ARABIAN SHIELD DEVELOPMENT CO - 10-K Annual Report

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Form 10-K

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

(Mark One)

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

For the fiscal year ended December 31, 1997

or

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

For the transition period from ________________ to _________________
Commission file number 0-6247

ARABIAN SHIELD DEVELOPMENT COMPANY
(Exact name of registrant as specified in its charter)

DELAWARE 75-1256622
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

10830 North Central Expressway
Suite 175 75231
Dallas, Texas (Zip Code)
(Address of principal executive offices)

Registrant's telephone number, including area code: (214) 692-7872

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

None

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

Common Stock, par value $0.10 per share
(Title of Class)

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

Yes X No
----- -----

Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.

Number of shares of registrant's Common Stock, par value $0.10 per
share, outstanding as of March 16, 1998: 20,721,494.

The aggregate market value on March 16, 1998 of the registrant's
voting securities held by non-affiliates was $26,194,149.

DOCUMENTS INCORPORATED BY REFERENCE

(a) Selected portions of the registrant's Annual Report to
Stockholders for the year ended December 31, 1997.
- Parts II and IV

(b) Selected portions of the registrant's definitive Proxy
Statement for the Annual Meeting to be held May 15, 1998.
- Part III
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PART I

Item 1. Business.

General

Arabian Shield Development Company (the "Company") was organized as a
Delaware corporation in 1967 and is principally engaged in the refining of
various specialty petrochemical products and developing various mineral
properties. All of its mineral properties are undeveloped and require
significant capital expenditures before any commercial operations are commenced.
The Company has operations in both the United States and Saudi Arabia. The
Company's undeveloped mineral interests are primarily located in Saudi Arabia.

The Company, through its indirect wholly owned subsidiary, South
Hampton Refining Company ("South Hampton"), owns and operates a specialty
products refinery which is the Company's only significant revenue producing
asset.

The Company holds a mining lease covering a 44 square kilometer area
in the Al Masane area in southwestern Saudi Arabia. In a 1996 update to the
1994 full bank feasibility study of the Al Masane lease area conducted by an
independent mining consulting firm, the consultants estimate the total capital
costs of the Al Masane project to be $88.6 million. The Company and its Saudi
Arabian advisors are in the process of forming a Saudi limited liability
company to own and operate the project. On November 5, 1997, the Company and
the Al Mashreq Company for Mining Investments ("Al Mashreq"), a Saudi limited
liability company owned by Saudi Arabian investors, initialed a joint venture
agreement to form a Saudi limited liability company which will be owned 50% by
the Company and 50% by Al Mashreq. The new company, called "The Arabian Shield
Company for Mining Industries Ltd.", is now under formation, and has applied to
the Saudi Ministry of Commerce for a charter to operate the mine. The Company
is diligently pursuing the financing of the project so that commercial
production can begin as contemplated in the updated feasibility study. There
can be no assurance that adequate capital for the project can be obtained in
order for commercial production to begin as contemplated. The ultimate
recovery of mineral exploration and development costs of the Company's other
mineral properties cannot presently be determined.

Saudi Arabian Activities. On May 22, 1993, the Company was granted a
30-year mining lease covering a 44 square kilometer area in the Al Masane area
in southwestern Saudi Arabia.

The Company was granted exploration licenses for the Wadi Qatan and
Jebel Harr areas in southwestern Saudi Arabia, approximately 30 kilometers east
of the Al Masane area, in 1971 and 1977, respectively. The exploration licenses
by their terms have expired, and although Saudi Arabian government officials
have orally advised the Company that the licenses will be extended as long as
mineral exploration is being carried out on the areas which they cover, formal
extensions from the government have not been obtained and there can be no
assurance that the Company's license rights will be honored. The Company remains
a party to an agreement with the Petroleum and Mineral Organization
("Petromin"), the official mining and petroleum company of the Saudi Arabian
government, which governs the rights of the parties if an exploration license is
converted into a mining lease. When financing for the Al Masane project is
completed, the Company plans to make an application for an expanded exploration
license for an area of approximately 2,800 square kilometers which includes the
original Greater Al Masane area and the Wadi Qatan and Jebel Herr areas. See
Item 2. Properties.

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In May 1993, the Company had discussions with Chevron Chemical Company
regarding the Company's proposal to purchase 5,000 barrels per day of mixed
pentanes from an Aromax(R) petrochemical project to be built in Jubail, Saudi
Arabia by Chevron Chemical in a joint venture with Saudi Venture Capital Group
(SVCS). The Company and some Saudi partners, all of whom are directors and/or
stockholders of the Company, plan to form a Saudi limited liability company
which will build and manage a processing plant located next to the Aromax(R)
plant in Saudi Arabia. The Company would have a 25% interest in the limited
liability company and would manage the plant. The plant will be similar to the
South Hampton refinery in producing purified pentanes from a feedstock of mixed
pentanes obtained from the Aromax(R) plant. Chevron Chemical advised the
Company by letter in July 1993 that Chevron Chemical and SVCS jointly agreed to
commit to supply the proposed pentane project with up to 5,000 barrels per day
of mixed pentane feedstock. Engineering and marketing studies of the project
made in 1994 by outside consultants reflected positive results. Planning then
began toward the construction and operation of the Aromax(R) plant. The
Aromax(R) plant received final approval from the Saudi Arabian government in
March 1996 and Chevron Chemical began construction soon thereafter. The source
of feedstock supply to the Aromax(R) plant has changed resulting in Chevron
Chemical and SVCS being unable to supply the proposed processing plant. The
Company has held discussions with several Saudi Arabian companies regarding
feedstock and transportation arrangements, although there can be no assurances
that any such arrangements can be made. The Company applied for and received a
license to build the proposed processing plant and further planning and design
work are underway.

In December 1993, the Company commissioned Sherritt Ltd. of Fort
Saskatchewan, Canada, to prepare a conceptual engineering design for a proposed
zinc refinery based on Sherritt's two stage pressure leach process, to be built
by the Company and Saudi partners at the Red Sea port of Yanbu, Saudi Arabia.
The refinery would have the capacity to produce 100,000 tonnes of slab zinc per
year, with elemental sulfur as a by-product. Sherritt Ltd. completed the study
in May 1994 which contains a proposed flow sheet that has been commercialized
and designed for a state of the art zinc refinery. Sherritt's zinc pressure
leach technology provides significant advantages over other existing zinc
production processes, including having the reputation as the most favored
technology for environmental considerations. In its study, Sherritt concluded,
after considering all of the presently identifiable elements, that they offer
a strong potential for the project and enhance the concept. Sherritt
encouraged the Company to carry out further studies toward the implementation
of the project. There has been a recent inquiry about this project from a zinc
smelting and refining company in Asia.

United States Activities. The Company has two direct wholly owned
subsidiaries, American Shield Refining Company (the "Refining Company") and
American Shield Coal Company (the "Coal Company"). The Refining Company owns
all of the capital stock of Texas Oil and Chemical Co. II, Inc. ("TOCCO").
TOCCO owns all of the capital stock of South Hampton, and South Hampton owns
all of the capital stock of Gulf State Pipe Line Company, Inc. ("Gulf State").
South Hampton owns and operates a special products refinery