted the Company under the terms of such

Warrants, resulting in such Warrant holders being offered the

right to acquire shares of Common Stock at an effective price per

share below the Exercise Price of this Warrant, then the Company

shall offer the holder of this Warrant the right to acquire that

number of shares of Common Stock at a purchase price of $.01 per

share which would result

in an effective reduction in the

Exercise Price of this Warrant so that it equals such reduced

effective exercise price offered such holders of Old Warrants;

and (ii) the Warrant Shares shall be considered "Registrable

Securities", for purposes of that certain Registration Rights

Agreement dated May 20, 1997 (the benefits of which the Company

hereby agrees to extend to the holder of this Warrant), which the

Company hereby agrees to include in the Registration Statement on

Form S-1 filed by the Company with the Securities and Exchange

Commission on May 8, 1998 (File No. 333-51937) pursuant to the

"Piggy-Back Registration Rights" provisions of Section 8(a) of

such Agreement which are incorporated by reference herein.

7.

Fractional Interest. The Company shall not

be required to issue fractional shares of Common Stock on the

exercise of Warrants.

If more than one Warrant shall be

presented for exercise in full at the same time by the same

holder, the number of full shares of Common Stock which shall be

issuable upon such exercise shall be computed on the basis of the

aggregate number of shares of Common Stock acquirable on exercise

of the Warrants so presented. If any fraction of a share of

Common Stock would, except for the provisions of this Section 7,

be issuable on the exercise of any Warrant, the Company shall

either (i) pay an amount in cash calculated by the Company to

equal the then current Market Price per Share (determined

pursuant to Section 6(f)) multiplied by such fraction computed to

the nearest whole cent or (ii) aggregate all such fractional

shares into a whole number of shares and sell such aggregated

fractional shares on behalf of the holders entitled thereto in a

public or private sale and distribute the net cash proceeds from

the sale thereof to such holders pro rata. While the Company

will endeavor to use its best efforts to secure the best

available sales price for such aggregated fractional shares, such

price shall not necessarily be the highest price obtainable for

such shares. Holders of Warrants, by their acceptances of this

Warrant Certificate, expressly waive any and all rights to

receive any fraction of a share of Common Stock or a stock

certificate or scrip representing a fraction of a share of Common

Stock.

8.

Notices to Warrant Holders. Nothing contained

in this Certificate shall be construed as conferring upon the

Holder the right to vote or to consent or to receive notice as a

stockholder in respect of any meetings of stockholders for the

election of directors or any other matter, or as having any

rights whatsoever as a stockholder of the Company. If, however,

at any time prior to the exercise or expiration of the Warrants,

any of the following events shall occur:

(i)



the holders of shares of the Common Stock shall

be entitled to receive a dividend or distribution

payable otherwise than in cash, or a cash dividend

or

distribution payable otherwise than out of

current or retained earnings, as indicated by the

accounting treatment of such dividend

or

dis

tribution on the books of the Company; or



(ii)

the Company shall offer to all the holders of

its Common Stock any additional shares of capital

stock of the Company or securities convertible into

or exchangeable for shares of capital stock of the

Company, or any option, right or warrant to sub

scribe therefor; or

(iii)

a dissolution, liquidation or winding-up of

the Company (other than in connection with

a

consolidation or merger) or a sale of all or sub

stantially all of its property, assets and business

as an entirety shall be approved by the Company's

Board of Directors; or

(iv)



there shall be any capital reorganization



or



reclassification of the capital stock

of

the

Company (other than a change in the number of

outstanding shares of Common Stock or a change in

the

par

value

of

the

Common

Stock),

or

consolidation or merger of the Company with another

entity;

then, in any one or more of said events, the Company shall give

written notice of such event at least fifteen (15) days prior to

the date fixed as a record date or the date of closing the

transfer books for the determination of the stockholders entitled

to such dividend, distribution, convertible or exchangeable secur

ities or subscription rights, options or warrants, or entitled to

vote on such proposed dissolution, liquidation, winding-up or

sale. Such notice shall specify such record date or the date of

closing the transfer books, as the case may be. Failure to give

such notice or any defect therein shall not affect the validity

of any action taken in connection with the declaration or payment

of any such dividend or distribution, or the issuance of any

convertible or exchangeable securities or subscription rights,

options or warrants, or any proposed dissolution, liquidation,

winding-up or sale.

9.



Reservation and Listing of Securities.



The Company covenants and agrees that at all times during

the period after September 15, 1998, the Company shall reserve

and keep available, free from preemptive rights, out of its auth

orized and unissued shares of Common Stock or out of its

authorized and issued shares of Common Stock held in its

treasury, solely for the purpose of issuance upon exercise of the

Warrants, such number of Shares as shall be issuable upon the

exercise of the Warrants.

(b)

The Company covenants and agrees that, upon

exercise of the Warrants in accordance with their terms and

payment of the Purchase Price, all Shares issued or sold upon

such exercise shall not be subject to the preemptive rights of

any stockholder and when issued and delivered in accordance with

the terms of the Warrants shall be duly and validly issued, fully

paid and non-assessable, and the Holder shall receive good and

valid title to such Shares free and clear from any adverse claim

(as defined in the applicable Uniform Commercial Code), except

such as have been created by the Holder.

(c)

As long as the Warrants shall be outstanding,

the Company shall use its reasonable efforts to cause all Shares

issuable upon the exercise of the Warrants to be quoted by or

listed on any national securities exchange or other securities

listing service on which the shares of Common Stock of the

Company are then listed.

10.

Survival.

All

agreements,

covenants,

representations and warranties herein shall survive the execution

and delivery of this Certificate and any investigation at any

time made by or on behalf of any party hereto and the exercise,

sale and purchase of the Warrants and the Shares (and any other

securities or properties) issuable on exercise hereof.

11.

Remedies. The Company agrees that the remedies

at law of the Holder, in the event of any default or threatened

default by the Company in the performance of or compliance with

any of the terms hereof, may not be adequate and such terms may,

in addition to and not in lieu of any other remedy, be

specifically enforced by a decree of specific performance of any

agreement contained herein or by an injunction against

a

violation of any of the terms hereof or otherwise.

12.

Registered Holder. The Company may deem and

treat the registered Holder hereof as the absolute owner of this

Certificate and the Warrants represented hereby (notwithstanding

any notation of ownership or other writing hereon made by

anyone), for the purpose of any exercise of the Warrants, of any

notice, and of any distribution to the Holder hereof, and for all

other purposes, and the Company shall not be affected by any

notice to the contrary.



13.

Notices. All notices and other communications

from the Company to the Holder of the Warrants represented by

this Certificate shall be in writing and shall be deemed to have

been duly given if and when personally delivered, two (2)

business days after sent by overnight courier or ten (10) days

after mailed by certified, registered or international recorded

mail, postage prepaid and return receipt requested, or when

transmitted by telefax, telex or telegraph and confirmed by

sending a similar mailed writing, if to the Holder, to the last

address of such Holder as it shall appear on the books of the

Company maintained at the Company's principal office or to such

other address as the Holder may have specified to the Company in

writing.

14.

for convenience

Certificate.



Headings. The headings contained herein are

of reference only and are not part of this



15.

Governing Law.

This Certificate shall be

deemed to be a contract made under the laws of the State of

Delaware and for all purposes shall be governed by, and construed

in accordance with, the laws of said state, without regard to the

conflict of laws provisions thereof.

IN WITNESS WHEREOF, the Company has caused this Warrant Certifi

cate to be duly executed by its duly authorized officers under

its corporate seal.

Dated: September 15, 1998

XCL LTD.

By:_____________________________

Name:______________________

Title:_____________________



Attest:



Corporate Secretary

XCL LTD.

FORM OF ELECTION TO PURCHASE

(To be executed by the registered Holder

if such Holder desires to exercise Warrants)

The undersigned registered Holder hereby irrevocably

elects to exercise the right of purchase represented by this

Warrant

Certificate

for,

and

to

purchase,

Shares hereunder, and herewith tenders in payment for such

Shares cash, a wire transfer, a certified check or a bank

er's draft payable to the order of XCL Ltd. in the amount of

, all in accordance with the terms hereof. The undersigned

requests that a share certificate for such Shares be

registered in the name of and delivered to:

(Please Print Name and Address)



and, if said number of Shares shall not be all the Shares

purchasable hereunder, that a new Warrant Certificate for

the balance remaining of the Shares purchasable hereunder be

registered in the name of the undersigned Warrant Holder or

his Assignee as below indicated and delivered to the address

stated below.

DATED:



Name of Warrant Holder:

(Please Print)

Address:



Signature:

Note:



The



above signature must correspond in

all

respects with the name of the Holder

as

specified on the face of this Warrant Certifi

cate, without alteration or enlargement or any

change

whatsoever,

unless

the

Warrants

represented by this Warrant Certificate have

been assigned.



XCL LTD.

FORM OF ASSIGNMENT

(To be executed by the registered Holder if such Holder

desires to transfer the Warrant Certificate)

FOR VALUE RECEIVED,

assigns and transfers to:



the undersigned



hereby



sells,



(Please Print Name and Address of Transferee)



Warrants to purchase up to

Shares represented by

this Warrant Certificate, together with all right, title and

interest therein, and does hereby irrevocably constitute and

appoint

, Attorney, to trans

fer such Warrants on the books of the Company, with full

power of substitution in the premises.

The undersigned

requests that if said number of Shares shall not be all of

the Shares purchasable under this Warrant Certificate that a

new Warrant Certificate for the balance remaining of the

Shares purchasable under this Warrant Certificate be regis

tered in the name of the undersigned Warrant Holder and

delivered to the registered address of said Warrant Holder.

DATED:

Signature of registered Holder:

Note:



The



above signature must correspond in

all

respects with the name of the Holder

as

specified

on

the face of

this

Warrant

Certificate, without alteration or enlargement

or any change whatsoever. The above signature

of the registered Holder must be guaranteed by

a commercial bank or trust company, by a

broker or dealer which is a member of the

National Association of Securities Dealers,

Inc. or by a member of a national securities

exchange, The Securities and Futures Authority

Limited in the United Kingdom or The London

Stock Exchange Limited in London, England.

Notarized or witnessed signatures are

not

acceptable as guaranteed signatures.



Signature Guaranteed:

Authorized Officer

Name of Institution



</TEXT>

</DOCUMENT>



<DOCUMENT>

<TYPE>EX-10.49

<SEQUENCE>4

<TEXT>

CONSULTING AGREEMENT



THIS CONSULTING AGREEMENT ("Agreement"), effective as

of June 15, 1998 and expiring on the later of March 31, 1999 or

the date on which the Company fileds its 1998 Form 10-K report

with the Securities and Exchange Commisison, by and between XCL

Ltd., a Delaware corporation., with offices at 110 Rue Jean

Lafitte, Lafayette, Louisiana 70508 (hereinafter the "Company")

and Patrick B. Collins, 14018 Taylorcrest, Houston, Texas 77079

(hereinafter "Consultant").

W I T N E S S E T H:

WHEREAS, Consultant has substantial experience and

ability in financial reporting and oil and gas accounting; and

WHEREAS, the Company desires to retain and secure for

itself the experience and ability of Consultant for the purpose

of

assisting

the

Company with its

financial

reporting

requirements; and

WHEREAS, the Company and Consultant desire to enter

into a consulting agreement to set forth this proposed consulting

relationship;

NOW, THEREFORE, the parties to this Agreement

agree as follows:



hereby



ARTICLE I

Rights and Duties Under Consulting Agreement

1.1

Term of Agreement and Duties.

The Company

and Consultant agree that for the period commencing June 15, 1998

and expiring on the later of March 31, 1999 or the date on which

the company files its 1998 Form 10-K report with the Securities

and Exchange Commission, Consultant shall perform consulting

services for the Company with regard to the financial reporting

obligations of the Company, including oil and gas accounting

matters, review of 1998 financial statements, presentation of

financial statements, projections and footnotes thereto in any

debt

and equity offering memoranda of the Company.

The

Consultant's duty will also assist the Company and its outside

auditors with regard to any activity involving the preparation or

review of 1998 quarterly 10-Q reports, the annual 1998 10-K

report, and any Securities and Exchange Commission filign or

report the Company is required to file during the term of this

agreement.

1.2

A.

Compensation.

For consulting

services performed by Consultant during the term of

this

Agreement, the Company shall pay Consultant by the issuance of

35,000 shares of Common Stock and warrants to purchase 17,000

shares of Common Stock of the Company at an exercise price of

$3.75 per share, exercisable for a five-year period.

B.

Restricted

Securities.

Consultant

acknowledges that the Common Stock and stock purchase warrants,

and the shares of Common Stock issuable upon exercise thereof,

(hereinafter collectively referred to as the "Securities"), being

delivered pursuant to Section 1.2 of this Agreement, are being

issued (i) without registration under the Securities Act of 1933,

as amended (the "Act"), or any other securities laws; no federal

or state agency has made any finding or determination as to the

fairness for investment, nor any recommendation or endorsement of

an

investment in the Securities, and the Securities

are

"restricted securities" as defined in Rule 144 promulgated under

the Act; (ii) to you for your own account, for investment and not

with any present intention to distribute or resell, directly or

indirectly, all or any portion of the interest therein; (iii) you

warrant and represent that you are financially able to bear the

economic risk associated with these Securities for an indefinite

period of time with no assurance of any return thereon; (iv) you



warrant and represent that you have the requisite knowledge and

experience in financial matters, and you have had access to all

information regarding the Company and the Securities which you

have requested, to enable you to evaluate the merits and risks

associated with the Securities; (v) you warrant and represent

that, in making your investment decision with respect to the

Securities, you have reviewed the Company's latest Annual Report

on form 10-K and Quarterly Report on Form 10-Q and that you have

solely relied upon your own investigation of the Company and its

affairs,

it being understood that the Company

makes

no

representations and warranties with respect to the Securities or

the

Company, it business affairs, financial condition

or

prospects; and (vi) acknowledge that; the Securities may not be

sold or offered for sale in the absence of an effective

registration statement for the Securities under the Act, or an

opinion of counsel acceptable to the Company to the effect that

such registration is not required; the certificate(s) evidencing

the Securities may be imprinted with a suitable restrictive

legend substantially to such effect that the Company is under no

obligation to take any steps to register the Securities under the

Act

or

otherwise cause the Securities to become

freely

transferable (including, without limitation,

to

make

the

provisions of Rule 144 available for any resales of

the

Securities under such Rule).

1.3

Reimbursement of Expenses.

The Company

shall reimburse Consultant for all reasonable and necessary

travel, or other related out-of-pocket expenses actually incurred

by it during the term of this Agreement in carrying out its

duties and responsibilities hereunder.

1.4

Time Requirements under Consulting Agreement.

Subject to the foregoing, Consultant agrees to provide the time

necessary for the performance of its consulting hereunder.

1.5

Place of Performance of Consulting Services.

Consultant shall perform its services hereunder in Lafayette,

Louisiana; Houston, Texas; and/or such other places as the

Company may direct.

1.6

Indemnification.

The

Company

shall

indemnify Consultant for all liabilities in connection with any

proceeding arising from services performed pursuant to this

Agreement, other than liability arising from the Consultants

gross negligence or willful misconduct.

1.7

Confidentiality of

Company's

Business.

Consultant acknowledges that the Company's business is highly

competitive and that the Company's books, records and documents,

the Company's technical information concerning its products,

equipment, services and processes, procurement procedures and

pricing techniques, the names of and other information (such as

credit and financial data) concerning the Company's customers and

business

affiliates,

all

comprise

confidential

business

information and trade secrets of the Company and are valuable,

special,

and

unique proprietary assets

of

the

Company

("Confidential Information"). Consultant further acknowledges

that protection of Company's Confidential Information against

unauthorized disclosure and use is of critical importance to the

company in maintaining its competitive position.

Accordingly,

Consulting hereby agrees that he will not, at any time during or

after the term of this Agreement, make any disclosure of any

Confidential Information, or make any use thereof, except for the

benefit of, and on behalf of, the Company.

However, the

Consultant's obligation under this Section 1.7 shall not extend

to information which is or becomes part of the public domain or

is available to the public by publication or otherwise than

through the Consultant. The provisions of this Section 1.7 shall

survive the termination of this Agreement. Money damages would

not be sufficient remedy for breach of this Section 1.7 by

Consultant, and the Company shall be entitled to specific

performance and injunctive relief as remedies for such breach or

any threatened breach. Such remedies for a breach of this

Section 1.7 by the Consultant, but shall be in addition to all

remedies available at law or in equity to the Company including

the recovery of damages from the Consultant. For the purposes of

this paragraph, the term Company shall also include affiliates of

the Company.

1.8



Covenants of Consultant.



Consultant agrees to



use his best efforts, skill and abilities so long as Consultant's

Services are retained hereunder to promote the best interest of

Company and its business. As part of the consideration for the

compensation to be paid to Consultant hereunder, and as an

additional incentive for the Company to enter

into

this

Agreement, Company and Consultant agree to the noncompetitive

provisions of this Section 1.8.

During the term of this

Agreement, Consultant agrees that:

(i)

Consultant will not directly or indirectly for

himself or for others consult, advise, counsel or

otherwise assist any customer, supplier, or direct

competitor of the Company or an affiliate on any matter

involving the Company that, in any manner, would have,

or is likely to have, an adverse effect upon the

Company or any affiliate;

(ii)

Consultant will not knowingly or intentionally

do or say any act or thing which will or may impair,

damage, or destroy the food will and esteem of the

Company with any of its suppliers, employees, and

others who may at any time have or have hd business

relations with the Company;

(iii)

Consultant will not reveal to any third

person any differences of opinion, if there be such at

any time, between him and the management of the Company

as to the Company's personnel, policies, practices or

prospects; and

(iv)

Consultant will not knowingly or intentionally

do any act or thing detrimental to the Company or its

business.

Consultant understands that the foregoing restrictions may

limit Consultant's ability to engage in a business similar to the

Company's business during the period provided for above, but

acknowledges that Consultant will receive sufficiently high

remuneration and other benefits from the Company hereunder to

justify such restrictions. The Company shall be entitled to

enforce the provisions of this Section 1.8 by resorting to

appropriate legal and equitable action.

It is expressly understood and agreed that the Company and

Consultant consider the restrictions contained in this Section

1.8 to be reasonable and necessary for the purposes of preserving

and protecting the goodwill and Confidential Information and

proprietary information of the Company. Nevertheless, if any of

the

aforesaid restrictions are found by a

court

having

jurisdiction to be unreasonable, or over broad as to geographic

area or time, or otherwise unenforceable, the parties intend for

the restrictions therein set forth to be modified by such court

so as to be reasonable and enforceable and, as so modified by the

court, to be fully enforced.

1.9



Independent Contractor:



(i)

The parties hereby agree that the services

rendered by Consultant in the fulfillment of the terms

and obligations of this Agreement shall be as an

independent contractor and not as an employee, and with

respect thereto, Consultant is not entitled to the

benefits provided by the Company to its employees

including, but not limited to, group insurance and

participation in the Company's employee benefit and

pension plan.

Further, Consultant is not an agent,

partner, or joint venture of the Company.

Consultant

shall not represent himself to third persons to be

other than an independent contractor of the Company,

nor shall he permit himself to offer or offer or agree

to incur or assume any obligations or commitments in

the name of the Company or for the Company without the

prior written consent and authorization of the Company.

Consultant warrants that the services to be provided

hereunder will not cause of conflict with any other

duties or obligations of Consultant to third parties.

Consultant shall not subcontract or assign any of the

work to be performed hereunder without obtaining the

prior

written consent of the Company,

provided,

however,

nothing contained herein shall

prohibit



Consultant from incorporating and rendering

hereunder as a corporation.



services



(ii)

Consultant shall be responsible for payment of

all taxes including Federal, State and local taxes

arising out of the Consultant's activities under this

Agreement, including by way of illustration but not

limitation, Federal and State income tax,

Social

Security tax, Unemployment Insurance taxes, and any

other taxes or business license fees as required.

ARTICLE II

Miscellaneous

2.1

Succession.

This Agreement shall inure to

the benefit of and be binding upon the Company, its successors

and assigns, and upon Consultant. Consultant shall be prohibited

from assigning this Agreement without prior written approval of

the Company.

2.2

Notice.

Any notice to be given to the

Company hereunder shall be deemed sufficient if addressed to the

Company in writing and personally delivered or mailed

by

certified mail to its office at the address set forth above. Any

notice to be given to Consultant hereunder shall be sufficient if

addressed to it in writing and personally delivered or mailed by

certified mail to its address set forth above. Either party may,

by notice as aforesaid, designate a different address for the

receipt of notice.

2.3

Amendment.

This Agreement may not be

amended or supplemented in any respect, except by a subsequent

written instrument entered into by both parties hereto.

2.5

Severability.

In the event any provision of

this

Agreement shall be held to be illegal, invalid

or

unenforceable for any reasons, the illegality, invalidity, or

unenforceablity thereof shall not affect the remaining provisions

hereof, but such illegal, invalid, or unenforceable provision

shall be fully severable and this Agreement shall be construed

and enforced as if the illegal, invalid, or unenforceable

provision had never been included herein.

2.6

Headings.

The titles and headings of

Articles and Sections are included for convenience of reference

only and are not to be considered in connection with the

construction or enforcement of the provisions hereof.

2.7

Governing Law.

This Agreement shall be

governed in all respects by the laws of the State of Delaware.

IN WITNESS WHEREOF, the parties have executed

Agreement effective as of the 15th day of June, 1998.



this



XCL LTD.

By:___________________________

Name:_________________________

Title:__________________________

______________________________

PATRICK B. COLLINS

</TEXT>

</DOCUMENT>

<DOCUMENT>

<TYPE>EX-10.51

<SEQUENCE>5

<TEXT>

XCL LTD.

RESTRICTED STOCK AWARD AGREEMENT

XCL LTD., a Delaware corporation (the "Company" or "XCL"),

effective as of the []st of [], 199[], hereby grants to []



("Grantee"), in consideration of services rendered and to be

rendered by the Grantee (the "Award"), [] shares of the Company's

fully-paid and non-assessable common stock, par value $.01 per

share (the "Shares") pursuant to the Company's Long-Term Stock

Incentive Plan, as amended and restated effective as of [], 199[]

(the "Plan"), with such Award to be evidenced by a certificate or

certificates for all Shares registered in the name of the Grantee

which shall be promptly drawn and held for the Grantee by the

Company, subject however to the following terms and conditions:

1.

Forfeiture Restrictions. The Shares may not be sold,

assigned,

pledged,

exchanged,

hypothecated

or

otherwise

transferred, encumbered or disposed of to the extent then subject

to the Forfeiture Restrictions (as hereinafter defined).

The

prohibition against transfer and the obligation to forfeit and

surrender Shares to the Company upon termination of employment

are herein referred to as the "Forfeiture Restrictions."

The

Forfeiture Restrictions shall be binding upon and enforceable

against any transferee of Shares.

2.



Release of Restrictions.



(a)

Subject to (b) below, and provided the Grantee

has been continuously employed by the Company from the date of

this Award through the Lapse Date specified in the table below

("Lapse Table"), the Forfeiture Restrictions shall be released as

to the number of Shares on the applicable Lapse Date, but only if

the "Fair Market Value" or "FMV" (as hereinafter defined) of the

Company's common stock, without any allowance for any dividends

of any kind paid by the Company on such common stock, has reached

the required FMV on such Lapse Date:

Lapse Date

[]

[]

[]



Number of Shares

The first []

An additional []

An additional []



FMV of Common Stock

$[]

[]

[]



"FMV" of the Company's common stock shall mean the last

sales price, regular way, per share of the common stock on such

day as reported in the principal consolidated reporting system

with respect to the common stock listed on the principal United

States securities exchange on which the common stock is listed or

admitted to trading, or if the common stock is not then listed on

any United States stock exchange, the last sales price reported

on each such day in the National Market System of the National

Association of Securities Dealers' Automated Quotation System

("NASDAQ"), or, if not so reported, the average of the bid and

asked prices on each such day as reported in the "pink sheets"

published by the National Quotation Bureau, Inc. or any successor

thereof, or, if not so reported, the average of the middle market

quotations on each such day as reported on The Stock Exchange

Daily Official List or, if applicable, the closing price on any

stock exchange on which the common stock is traded or, if not so

traded, the FMV shall be determined in good faith by the Board.

If the required FMV of the Company's common stock on

the pertinent Lapse Date is not equal to the FMV specified in the

Lapse

Table

above for such Lapse Date,

the

Forfeiture

Restrictions as to such Shares shall not lapse, and such Shares

shall become "Suspended Shares" as of such Lapse Date.

The

Forfeiture Restrictions with respect to Suspended Shares shall

lapse, if on any subsequent Lapse Date, the FMV of the Company's

common stock is equal to, or greater than, the required FMV

referenced in the Lapse Table for such Lapse Date.

(b)

Paragraph

(a)

above

to

the

contrary

notwithstanding, the Forfeiture Restrictions on all Shares to the

extent then still applicable shall lapse in full on [], 200[], if

Grantee is employed by the Company on such date. Paragraph (a)

above further to the contrary notwithstanding, the Forfeiture

Restrictions on all Shares to the extent then still applicable

shall lapse in full if Grantee's employment with the Company is

terminated for any reason other than termination of

such

employment by the Company for "cause" or termination of such

employment by Grantee without "good reason." For purposes of

this Agreement, the term "cause" shall mean the termination of

Grantee's employment with the Company due to the Grantee's

(i) engagement in gross negligence or willful misconduct in the

performance of his duties with respect to the Company or any of



its affiliates, (ii) conviction of a felony or misdemeanor, (iii)

refusal without proper legal reason to perform his duties and

responsibilities to the Company or any of its affiliates or (iv)

breach of any provision of a written employment agreement between

Grantee and the Company; provided, however, that if Grantee's

employment with the Company is subject to and governed by the

terms of a written employment contract as of the date of

Grantee's termination of employment, the term "cause"

for

purposes of this Agreement shall include only those events or

circumstances which, pursuant to the terms of such employment

agreement, enable the Company to terminate Grantee's employment

without liability to Grantee (whether in the nature of breach of

contract

damages,

liquidated

damages,

punitive

damages,

compensatory damages or otherwise).

For purposes of

this

Agreement, the term "good reason" shall mean (i) the removal of

Grantee as Vice Chairman of the Company, (ii) a reduction in

Grantee's annual base salary by more than 10% unless such

reduction was pursuant to a Company-wide cost reduction program

pursuant

to

which

all

Company employees

were

treated

substantially equally, (iii) a breach by the Company of any

obligation owed to Grantee under any written agreement between

Grantee and the Company with respect to Grantee's employment

with, or benefits from, the Company or any of its affiliates, or

(iv) death or total disability of Grantee.

(c)

Notwithstanding any provision in this Agreement

or the Plan to the contrary, the Forfeiture Restrictions as to

all Shares shall lapse and cease to be applicable upon the

occurrence of an event which constitutes a change of control of

XCL. For purposes of this Paragraph (c), a "change in control of

XCL" shall mean a change in control of a nature that would be

required to be reported in response to Item 5(f) of Schedule 14A

of Regulation 14A promulgated under the Securities Exchange Act

of 1934, as amended (the "Exchange Act"); provided that, without

limitation, such a change in control shall be deemed to have

occurred if (Y) any "person" (as such term is used in Section

13(d) and 14(d) of the Exchange Act), other than XCL or any

person who on the date the Plan is amended is a director or

officer of XCL is or becomes the "beneficial owner" (as defined

in Rule 13d-3 under the Exchange Act), directly or indirectly, of

securities of XCL representing 20% or more of the combined voting

power of XCL's then outstanding securities, unless such person

owns, directly or indirectly, as of the date the Plan is amended,

more than 25% of the combined voting power of XCL's then

outstanding securities, in which case, if any such person (a

"Major Stockholder") becomes the beneficial owner, directly or

indirectly, of 33a% or more of the combined voting power of XCL's

then outstanding securities; provided, further, however, that

acquisition of 33a% or more of such combined voting power shall

not constitute a "change in control of XCL" if (1) such combined

voting power does not exceed 372% or more of the combined voting

power of XCL's then outstanding securities, and (2) either (i) to

the extent any such increase in a Major Stockholder's beneficial

ownership results from a redemption or purchase by XCL of its

securities, or (ii) if the Board of Directors of XCL, by vote of

two-thirds (b) of the full Board, in good faith, determines

(hereinafter referred to as a "Determination") both (A) that such

acquisition does not constitute, in fact, a change in the control

of XCL and (B) that such Major Stockholder does not and cannot

then control XCL or (Z) during any period of two consecutive

years prior to the date of such Determination, individuals who at

the beginning of such period constituted the Board of Directors

cease for any reason to constitute at least a majority thereof,

unless the election of each director who was not a director at

the beginning of such period has been approved in advance by

directors representing at least two-thirds of the directors then

in office who were directors at the beginning of the period.

Further notwithstanding any provision in this Agreement or the

Plan to the contrary, upon the occurrence of a "change in control

of XCL" and the lapse of the Forfeiture Restrictions on the

Shares resulting therefrom, Grantee shall have the right at any

time during the sixty-day period immediately following such

"change

in control of XCL" to require the Company to purchase

from Grantee at their then Fair Market Value up to 40% (as

elected by Grantee) of the Shares as to which the Forfeiture

Restrictions lapsed as a result of such "change in control of

XCL". Grantee shall exercise the put option provided pursuant to

the

preceding sentence by written notice to the

Company

specifying the number of Shares which Grantee demands that the

Company purchase. The purchase price for Shares purchased by the



Company

from Grantee pursuant to the put option provided

hereunder shall be paid in cash and in full no later than thirty

days after the date of Grantee's notice to Company of Grantee's

exercise of the put option provided herein and tender of the

Shares as to which such put option is being exercised.

3.

Adjustments on Recapitalization.

The number of

Shares subject hereto shall be proportionately adjusted for any

increase or decrease in the number of issued Shares resulting

from the subdivision or consolidation of Shares, or the payment

of a stock dividend on the Shares or increase in the Shares

outstanding effected without receipt of consideration by the

Company, provided that any fractional Shares resulting from such

adjustments shall be eliminated.

If the Company shall at any time merge or consolidate with

or into another corporation, Grantee (or other party entitled to

the Award) will thereafter receive the securities or property to

which a holder of the number of Shares then deliverable upon the

lapse of the Forfeiture Restrictions of the Award would have been

entitled upon such merger or consolidation, and the Company shall

take such steps in connection with such merger or consolidation

as may be necessary to assure that provisions of the Plan shall

thereafter be applicable, as nearly as reasonably may be, in

relation to any securities or property thereafter deliverable

upon lapse of the Forfeiture Restrictions of the Award. A sale

of all or substantially all of the assets of the Company for a

consideration

(apart from the assumption

of

obligations)

constituted primarily of securities shall be deemed a merger or

consolidation for the foregoing purposes. In the event of the

proposed dissolution, liquidation or reorganization of

the

Company, other than pursuant to a merger or consolidation as

hereinabove provided, the Forfeiture Restrictions on the Award

shall terminate as of a date to be fixed by the Company's

Compensation Advisory Committee; provided that not less than 120

days (or such shorter period as shall elapse between the date the

Board of Directors shall decide upon a dissolution, liquidation

or reorganization and the effective date of such dissolution,

liquidation or reorganization) prior written notice shall be

given to Grantee and Grantee shall have the right, during such

period, to receive unrestricted Shares covered by the Award,

including Shares granted pursuant to the Award as to which the

Forfeiture Restrictions would not otherwise have lapsed.

4.



Status of Shares.



(a)

The Grantee agrees that (i) the Shares will not

be sold or otherwise disposed of in any manner which would

constitute a violation of any applicable federal or state laws,

(ii) the certificates representing the Shares shall bear such

legend or legends as the Committee deems appropriate in order to

reflect the Forfeiture Restrictions and to assure compliance with

applicable securities laws, (iii) the Company may refuse to

register the transfer of the Shares on the stock transfer records

of the Company if such proposed transfer would constitute a

violation of the Forfeiture Restrictions or, in the opinion of

counsel satisfactory to the Company, any applicable securities

laws, and (iv) the Company may give related instructions to its

transfer agent, if any, to stop registration of the transfer of

Shares.

(b)

As the Forfeiture Restrictions on the Award are

released, a certificate without the legend describing such

Forfeiture Restrictions and evidencing the number of Shares with

respect to which restrictions have been released will

be

delivered to the Grantee as soon as practicable.

5.

Subject to Plan. The Award granted hereunder has

been issued under the Plan and is specifically subject to and

conditioned upon approval by the stockholders of the Company of

the June 1, 1997 amendment and restatement of the Plan and shall

be null and void ab initio if such approval is not obtained. In

addition to the provisions hereof, this Award will be subject to

the power under the Plan of the Company's Compensation Advisory

Committee and the Board of Directors to make interpretations of

the Plan and of any awards granted thereunder, and to make

determinations and take other actions with respect to the Plan;

provided,

however,

that

if

any

such

interpretations,

determinations or other actions shall conflict with any of the

provisions of this Agreement, the provisions shall

hereof



control. By acceptance hereof, Grantee acknowledges receipt of a

copy of the Plan and recognizes and agrees that determinations,

interpretations or other actions respecting the Plan may be made

by a majority of the Board of Directors or by the Compensation

Advisory Committee.

6.

Securities Laws. Grantee acknowledges that he has

been informed of, or is otherwise familiar with, the nature and

the limitations imposed by the Securities Act of 1933, as amended

(the

"Act"), the Exchange Act, state securities or Blue Sky

laws, and the rules and regulations thereunder (in particular,

Rule 144, promulgated under the Act and Section 16 of the

Exchange Act, and Rule 16b-3 promulgated thereunder), concerning

the restricted stock awarded under this Agreement and agrees to

be bound by the restrictions embodied in such Act, the Exchange

Act, state securities or Blue Sky laws, and all the rules and

regulations promulgated thereunder.

7.

Grantee a Stockholder. Grantee shall be entitled to

all rights of a stockholder of the Company, including the right

to vote and to receive all dividends and other distributions made

or paid with respect to the Shares.

8.

The Company's Right to Terminate Employment. Nothing

contained in this Agreement shall confer upon Grantee the right

to employment by the Company or any of its affiliates.

9.

Withholding. Grantee hereby agrees that he will make

such arrangements as the Company deems necessary to discharge any

federal, state or local taxes imposed upon the Company in respect

of this Award.

10.

Entire Agreement.

This Agreement contains the

entire agreement of the parties relative to the subject matter

hereof, superseding and terminating all prior agreements or

understandings, whether oral or written, between the parties

hereto relative to the subject hereof, and this Agreement may not

be extended, amended, modified or supplemented without written

consent of the parties hereto.

11.

Governing Law. This Agreement and all amendments or

changes relating hereto shall be deemed to have been entered into

pursuant to, and shall be governed by, the laws of the State of

Delaware.

12.

Notices.

Notices given pursuant hereto shall be

registered or certified mail and shall be deemed delivered four

(4) days after deposit in the United States mail, postage

prepaid, addressed as follows:

If to the Company:

XCL Ltd.

110 Rue Jean Lafitte

Lafayette, Louisiana



70508



If to Grantee:



IN WITNESS WHEREOF, this Agreement is executed

[]st day of [], 199[].



as



of



the



Attest

XCL LTD.

By:___________________________

Name:_________________________

Title:________________________



By:___________________________

Name:_________________________

Title:________________________



The

undersigned Grantee hereby accepts the

foregoing

Restricted Stock Award Agreement dated as of the []st day of [],

199[] (the "Date of Grant"), and the undertaking on his part

contained therein, and agrees to all of the terms and conditions

thereto.



____________________________

Grantee

</TEXT>

</DOCUMENT>

<DOCUMENT>

<TYPE>EX-10.52

<SEQUENCE>6

<TEXT>



XCL LTD.

NONQUALIFIED STOCK OPTION AGREEMENT

XCL LTD., a Delaware corporation (the "Company" or "XCL"),

effective as of the []st day of [], 199[], hereby irrevocably

grants to [] ("Optionee") in consideration of services rendered

and to be rendered by the Optionee, the right and option (the

"Option") to purchase [] shares of the Company's fully-paid and

non-assessable common stock, par value $.01 per share (the

"Shares") pursuant to the Company's Long-Term Stock Incentive

Plan, as amended and restated effective as of June 1, 1997 (the

"Plan") on or before [], 200[] (the "Expiration Date"), subject,

however, to the following terms and conditions:

1.

Exercise. The Option herein granted may be exercised

subject to the provisions of the Plan and Section 5 hereof, as to

the following amounts of the Shares:

[] Shares on or after []

As to an additional [] Shares on or after []

As to an additional [] Shares on or after []

by giving written notice of such exercise to the Company at any

time (or exercised as to part of each allotment, from time to

time), specifying the number of Shares to be purchased.

A

closing shall be held within ten days after receipt of notice of

exercise.

2.

Exercise Price. The aggregate purchase price of the

Shares to be purchased pursuant to any exercise of this Option

shall be equal to the product of the number of Shares to be

purchased

multiplied by the "Exercise Price", as

defined

hereinafter.

The Exercise Price for all Shares to be purchased

shall be $[] per Share.

3.

Adjustments on Recapitalization.

The number of

Shares subject hereto and the Exercise Price per Share shall be

proportionately adjusted for any increase or decrease, after the

date hereof, in the number of issued Shares resulting from the

subdivision or consolidation of Shares, or the payment of a stock

dividend on the Shares or increase in the Shares outstanding

effected

without receipt of consideration by the Company,

provided that any Options to purchase fractional Shares resulting

from such adjustments shall be eliminated.

If the Company shall at any time merge or consolidate with

or into another corporation, Optionee (or other party entitled to

the Option) will thereafter receive, upon the exercise of the

Option, the securities or property to which a holder of the

number of Shares then deliverable upon the exercise of the Option

would have been entitled upon such merger or consolidation, and

the Company shall take such steps in connection with such merger

or consolidation as may be necessary to assure that provisions of

the Company's stock option plans shall thereafter be applicable,

as nearly as reasonably may be, in relation to any securities or

property thereafter deliverable upon the exercise of the Option.

A sale of all or substantially all of the assets of the Company

for a consideration (apart from the assumption of obligations)

constituted primarily of securities shall be deemed a merger or

consolidation for the foregoing purposes. In the event of the

proposed dissolution, liquidation or reorganization of

the

Company, other than pursuant to a merger or consolidation as

hereinabove provided, the Option shall terminate as of a date to

be fixed by the Company's Compensation Advisory Committee;



provided that not less than 120 days (or such shorter period as

shall elapse between the date the Board of Directors shall decide

upon a dissolution, liquidation or reorganization and

the

effective

date

of

such

dissolution,

liquidation

or

reorganization) prior written notice shall be given to Optionee

and Optionee shall have the right, during such period to exercise

this Option as to all or part of the Shares covered thereby,

including Shares as to which the Option would not otherwise be

exercisable.

4.

Adjustment upon Exercise. If Optionee exercises this

Option by payment of all or a portion of the Exercise Price with

Shares which Optionee has owned for at least six months, Optionee

will receive an Option to purchase a number of Shares equal to

the number of Shares used in payment of the Exercise Price of the

original Option.

5.

Closing.

At the closing, full payment of the

aggregate purchase price for the Shares purchased by the Optionee

shall be made to the Company by delivery to the Company of

consideration acceptable to the Company for such Shares and such

Shares will then be delivered to Optionee. No Shares shall be

issued until full payment therefor has been made, and Optionee

shall have none of the rights of a shareholder with respect to

any Shares subject to this Option until a certificate for such

Shares shall have been issued. If the number of Shares purchased

at the closing shall not be all the Shares purchasable under this

Option, a new Nonqualified Stock Option Agreement with the same

terms

and

conditions as this Option, including,

without

limitation, the Expiration Date, shall be issued for the balance

remaining of the Shares purchasable hereunder.

Consideration

acceptable to the Company includes (i) cash (including

a

certified or official bank check) or the equivalent thereof

acceptable to the Company, (ii) the equivalent fair market value

of Shares, properly endorsed, (iii) the equivalent fair market

value of any other property acceptable to the Company, or (iv)

any combination of (i), (ii) and (iii).

6.



Expiration.



(a)

The Option shall expire and become null and

void at 5:00 P.M. Lafayette, Louisiana time, on the Expiration

Date.

This Option shall not terminate upon the Optionee's

termination of employment with the Company for any reason other

than termination of such employment by the Company for "cause" or

termination of such employment by Optionee without "good reason".

For purposes of this Agreement, the term "cause" shall mean

Optionee's

(i) engagement in gross negligence or

willful

misconduct in the performance of his duties with respect to the

Company or any of its affiliates, (ii) conviction of a felony or

misdemeanor, (iii) refusal without proper legal reason to perform

his duties and responsibilities to the Company or any of its

affiliates or (iv) breach of any provision of a

written

employment agreement between Optionee and the Company; provided,

however, that if Optionee's employment with the Company is

subject to and governed by the terms of a written employment

contract as of the date of Optionee's termination of employment,

the term "cause" for purposes of this Agreement shall include

only those events or circumstances which, pursuant to the terms

of such employment agreement, enable the Company to terminate

Optionee's employment without liability to Optionee (whether in

the nature of breach of contract damages, liquidated damages,

punitive damages, compensatory damages or otherwise).

For

purposes of this Agreement, the term "good reason" shall mean (i)

the removal of Optionee as Vice Chairman of the Company, (ii) a

reduction in Optionee's annual base salary by more than 10%

unless such reduction was pursuant to a Company-wide cost

reduction program pursuant to which all Company employees were

treated substantially equally, (iii) a breach by the Company of

any obligation owed to Optionee under any written agreement

between Optionee and the Company with respect to Optionee's

employment with, or benefit from, the Company or any of its

affiliates or (iv) death or total disability of Optionee.

(b)

Notwithstanding any provision in this Option to

the contrary, this Option shall become immediately exercisable in

whole or in part, at the election of Optionee, upon the

occurrence of an event which constitutes a change in control of

XCL, provided that under no circumstances shall an option be

exercisable within six months (or such greater or lesser period



prescribed or permitted by any applicable rule promulgated under

the Exchange Act, including, without limitation, Rule 16b-3 from

its grant date. For purposes of this Paragraph (b), a "change in

control of XCL" shall mean a change in control of a nature that

would be required to be reported in response to Item 5(f) of

Schedule 14A of Regulation 14A promulgated under the Securities

Exchange Act of 1934, as amended (the "Exchange Act"); provided

that, without limitation, such a change in control shall be

deemed to have occurred if (Y) any "person" (as such term is used

in Section 13(d) and 14(d) of the Exchange Act), other than XCL

or any person who on the date the Plan is amended is a director

or officer of XCL is or becomes the "beneficial owner" (as

defined in Rule 13d-3 under the Exchange Act), directly or

indirectly, of securities of XCL representing 20% or more of the

combined voting power of XCL's then outstanding securities,

unless such person owns, directly or indirectly, as of the date

the Plan is amended, more than 25% of the combined voting power

of XCL's then outstanding securities, in which case, if any such

person (a "Major Stockholder") becomes the beneficial owner,

directly or indirectly, of 33a% or more of the combined voting

power of XCL's then outstanding securities; provided, further,

however, that acquisition of 33a% or more of such combined voting

power shall not constitute a "change in control of XCL" if (1)

such combined voting power does not exceed 372% or more of the

combined voting power of XCL's then outstanding securities, and

(2) either (i) to the extent any such increase in a Major

Stockholder's beneficial ownership results from a redemption or

purchase by XCL of its securities, or (ii) if the Board of

Directors of XCL, by vote of two-thirds (b) of the full Board, in

good

faith,

determines (hereinafter

referred

to

as

a

"Determination") both (A) that such acquisition

does

not

constitute, in fact, a change in the control of XCL and (B) that

such Major Stockholder does not and cannot then control XCL or

(Z) during any period of two consecutive years prior to the date

of such Determination, individuals who at the beginning of such

period constituted the Board of Directors cease for any reason to

constitute at least a majority thereof, unless the election of

each director who was not a director at the beginning of such

period has been approved in advance by directors representing at

least two-thirds of the directors then in office who were

directors at the beginning of the period.

7.

Transferability.

This Option

is

granted

in

recognition of the personal services of the Optionee to the

Company or its affiliates and is not assignable or transferable

other than by will or by the laws of descent and distribution.

During the lifetime of the Optionee, this Option shall be

exercisable only by him.

8.

Subject to Plan. The Option granted hereunder has

been issued under the Plan and is specifically subject to and

conditioned upon approval by the stockholders of the Company of

the June 1, 1997 amendment and restatement of the Plan and shall

be null and void ab initio if such approval is not obtained. In

addition to the provisions hereof, this Option will be subject to

the power under the Plan of the Company's Compensation Advisory

Committee and the Board of Directors to make interpretations of

the Plan and of any options granted thereunder, and to make

determinations and take other actions with respect to the Plan;

provided,

however,

that

if

any

such

interpretations,

determinations or other actions shall conflict with any of the

provisions of this Agreement, the provisions shall

hereof

control; and provided further, that this Option shall not be

treated as an incentive stock option as defined in Section 422A

of the Internal Revenue Code of 1986, as amended. By acceptance

hereof, Optionee acknowledges receipt of a copy of the Plan and

recognizes and agrees that determinations, interpretations or

other actions respecting the Plan may be made by a majority of

the Board of Directors or by the Compensation Advisory Committee.

9.

Securities Laws. Optionee acknowledges that he has

been informed of, or is otherwise familiar with, the nature and

the limitations imposed by the Securities Act of 1933, as amended

(the

"Act"), the Exchange Act, and the rules and regulations

thereunder (in particular, Rule 144, promulgated under the Act

and Section 16 of the Exchange Act, and Rule 16b-3 promulgated

thereunder), concerning the Shares issuable upon exercise of this

Option and agrees to be bound by the restrictions embodied in the

Act,

the Exchange Act and all the rules and regulations

promulgated thereunder.



10.

Reservation of Shares. The Company will at all

times reserve and keep available out of its authorized Shares,

the required number of Shares issuable upon the exercise of this

Option.

11.

Optionee not a Stockholder. Optionee shall not be

entitled by reason of this Option to any rights whatsoever as a

stockholder of the Company.

12.

The

Company's Right to Terminate Employment.

Nothing contained in this Agreement shall confer upon Optionee

the right to employment by the Company or any of its affiliates.

13.

Withholding. Optionee hereby agrees that he will

make such arrangements as the Company deems necessary

to

discharge any federal, state or local taxes imposed upon the

Company in respect of this Option.

14.

Entire Agreement.

This Agreement contains the

entire agreement of the parties relative to the subject matter

hereof, superseding and terminating all prior agreements or

understandings, whether oral or written, between the parties

hereto relative to the subject hereof, and this Agreement may not

be extended, amended, modified or supplemented without written

consent of the parties hereto.

15.

Governing Law. This Agreement and all amendments or

changes relating hereto shall be deemed to have been entered into

pursuant to, and shall be governed by, the laws of the State of

Delaware.

16.

Notices.

Notices given pursuant hereto shall be

registered or certified mail and shall be deemed delivered four

(4) days after deposit in the United States mail, postage

prepaid, addressed as follows:

If to the Company:

XCL Ltd.

110 Rue Jean Lafitte

Lafayette, Louisiana

If



to



Optionee,



70508

to



the



address



below



Optionee's



signature.

IN WITNESS WHEREOF, this Agreement is executed

[]st day of [], 199[].



as



of



the



Attest

XCL LTD.

By:___________________________

Name:_________________________

Title:________________________



By:___________________________

Name:_________________________

Title:________________________



The

undersigned Optionee hereby accepts the foregoing

Nonqualified Stock Option Agreement dated as of the []st day of

[], 199[] (the "Date of Grant"), and the undertaking on his part

contained therein, and agrees to all of the terms and conditions

thereof.



______________________________

OPTIONEE

Address:



</TEXT>

</DOCUMENT>

<DOCUMENT>

<TYPE>EX-10.54

<SEQUENCE>7

<TEXT>



PETROLEUM CONTRACT

FOR

ZHANG DONG BLOCK

SHALLOW WATER AREA, BOHAI BAY

THE PEOPLE'S REPUBLIC OF CHINA



BEIJING, CHINA

AUGUST, 1998



<PAGE.

PETROLEUM CONTRACT BY AND

BETWEEN XCL CATHAY LTD.

AND CHINA NATIONAL PETROLEUM CORPORATION



ON ZHANG DONG BLOCK IN THE BOHAI BAY SHALLOW WATER SEA AREA



OF THE PEOPLE'S REPUBLIC OF CHINA



BEIJING, CHINA



AUGUST 1998

<PAGE>

TABLE OF CONTENTS



Preamble -----------------------------------------



2



Article 1



Definitions ----------------------------------



3



Article 2



Objective of the Contract --------------------



8



Article 3



Contract Area --------------------------------



9



Article 4



Contract Term --------------------------------



10



Article 5



Relinquishment of Contract Area --------------



13



Article 6



Minimum Appraisal Work Commitment

And Expected Minimum Appraisal Expenditures ------



14



Article 7



Management and its Functions------------------



17



Article 8



Operator--------------------------------------



22



Article 9



Assistance Provided by CNPC ------------------



27



Article 10



Work Program and Budget ---------------------



29



Article 11



Determination of Commerciality --------------



31



Article 12



Financing and Cost Recovery -----------------



34



Article 13



Crude Oil Production and Allocation----------



37



Article 14



Quality, Quantity, Price and

Destination of Crude Oil -------------------------



43



Preference to Employment of

CNPC Personnel, Goods and

Services------------------------------------------



48



Training of CNPC Personnel and

Transfer of Technology ---------------------------



49



Article 17



Ownership of Assets and Data ----------------



51



Article 18



Associated Natural Gas and

Non-Associated Natural Gas -----------------------



52



Accounting, Auditing and

Personnel Costs ----------------------------------



55



Article 20



Taxation ------------------------------------



57



Article 21



Insurance -----------------------------------



58



Article 22



Confidentiality -----------------------------



60



Article 23



Assignment ----------------------------------



62



Article 24



Environmental Protection and Safety ---------



63



Article 25



Force Majeure -------------------------------



64



Article 26



Consultation and Arbitration ----------------



65



Article 27



Effectiveness and Termination of the

Contract -----------------------------------------



67



Article 28



The Applicable Law --------------------------



69



Article 29



Language of Contract and

Working Language ---------------------------------



70



Article 15



Article 16



Article 19



Article 30

Annex I

Annex II

Annex III

Article IV



Miscellaneous ------------------------------Geographic Location and Coordinates of the

Boundary Lines of the Zhang Dong Contract

Accounting Procedure

Personnel Costs

Data Control Agreement



<PAGE>

PREAMBLE

This Contract is entered into in Beijing on this 20th

_____ day of August of 1998 by and between China National

Petroleum Development Corporation (hereafter abbreviated as

"CNPC"), a company organized and existing under the laws of

the People's Republic of China, having its headquarters

domiciled in Beijing, the People's Republic of China, as one



71



part; and XCL Cathay Ltd., an international business company

organized under the laws of the British Virgin Islands with

corporate headquarters domiciled in Roadtown, Tortola,

B.V.I., (hereafter referred to as the "Foreign Contractor"),

and being a subsidiary of XCL Ltd., a company organized and

existing under the laws of the State of Delaware, United

States of America, having its corporate headquarters

domiciled in Delaware, as the other part.

WITNESSETH

WHEREAS, all Petroleum resources under the territory,

internal water, territorial sea, and continental shelf of

the People's Republic of China and under all sea areas

within the limits of national jurisdiction over the maritime

resources of the People's Republic of China are owned by the

People's Republic of China;

WHEREAS, the State Council of the People's Republic of

China has authorized CNPC to be responsible for the

negotiation, signature and implementation of the contracts

for the exploitation of China's onshore Petroleum resources

in cooperation with foreign enterprises and to have the

exclusive right to explore for, develop, produce and market

the Petroleum of the Contract Area; and

WHEREAS, the Foreign Contractor desires and agrees to

provide funds, and apply its appropriate and advanced

technology and managerial experience to cooperate with CNPC

for the exploitation of Petroleum resources within the

Contract Area and agrees to be subject to the laws, decrees,

and other rules and regulations of the People's Republic of

China in the implementation of the Contract.

NOW, THEREFORE IT IS MUTUALLY AGREED as hereafter set

forth:

Article 1

Definitions

The following words and terms used in the Contract

shall have, unless otherwise specified in the Contract, the

following meaning:

1.1 "Petroleum" means Crude Oil and Natural Gas

deposited in the subsurface and being extracted or already

extracted, including any valuable non-hydrocarbon substances

produced in association with Crude Oil and/or Natural Gas

separated or extracted therefrom.

1.2 "Crude Oil" means solid and liquid hydrocarbons in

their natural states and also includes any liquid

hydrocarbons extracted from Natural Gas except for methane

(CH4).

1.3 "Natural Gas" means Non-associated Natural Gas and

Associated Natural Gas in their natural state.

1.4 "Non-associated Natural Gas" means all gaseous

hydrocarbons produced from gas reservoirs, and includes wet

gas, dry gas and residue gas remaining after the extraction

of liquid hydrocarbons from wet gas.

1.5 "Associated Natural Gas" means all gaseous

hydrocarbons produced in association with Crude Oil from oil

reservoirs, and includes residue gas remaining after the

extraction of liquid hydrocarbons therefrom.

1.6 "Oil Field" means an accumulation of Petroleum

within the Contract Area composed of one or several oilbearing zones, within one trap or within traps of the same,

independent geological structure, which may or may not be

complicated by faulting, and which has been determined to be

of commercial value in accordance with the procedures

stipulated in Article 11 hereof.

1.7 "Gas Field" means an accumulation of Petroleum

within the Contract Area composed of one or several gas-



bearing zones, within one trap or traps of the same,

independent geological structure, which may or may not be

complicated by faulting, and which has been determined to be

of commercial value in accordance with the procedures

stipulated in Article 18 hereof.

1.8 "Petroleum Operations" means the Appraisal

Operations, the Development Operations, the Production

Operations, and other activities related to these Operations

carried out under the Contract.

1.9 "Appraisal Operations" means operations carried

out for the purpose of confirming Petroleum-bearing traps by

means of geological, geophysical, geochemical and other

methods; all the work undertaken to determine the

commerciality of traps in which Petroleum has been

discovered including Appraisal Well drilling and feasibility

studies, Trial Production, formulation of the Overall

Development Program; and activities related to all such

operations.

1.10 "Development Operations" means operations carried

out for the realization of Petroleum production from the

date of approval of the Overall Development Program for any

Oil Field and/or Gas Field by the Department or Unit,

including design, construction, installation, drilling, and

the related research work as well as production activities

carried out before the Date of Commencement of Commercial

Production.

1.11 "Production Operations" means operations and all

activities related thereto carried out for Petroleum

production of an Oil Field and/or Gas Field from the Date of

Commencement of Commercial Production, such as extraction,

injection, stimulation, treatment, storage, transportation,

lifting, etc.

1.12 "Progressive Appraisal and Development Program"

means an operational procedure during which Appraisal

Operations and Development Operations are conducted during

the appraisal period and development and production period

and during which Trial Production, if feasible, is conducted

simultaneously with Appraisal Operations and/or Development

Operations.

1.13 "Basic Block" means a section of the surface of

the earth bounded by the segments of longitude and latitude

of equal distance of ten (10) minutes.

demarcated on the

map as Annex I hereto.

1.14 "Contract Area" means a surface area demarcated

with geographic coordinates for the cooperative exploitation

of Petroleum resources, and in the Contract, means the

surface area stipulated in Article 3.1 hereof.

1.15 "Appraisal Area" means a surface area within the

Contract Area which has not been relinquished before the

expiration of the appraisal period and in which Development

Operations have not begun.

1.16 "Development Area" means a portion of the

Contract Area covering an Oil Field and/or Gas Field and any

potential contiguous extension areas to such Field(s) within

the Contract Area which has been designated for development.

The Development Area(s) shall be proposed by the Operator,

demarcated by the Joint Management Committee ("JMC") and

delineated as such in the Overall Development Program

approved by the Department or Unit.

1.17 "Production Area" means a surface area within any

Development Area for the purpose of the performance of the

Production Operations within the said Development Area after

completion of the Development Operations.

1.18 "Date of Commencement of Commercial Production"

means, in respect of each Oil Field, the date on which a

cumulative total of sixty thousand (60,000) metric tons of

Crude Oil shall have been extracted and delivered out of the

Field; in respect of each Gas Field, the date on which a

cumulative total of sixty million (60,000,000) cubic meters



of Natural Gas (under standard atmospheric conditions) shall

have been extracted and delivered out of the Field. If any

field produces both oil and gas, and if the gas is sold,

then the net amount received by the Parties for the gas sold

shall be converted, on an equivalent dollar basis, into a

volume of oil.

1.19 "Calendar Year" means a period of twelve (12)

consecutive Gregorian months under the Gregorian Calendar,

beginning on the first day of January and ending on the

thirty-first day of December of the same year.

1.20 "Contract Year" means a period of twelve (12)

consecutive Gregorian months under the Gregorian Calendar,

within the term of the Contract, beginning on the effective

date of the Contract or any anniversary thereof.

1.21 "Production Year" means, in respect of each Oil

Field and/or Gas Field, a period of twelve (12) consecutive

Gregorian months under the Gregorian Calendar beginning on

the Date of Commencement of Commercial Production of such

Field or any anniversary thereof.

1.22 "Calendar Quarter" means a period of three (3)

consecutive Gregorian months under the Gregorian Calendar

beginning on the first day of January, the first day of

April, the first day of July, or the first day of October.

1.23 "Exploratory Well" means any Wildcat and/or

Appraisal Well drilled within the exploration period,

including dryhole(s) and discovery well(s).

1.24 "Wildcat" means a well drilled on any geological

trap for the purpose of searching for Petroleum

accumulations, including wells drilled for the purpose of

obtaining geological and geophysical parameters.

1.25 "Appraisal Well" means any well drilled for the

purpose of evaluating the commerciality of a geological trap

in which Petroleum has been or may be discovered.

1.26 "Development Well" means a well drilled after the

date of approval of the Overall Development Program for the

purpose of producing Petroleum, increasing production or

accelerating extraction of Petroleum, including production

wells, injection wells and dry holes.

Any Appraisal Well

drilled during the production period shall be deemed a

Development Well.

1.27 "Work Program" means all types of plans

formulated for the performance of the Petroleum Operations,

including plans for appraisal, development and production.

1.28 "Overall Development Program" means a plan

prepared by the Operator for the development of an Oil Field

and/or Gas Field which has been reviewed and adopted by JMC,

confirmed by CNPC and approved by the Department or Unit and

such plan shall include, but shall not be limited to,

recoverable reserves, the Development Well pattern, master

design, production profile, economic analysis and time

schedule of the Development Operations.

1.29 "Deemed Interest" means interest on the

development costs calculated in accordance with the rate of

interest stipulated in Article 12.2.3.2. hereof when the

development costs incurred in each Oil Field and/or Gas

Field within the Contract Area are recovered by the Parties.

1.30 "Oil Field and/or Gas Field Straddling a

Boundary" means an Oil Field and/or Gas Field extending from

the Contract Area to one or more other contract areas and/or

areas in respect of which no Petroleum contracts have been

signed.

1.31 "Annual Gross Production of Natural Gas" means

the total amount of Natural Gas produced from each Oil Field

and/or Gas Field within the Contract Area considered

separately in each Calendar Year, less the amount of Natural

Gas used for Petroleum Operations and the amount of losses,

and which is saved and measured by a measuring device at the



Delivery Point as defined in Article 1.43 herein.

1.32 "Annual Gross Production of Crude Oil" means the

total amount of Crude Oil produced from each Oil Field

within the Contract Area considered separately in each

Calendar Year, less the amount of Crude Oil used for

Petroleum Operations and the amount of losses, which is

saved and measured by a measuring device at the Delivery

Point as defined in Article 1.43 herein.

1.33 "Basement" means igneous rocks, metamorphic rocks

or rocks of such nature which, or formations below which,

could not contain Petroleum deposits in accordance with the

knowledge generally accepted in the international oil

industry; and shall also include such impenetrable rock

substances as salt domes, mud domes and any other rocks

which make further drilling impracticable or economically

unjustifiable by the modern drilling technology normally

utilized in the international oil industry.

1.34 "Contractor" means the Foreign Contractor

specified in the Preamble hereto, including assignee(s) in

accordance with Article 23 hereof.

1.35



"Parties" means CNPC and Contractor.



1.36 "Operator" means an entity responsible for the

performance of the Petroleum Operations under the Contract.

1.37 "Subcontractor" means an entity which provides

the Operator with goods or services for the purpose of

implementing the Contract.

1.38 "Third Party" means an individual or entity

except CNPC, the Contractor and any of their Affiliates.

1.39 "Chinese Personnel" means any citizen of the

People's Republic of China, including CNPC's personnel and

Chinese citizens employed by the Contractor and/or the

Subcontractor(s), involved in Petroleum Operations under the

Contract.

1.40 "Expatriate Employee" means any person employed

by the Contractor, Subcontractor(s), or CNPC who is not a

citizen of the People's Republic of China. Overseas Chinese

who reside abroad and have the nationality of the People's

Republic of China and other overseas Chinese abroad, when

they are employed by the Contractor, Subcontractor(s) or

CNPC shall also be deemed to be Expatriate Employees within

the scope of the Contract.

1.41



"Affiliate" means in respect of the Contractor:



(a) any entity in which any company comprising the

Contractor directly or indirectly holds fifty percent (50%)

or more of the voting rights carried by its share capital;

or

(b) any entity which directly or indirectly holds

fifty percent (50%) or more of the aforesaid voting rights

of any company comprising the Contractor; or

(c) any other entity whose aforesaid voting rights are

held by an entity mentioned in (b) above in an amount of

fifty percent (50%) or more;

"Affiliate" means in respect of CNPC, any subsidiary,

branch or regional corporation of CNPC or CNPC and any

entity in which CNPC directly or indirectly holds fifty

percent (50%) or more of the voting rights carried by its

share capital.

1.42 "Department or Unit" means the department or unit

which is authorized by the State Council of the People's

Republic of China to be responsible for administration of

the petroleum industry of the People's Republic of China..

1.43 "Delivery Point" means a point for the delivery

of Petroleum located within or outside the Contract Area and

specified in the Overall Development Program.



1.44 "Date of Commencement of the Implementation of

the Contract" means the first day of the month following the

month in which the Contractor has received the notification

from CNPC of the approval by the Ministry of Foreign Trade

and Economic Cooperation of the People's Republic of China.

1.45



"Dagang" means Dagang Oilfield (Group) Co., Ltd.



1.46 "Trial Production" means, as to any Appraisal Well,

the oil and/or gas production which is produced during the

period from completion of that well to the Date of

Commencement of Commercial Production in the Oil Field or

Gas Field in which that well is located.

1.47

"Pre-Contract Appraisal Costs" is defined in

Article 12.1.1 hereinafter.

1.48

"Remaining Pre-Contract Appraisal Costs" is

defined in Article 13.2.2.2(a)(2) hereinafter.

1.49

"Pre-Contract Development Costs" is defined in

Article 12.1.2 hereinafter.

Article 2

Objective of the Contract

2.1 The objective of the Contract is to appraise,

develop and produce Petroleum that exists and may exist in

the Contract Area.

2.2 The Contractor shall apply a Progressive Appraisal

and Development Program approach in its efforts to comply

with the objectives of the Contract.

2.3 The Contractor shall apply its appropriate and

advanced technology and assign its competent experts to

perform the Petroleum Operations.

2.4 During the performance of the Petroleum

Operations, the Contractor shall transfer its technology to

the Chinese Personnel and train them.

2.5 The Contractor shall pay all appraisal costs

required during Appraisal Operations with the exception of

all previous costs incurred by Dagang. In the event that

any Oil Field and/or Gas Field is developed within the

Contract Area, the development costs of such Oil Field

and/or Gas Field or Fields shall be paid by the Parties in

proportion to their participating interests: fifty-one

percent (51%) by CNPC and forty-nine percent (49%) by the

Contractor. Contractor shall not be responsible for the

prior appraisal costs expended by Dagang, which are agreed

to be $19,312,000 U.S dollars, but Dagang's prior appraisal

costs shall be eligible for in accordance with the

provisions of Articles 12, 13 and 18, below. In the event

that CNPC elects to participate at a level less than fiftyone percent (51%) of the participating interest, or not to

participate in the development of the Oil Field and/or Gas

Field, the Contractor shall pay the remaining development

costs necessary for the development of the Oil Field and/or

Gas Field in accordance with Article 12.1.2 hereof.

2.6 If any Oil Field and/or Gas Field is developed

within the Contract Area, the Petroleum produced therefrom

shall, from the Date of Commencement of Commercial

Production of such Field, be allocated in accordance with

Articles 12, 13 and/or 18 hereof.

2.7 Nothing contained in the Contract shall be deemed

to confer any right on the Contractor other than those

rights expressly granted hereunder.

Article 3

Contract Area



3.1 The Contract Area as of the date of signature of

the Contract comprises, in part, three (3) blocks, covering

a total of fifty and two tenths (50.2)) square kilometers,

as marked out by the geographic location and the coordinates

of the connecting points of the boundary lines in Annex I

attached hereto.

The said total area of the Contract Area shall be

reduced in accordance with Articles 4, 5, 11 and 18 hereof.

3.2 For the proper execution of operations under the

Contract, the Operator shall be permitted to use those

portions of the seabed, mudflats and land surface inside or

outside the Contract Area under the control of CNPC as may

be necessary for Petroleum Operations, for as long as

Appraisal Operations, Development Operations or Productions

Operations continue. All reasonable costs incurred by CNPC

for this purpose shall be reimbursed by the Operator from

the Joint Account.

3.3 The Operator shall be permitted to use for the

purpose of Petroleum Operations any water source located

within the Contract Area, subject to Government rules any

payment of reasonable charges at the rates not more than

rates charged to other users of similar water sources in the

area.

3.4 If the Operator is unable to secure in its own

name any rights to use of the surface area necessary for

Petroleum Operations or for the delivery of Crude oil to the

delivery point defined in any overall development plan, CNPC

will assist the Operator by securing such rights in CNPC's

name for the benefit of the joint venture. All reasonable

costs incurred by CNPC for this purpose shall be reimbursed

by Operator from the Joint Account.

3.5 Except for the rights as expressly provided by the

Contract, no right is granted in favor of the Contractor to

the surface area, lake bed, stream bed and subsoil or any

bodies of water or any natural resources or aquatic

resources other than Petroleum existing therein, and any

thing under the surface within the Contract Area.



Article 4

Contract Term

4.1 The term of the Contract shall include an

appraisal period, a development period and a production

period.

4.2 The appraisal period, beginning on the Date of

Commencement of the Implementation of the Contract, shall be

divided into three (3) phases and shall consist of five (5)

consecutive Contract Years, unless the Contract is sooner

terminated, or the appraisal period is extended in

accordance with Article 25 hereof and/or Article 4.3 herein.

The three (3) phases shall be as follows:

The first phase of one (1) Contract Year (the

first Contract Year);

The second phase of two (2) Contract Years (the

second Contract Year through the third Contract

Year); and

The third phase of two (2) Contract Years (the

fourth Contract Year through the fifth Contract

Year).

4.3 Where time is insufficient to complete the

appraisal work on a Petroleum discovery prior to the

expiration of the appraisal period or where the time of the

appraisal work on a Petroleum discovery in accordance with

the appraisal Work Program approved by JMC as stated in

Articles 11 and 18 hereof extends beyond the appraisal

period, the appraisal period as described in Article 4.2

herein shall be extended. The period of extension shall be



whatever period CNPC regards as a reasonable period of time

required to complete the above mentioned appraisal work in

order to enable JMC to make a decision on the commerciality

of the said Petroleum discovery in accordance with Article

11 or 18 hereof, and until the Department or Unit approves

or finally rejects the Overall Development Program.

4.4 The development of any Oil Field and/or Gas Field

within the Contract Area shall begin on the date of approval

by the Department or Unit of the Overall Development Program

of the said Oil Field and/or Gas Field, and end on the date

of the entire completion of the Development Operations set

forth in the Overall Development Program, excluding the time

for carrying out additional development projects in the

production period in accordance with Article 11.9 hereof.

The Contractor and CNPC will commence preparation of the

Overall Development Program when appraisal of any potential

Oil Field and/or Gas Field indicates by reinterpretation of

seismic and mapping and integrated reservoir study that such

field is commercial. The Overall Development Program will be

submitted for approval by the Department or Unit as soon as

approved by the JMC.

4.5 The production period of any Oil Field and/or Gas

Field within the Contract Area shall be a period of twenty

(20) consecutive Production Years beginning on the Date of

Commencement of Commercial Production unless otherwise

provided in Article 4.6 herein and Article 18.2 or 25

hereof. Under such circumstances as where the overall

development of an Oil Field and/or Gas Field is to be

conducted on a large scale, and the time span required

therefor is long, or where separate production of each of

the multiple oil or gas producing zones of an Oil Field

and/or Gas Field is required, or under other special

circumstances, the production period thereof shall, when it

is necessary, be appropriately extended with the approval

of the Department or Unit.

4.6 Suspension Or Abandonment Of Production Of An Oil

Field and/or Gas Field.

4.6.1 In the event that the Parties agree to suspend

temporarily production from an Oil Field and/or Gas Field

which has entered into commercial production, the Production

Area covered by that Oil Field and/or Gas Field may be

retained within the Contract Area. In no event shall the

period of such retention extend beyond the date of the

expiration of the production period of that Oil Field and/or

Gas Field except as otherwise provided in Article 25.4

hereof. The duration of the relevant period of production

suspension and the arrangement for the maintenance

operations during the aforesaid period of suspension shall

be proposed by the Operator, and shall be decided by JMC

through discussion. With respect to the aforesaid Oil Field

and/or Gas Field which has been suspended and retained

within the Contract Area, in the event that production is

restored during the period of such retention, the production

period of that Oil Field and/or Gas Field shall be extended

correspondingly. In the event that the Parties fail to

reach an agreement on the restoration of production by the

expiration of the production suspension period decided by

JMC through discussion, the party who wishes to restore

production shall have the right to restore production

solely. The other party may later elect to participate in

production but shall have no rights or obligations in

respect of such Field for the solely restored production

period.

4.6.2 Abandonment Of Production From An Oil Field

and/or Gas Field Within The Production Period.

4.6.2.1 During the production period, either party to

the Contract may propose the abandonment of production from

any Oil and/or Gas Field within the Contract Area, provided,

however, that prior written notice shall be given to the

other party to the Contract. The other party shall make a

response in writing within ninety (90) days from the date on

which the said notice is received. If the other party also

agrees to abandon production from the said Oil Field and/or

Gas Field, then abandonment costs shall be paid by the



Parties in proportion to their participating interests in

the development of such Oil Field and/or Gas Field. From

the date on which the other party makes the response in

writing, the production period of such Oil Field and/or Gas

Field shall be terminated and such Oil Field and/or Gas

Field shall be excluded from the Contract Area.

4.6.2.2 If the Contractor notifies CNPC in writing of

its decision on abandoning production from an Oil Field

and/or Gas Field, and CNPC decides not to abandon production

from such Oil Field and/or Gas Field, then from the date on

which the Contractor receives CNPC's written response of its

aforesaid decision, all of the Contractor's rights and

obligations, including but not limited to the

responsibilities for payment of abandonment in respect of

such Field, shall be terminated automatically, provided that

the Contractor shall not transfer to CNPC any of the

Contractor's liabilities and obligations in respect of the

said Field. The said Field shall be excluded from the

Contract Area.

4.7 The term of the Contract shall not go beyond

thirty (30) consecutive Contract Years from the Date of

Commencement of the Implementation of the Contract, unless

otherwise stipulated hereunder.



Article 5

Relinquishment

5.1 In any of the following cases, the Contractor

shall relinquish the remaining Contract Area except any

Development Area and/or Production Area:

(a) at the expiration of the last phase of the

appraisal period and development period; or

(b) at the expiration of the extended period, in the

event that the appraisal period and development period is

extended in accordance with Article 4.3. or Article 25

hereof.

5.2

At the expiration of the production period of the

last producing Oil Field and/or Gas Field within the

Contract Area, the contractor shall relinquish all rights to

the entire Contract Area.

Article 6

Minimum Appraisal Work Commitment

and Expected Minimum Appraisal Expenditures

6.1

The Contractor shall begin to perform the on

site Appraisal Operations within three (3) months after the

Date of Commencement of the Implementation of the Contract

and spud the first Appraisal Well within ten (10) moths

after the Date of Commencement of Implementation of the

Contract, unless otherwise agreed by the Parties.

6.2

The Contractor shall fulfill the minimum

appraisal work commitment and expected minimum appraisal

expenditures for each phase of the appraisal period in

accordance with the following provisions:

6.2.1

During the first phase of the appraisal

period, the Contractor shall:

(a) reprocess and reinterpret a minimum of

approximately three hundred (300) kilometers of existing 2D seismic data and seventy (70) square kilometers of

existing 3-D seismic data, provided necessary support data

is available. Contractor will have access to additional

seismic data outside the Contract Area as needed to make

geological and geophysical evaluations of the Contract Area;



(b) drill one (1) Appraisal Well with the footage of

three thousand (3,000) meters;

(c) spend a minimum of one million ($1,000,000) U.S.

dollars upgrading the artificial island and to recondition

the causeway and causeway drilling pad in preparation of

Petroleum Operations; and

(d) spend a minimum of four million ($4,000,000) U.S.

dollars (including the expenditures described in (c), above)

for such Appraisal Operations.

6.2.2 During the second phase of the appraisal

period, the Contractor shall:

(a) drill two (2) Appraisal Wells, one with the

footage of three thousand (3,000) meters, and one with the

footage of three thousand five hundred (3,500) meters;

(b) if the decision is made to drill from the

artificial island, the Contractor will spend a minimum of an

additional one million ($1,000,000) U.S. dollars upgrading

the drilling rig and other facilities on the artificial

island;

(c) If Contractor concludes and the JMC agrees that it

is feasible from an engineering, geological and economic

viewpoint to reevaluate the nine (9) existing wellbores on

the Contract Area, Contractor will commit to re-evaluate a

minimum of three (3) of the existing wells.

(d) spend a minimum of six million ($6,000,000) U.S.

dollars as its expected minimum appraisal expenditures for

such Appraisal Operations.

(e) Formulate the Overall Development Program if

appraisal of any potential Oil Field and/or Gas Field

indicates that such a field is commercial.

6.2.3 During the third phase of the appraisal period,

the Contractor shall:

(a) drill two (2) Appraisal Wells with the footage of

three thousand (3,000) meters each; and

(b) spend a minimum of six million ($6,000,000) U.S.

dollars as its expected minimum appraisal expenditures for

such Appraisal Operations.

6.2.4 With respect to the minimum appraisal work

commitment for each phase of the appraisal period committed

by the Contractor in accordance with Articles 6.2.1, 6.2.2.

and 6.2.3 herein when calculating whether the minimum

appraisal work commitment has been fulfilled, the number of

Appraisal Wells and the kilometers of seismic lines

reprocessed and reinterpreted shall be the basis of such

calculation. However, the Appraisal Wells abandoned for

technical reasons without reaching their predetermined

geological objective shall not count as Appraisal Wells

actually fulfilled by the Contractor thereunder, without the

consent of CNPC.

6.3

At the expiration of the first phase or the

second phase of the appraisal period, the Contractor has the

following options:

(a)



to enter the next phase and continue appraisal; or



(b)



to terminate the Contract.



6.4

At the expiration of any phase of the appraisal

period, if the actual appraisal work fulfilled by the

Contractor is less than the minimum appraisal work

commitment set forth for the said appraisal phase and if the

Contractor elects to enter the next phase and continue

appraisal under Article 6.3 (a) herein, the Contractor shall

give reasons to CNPC for the underfulfillment, and with the

consent of CNPC, the unfulfilled balance of the said phase

shall be added to the minimum appraisal work commitment for



the next appraisal phase.

In the event of a commercial appraisal at any time

within the appraisal period, JMC shall, at the request of

any party to the Contract, discuss the possibility of

increasing the appraisal work. Any Appraisal Wells involved

in such increase shall be deducted from the minimum

appraisal work commitment.

6.5 Where the Contractor has fulfilled ahead of time

the minimum appraisal work commitment for any phase of the

appraisal period, the duration of such appraisal phase

stipulated in Article 4.2 hereof shall not be shortened

thereby, and if the appraisal work actually fulfilled by

the Contractor exceeds the minimum appraisal work commitment

for the said appraisal phase, the excess part shall be

deducted from and credited against the minimum appraisal

work commitment for the next appraisal phase.

6.6

If any addition or deduction is made under

Article 6.4 or Article 6.5 herein in regard to the minimum

appraisal work commitment for any phase of appraisal period,

the increased or reduced appraisal work shall become the new

minimum appraisal work commitment for the Contractor to

fulfill in the said phase.

6.7

At the expiration of any phase during the

appraisal period, if the appraisal work actually fulfilled

by the Contractor is less than the minimum appraisal work

commitment for such phase or less than the new minimum

appraisal work commitment as mentioned in Article 6.6

herein, and if, regardless of whether the expected minimum

appraisal expenditures are fulfilled or not fulfilled, the

Contractor elects to terminate the Contract under Article

6.3 (b) herein or if the said phase is the last phase of the

appraisal period, the Contractor shall, within thirty (30)

days from the date of the decision of election to terminate

the Contract or thirty (30) days from the date of the

expiration of the exploration period, pay CNPC any

unfulfilled balance of the minimum appraisal work commitment

(or of the new one) in U.S. dollars after it has been

converted into a cash equivalent using the method provided

in Annex II-Accounting Procedure attached hereto. However,

if the minimum appraisal work commitment for the appraisal

period is fulfilled while its expected corresponding minimum

appraisal expenditures are not fulfilled, the unfulfilled

part shall be deemed as a saving and shall not be paid to

CNPC.

Article 7

Management Organization and Its Functions

7.1 For the purpose of the proper performance of the

Petroleum Operations, the Parties shall establish a Joint

Management Committee (JMC) within forty-five (45) days from

the effective date of the Contract.

7.1.1 CNPC and the Contractor shall each appoint an

equal number of representatives (three to five), to form

JMC, and each party to the Contract shall designate one of

its representatives as its chief representative. All the

aforesaid representatives shall have the right to present

their views on the proposals at the meetings held by the

JMC. When a decision is to be made on any proposal, the

chief representative from each party to the Contract shall

be the spokesman on behalf of the party to the Contract.

The chairman of the JMC shall be the chief

representative designated by CNPC, and the vice chairman

shall be the chief representative designated by the

Contractor. The chairman of JMC shall preside over the

meetings of JMC. In his absence, one representative present

at the meeting from CNPC shall be designated to act as the

chairman of the meeting. In the absence of the vice

chairman, one representative present at the meeting from the

Contractor shall be designated to act as vice chairman at

the meeting. The Parties may, according to need, designate

a reasonable number of advisors who may attend, but shall



not be entitled to vote at JMC meetings.

7.1.2 A regular meeting of JMC shall be held at least

once a Calendar Quarter, and other meetings, if necessary,

may be held at any time at the request of any party to the

Contract, upon giving reasonable notice to the other party

of the date, time and location of the meeting and the items

to be discussed.

7.2



The Parties shall empower JMC to:



7.2.1 Review and adopt the Work Program and budget

proposed by the Operator;

7.2.2 determine the commerciality of each trap on

which a Petroleum discovery has been made in accordance with

the Operator's appraisal report and report its decision to

CNPC for confirmation;

7.2.3 review and adopt the Overall Development Program

and budget for each Oil Field and/or Gas Field;

7.2.4 approve or confirm the following items of

procurement and expenditures:

(a) approve procurement of any item within the budget

with a unit price exceeding Five Hundred Thousand U.S.

dollars (U.S.$ 500,000) or any single purchase order of

total monetary value exceeding Two Million U.S. dollars

(U.S. $2,000,000);

(b) approve a lease of equipment, or an engineering

subcontract or a service contract within the budget worth

more than One Million U.S. dollars (U.S. $1,000,000); and

(c) confirm excess expenditures pursuant to Article

10.2.1 hereof and the expenditures pursuant to Article

10.2.2 hereof;

7.2.5 determine and announce the Date of Commencement

of Commercial Production of each Oil Field and/or Gas Field

within the Contract Area;

7.2.6 determine the type and scope of information and

data provided to any Third Party and Affiliate in relation

to the Petroleum Operations in accordance with Article 22.5

hereof and Annex IV - Data Control Agreement;

7.2.7 demarcate boundaries of the Development Area and

the Production Area of each Oil Field and/or Gas Field;

7.2.8 review and approve plans for transfer of the

Production Operations in accordance with Article 8.7 hereof;

7.2.9 review and approve the insurance program

proposed by the Operator and emergency procedures on safety

and environmental protection;

7.2.10



review and approve personnel training programs;



7.2.11 discuss, review, decide and approve other

matters that have been proposed by either party to the

Contract or submitted by the expert groups or the Operator;

and

7.2.12 review and examine matters required to be

submitted to relevant authorities of the Chinese Government

and/or CNPC for approval.

7.2.13

Approve Trial Production for any Appraisal

Well when feasible.

7.3 Decisions of JMC shall be made unanimously through

consultation. All decisions made unanimously shall be

deemed as formal decisions and shall be equally binding upon

the Parties. When matters arise on which agreement cannot

be reached, the Parties may convene another meeting in an

attempt to find a new solution thereto based on the

principle of mutual benefit.



7.3.1 In the appraisal period, the Parties shall

endeavor to reach agreement through consultation on

appraisal programs and annual appraisal Work Programs. If

the Parties fail to reach agreement through consultation,

the Contractor's proposal shall prevail, provided that such

proposal is not in conflict with the relevant provisions in

Articles 4, 5, and 6 hereof.

7.3.2 If it is considered by the chairman and/or the

vice chairman or their nominees that a matter requires

urgent handling or may be decided without convening a

meeting, JMC may make decisions through conference telephone

calls, telefax transmissions or the circulation of documents

to produce decisions.

7.4

bodies:

7.4.1



JMC shall establish the following subordinate

Secretariat



The secretariat shall be a permanent organization

consisting of two (2) secretaries. One secretary shall be

appointed by each of the Parties. The secretaries shall not

be members of JMC, but may attend meetings of JMC as

observers. The duties of the secretariat are as follows:

(a)



to keep minutes of meetings;



(b) to prepare summaries of and resolutions for JMC

meetings;

(c)



to draft and transmit notices of meetings: and



(d) to receive and transmit proposals, reports or

plans, etc. submitted by the Operator and/or any party to

the Contract, which require discussion, review and/or

approval by JMC.

7.4.2



Expert Groups



Advisory expert groups shall be established in

accordance with the requirements of the Petroleum Operations

in various periods. Each expert group shall consist of an

equal number of CNPC and the Contractor's personnel, and,

with the agreement of JMC, any other personnel. JMC shall

discuss and decide upon their establishment or dissolution,

size, and the appointment of their leaders in accordance

with requirements of their work. The expert groups shall

have the following functions;

(a) to discuss and study matters assigned to them by

JMC and submitted by the Operator to JMC for its review and

approval and any other matter assigned to them by JMC and to

make constructive suggestions to JMC;

(b) to have access to and observe and investigate the

Petroleum Operations conducted by the Operator at its office

and operating sites as work requires and to submit relevant

reports to JMC; and

(c) to attend meetings of JMC as observers at the

request of JMC.

7.5 When the Contractor acts as the Operator, CNPC

shall have the right to assign professional representatives

to the Operator's administrative and technical departments

which are related to the Petroleum Operations, who may work

on a long-term basis together with the Operator's staff.

The professional representatives shall have access to

the centers of research, design, and data processing related

only to the execution of the Contract and to the operating

sites to observe all of the activities and study all the

information with respect to the Petroleum Operations. Such

access to the aforesaid centers outside the People's

Republic of China shall be decided by JMC through discussion

and shall be arranged by the Operator. The Operator shall

use all reasonable endeavors to assist the professional

representatives to have access to Third Parties' sites. The

Operator's staff shall regularly discuss their work with the



professional representatives of CNPC. The work of

professional representatives of CNPC shall be arranged by

the manager(s) of the departments of the Operator in which

professional representatives work.

Professional representatives of CNPC, except for the

professional representatives in charge of procurement who

shall undertake their functions in accordance with Article

7.6 herein, shall not interfere in the decision making on

relevant matters by departmental manager(s) of the Operator.

However, such professional representatives shall have the

right to make proposals and comments to departmental

manager(s) of the Operator or to report directly to CNPC

representatives in JMC.

When CNPC acts as the Operator, the Contractor may also

assign professional representatives including professional

representatives in charge of procurement.

7.5.1. On the principle of mutual cooperation and

coordination, the Operator shall provide the professional

representatives with necessary facilities and assistance to

perform office work and to observe the operating sites, etc.

7.5.2. The number of professional representatives

shall be decided by JMC though consultations.

7.6 When one of the companies comprising the

Contractor acts as the Operator, in respect of the items

listed in the procurement plan, the procedures and

provisions herebelow shall be followed:

7.6.1. The procurement department of the Operator

shall inform the professional representatives appointed by

CNPC in charge of procurement of all the items of

procurement.

7.6.2. The Operator shall be subject to Articles 15.1

and 15.3 hereof and reach agreement through consultation

with the professional representatives of CNPC in charge of

procurement when preparing the procurement plan in

accordance with the Work Program and budget. The

professional representatives of CNPC in charge of

procurement shall work out an inventory listing the

equipment and materials which can be made and provided in

China and a list of manufacturers, engineering and

construction companies and enterprises in China which can

provide services and undertake subcontracting work.

7.6.3. Unless otherwise agreed upon by the Parties,

the Operator shall, in general, make procurement by means of

calling for bids and shall notify at the same time

manufacturers and enterprises concerned both inside and

outside China, and the work of calling for bids shall be

done within the territory of China.

7.6.4. When any procurement is to be made by means of

calling for bids, the manufacturers and enterprises in China

applying for bidding, which are included in a list delivered

in advance to the Operator by the professional

representative of CNPC in charge of procurement, shall be

invited. The professional representatives of CNPC in charge

of procurement shall have the right to take part in the work

of calling for bids, including examination of the list of

bidders to be invited, preparing and issuing bidding

documents, opening bids, evaluation of bids, negotiation,

and award of contracts through consultation, as well as

negotiation for subcontracts and services contracts.

7.6.5. With respect to the items of procurement by

means of not calling for bids, the Operator's procurement

department and the professional representatives of CNPC in

charge of procurement shall, in accordance with the

provisions specified in Article 7.6.2 herein define which

items are to be procured in the People's Republic of China

and which items are to be procured abroad.

7.6.6 With respect to the use of personnel, equipment

and services to be procured in the People's Republic of

China, it is expressly understood that quality and costs



shall be competitive with personnel, equipment and services

that can be procured outside of the People's Republic of

China subject to Article 15 hereof.

7.7 All costs and expenses with respect to the staff

members of the Parties in the subordinate bodies of JMC

established in accordance with Article 7.4 herein, and those

with respect to the professional representatives referred to

in Article 7.5 herein and wages and salaries, costs and

expenses incurred by the representatives of JMC referred to

in Article 7.1.1 herein while attending JMC meetings shall

be paid by the Operator and charged respectively to the

appraisal costs, development costs and production costs in

accordance with Annex II-Accounting Procedure hereto.

7.8 The specific responsibilities and working

procedures within JMC shall be discussed and determined by

JMC in accordance with the relevant provisions herein.

7.9 For the purpose of assisting the Operator in the

proper implementation of Development Operations, an

Integrated Project Team ( the "IPT") shall be established to

act as a working group under the direction of the Operator.

Within the IPT in working roles, and charged with oversight

of development planning and execution will be a group of six

(6) persons designated by the Parties hereto. The sixperson group (the "Management Group") will consist of three

(3) CNPC designees and three (3) designees of the

Contractor, including one Operator designee who shall be

General Manager of the IPT and one CNPC designee who shall

be Deputy Manager. The Management Group will operate on the

principles of cooperation and mutual consultation. The IPT

shall be established within thirty (30) days from the date

of approval of the Overall Development Program.

The specific organization, staffing and working system

of the IPT and the responsibilities and competence of

various positions, including those of CNPC's personnel

assigned to the IPT, shall be determined by the parties

through consultation based on the principal of efficiency of

operations. The IPT shall comprise those personnel

designated by the parties and the number of CNPC's personnel

shall be no less than one third (1/3) of the total number of

personnel within the IPT. The working location(s) of the

members of the IPT shall be decided according to the needs

of the work.

Article 8

Operator

8.1 The Parties agree that XCL Cathay Ltd. ("XCL")

shall act as the Operator for the Petroleum Operations

within the Contract Area, unless otherwise stipulated in

Article 8.7 herein.

8.2 For the implementation of the Contract, the

companies comprising the Contractor shall register with the

State Administration for Industry and Commerce of the

People's Republic of China in accordance with the relevant

provisions of the said State Administration for Industry and

Commerce and shall obtain the necessary approval from CNPC.

The person in charge of the Operator shall have the

full right to represent the Contractor in respect of the

performance of the Petroleum Operations. The names,

positions and resumes of the staff and an organization chart

of the Operator shall be submitted in advance to CNPC and

the appointment of the Operator's senior staff shall be

subject to the consent of CNPC.

The parent corporation of each company comprising the

Contractor which is not itself a parent corporation shall,

at the request of CNPC, provide CNPC with a written

performance guarantee with terms acceptable to CNPC.

8.3

8.3.1



The Operator shall have the following obligations:

To apply the appropriate and advanced technology



and business managerial experience of the Contractor,

including each company comprising the Contractor or its and

their Affiliates, to perform the Petroleum Operations

reasonably, economically and efficiently in accordance with

sound international practice.

8.3.2 To prepare Work Programs and budgets related to

the Petroleum Operations and to carry out the approved Work

Programs and budgets.

8.3.3 To be responsible for procurement of

installations, equipment, and supplies and entering into

subcontracts and service contracts related to the Petroleum

Operations, in accordance with the approved Work Programs

and budgets and the applicable provisions of Articles 7.2.4,

7.6 and 10.2 hereof.

8.3.4 To prepare in advance, in accordance with

Article 16 hereof, a personnel training program and budget

before the commencement of the Appraisal Operations,

Development Operations and Production Operations,

respectively, and, in accordance with the said program and

budget, to be responsible for preparing an annual personnel

training program and budget and carrying out the annual

program and budget after approval by JMC.

8.3.5 To establish an insurance program, and to enter

into and implement the insurance contracts in accordance

with Article 21 hereof.

8.3.6 To issue cash-call notices to all the parties to

the Contract to raise the required funds based on the

approved budgets and in accordance with Article 12 hereof

and Annex II-Accounting Procedure hereto.

8.3.7

records of

Operations

Accounting

accounting

8.3.8

meetings of

information

approved by



To maintain complete and accurate accounting

all the costs and expenditures for the Petroleum

in accordance with the provisions of Annex IIProcedure hereto and to keep securely the

books in good order.

To make necessary preparation for regular

JMC, and to submit in advance to JMC necessary

related to the matters to be reviewed and

JMC.



8.3.9 To inform directly or indirectly all the

Subcontractors which render services for the Petroleum

Operations in China and all the Expatriate Employees of the

Operator and of Subcontractors who are engaged in the

Petroleum Operations in China that they shall be subject to

the laws, decrees, and other rules and regulations of the

People's Republic of China.

8.3.10 To report its work to JMC as provided in

Article 7.2 hereof.

8.4 In the course of the performance of the Petroleum

Operations, any direct loss arising out of the gross

negligence or willful misconduct of the Operator or its

employees shall be solely borne by the Operator. The

Operator shall make its best efforts in accordance with the

international Petroleum industry practice to include

provisions similar to this Article 8.4 herein in related

subcontracts and service contracts.

8.5 In the course of the performance of the Petroleum

Operations, the Operator shall handle the information,

samples or reports in accordance with the following

provisions:

8.5.1 The Operator shall provide CNPC with various

information and data and the Operator shall have the right

to use and handle such information and data. The

information and data shall be reported to CNPC at the same

time when the Operator reports them to its parent

corporation.

8.5.2 The Operator shall furnish CNPC in a timely

manner with reports on safety, environmental protection and



accidents related to the Petroleum Operations and with

financial reports prepared in accordance with the provisions

of Annex II-Accounting Procedure hereto.

8.5.3 The Operator shall provide the non-operator(s)

with copies of the relevant information and reports

reasonably required by non-operator(s) and referred to in

Articles 8.5.1. and 8.5.2. herein.



8.5.4 The Operator shall, at the request of any party

to the Contract, furnish that party to the Contract with the

following:

8.5.4.1 Procurement plans for purchasing equipment and

materials, inquiries, offers, orders and service contracts,

etc.;

8.5.4.2 Manuals, technical specifications, design

criteria, design documents (including design drawings),

construction records and information, consumption

statistics, equipment inventory, spare parts inventory,

etc.;

8.5.4.3

reports; and



Technical investigation and cost analysis



8.5.4.4 Other information relating to the Petroleum

Operations already acquired by the Operator in the

performance of the Contract.

8.6 In the course of performing the Petroleum

Operations, the Operator shall abide by the laws, decrees,

and other rules and regulations with respect to

environmental protection and safety of the People's Republic

of China and shall endeavor in accordance with

international Petroleum industry practice to:

8.6.1 Minimize the damage and destruction to

environment, community and ecology;

8.6.2 Control blowouts promptly and prevent or avoid

waste or loss of Petroleum discovered in, or produced from,

the Contract Area;

8.6.3 Prevent Petroleum from flowing into low pressure

formations or damaging adjacent Petroleum-bearing

formations;

8.6.4 Prevent water from flowing into Petroleumbearing formations through dry holes or other wells, except

for the purpose of secondary recovery;

8.6.5 Prevent land, forests, crops, buildings and

other installations from being damaged and destroyed; and

8.6.6

health.



Minimize the danger to personnel safety and



8.7 Transfer And Take Over Of The Production

Operations.

Before the full recovery of all appraisal and

development costs incurred in accordance with the Work

Program of any Oil Field and/or Gas Field within the

Contract Area, CNPC may, after agreement reached through

consultations with JMC, take over the Production Operations

of that Oil Field and/or Gas Field, if conditions permit.

After the full recovery of all appraisal and development

costs incurred in accordance with the Work Program of any

Oil Field and/or Gas Field within the Contract Area, CNPC

shall, at any time, have the right by giving written notice

to the Contractor, to take over the Production Operations of

that Oil Field and/or Gas Field. The transfer and take over

shall be effected in accordance with the procedures

described hereunder.

8.7.1 The Contractor shall submit a transfer plan of

the Production Operations to CNPC and JMC respectively



within sixty (60) days following the date of receiving the

written notice from CNPC. Such transfer plan shall include,

but not be limited to, a list of various posts to be taken

over by CNPC, a schedule of transfer by stages, inventories

of the relevant facilities and equipment and an inventory of

all documents, manuals, data and information necessary for

the Production Operations. Where the transfer of some of

the Production Operations involves any Third Party, the

Contractor shall consult with CNPC in advance and propose a

solution thereto in the transfer plan. However, this

situation shall not be taken by the Contractor as an excuse

to delay and hinder the transfer of the Production

Operations.

JMC shall, within thirty (30) days after receiving the

said plan, review and approve it.

8.7.2 CNPC shall, within sixty (60) days from the date

of receiving the transfer plan of the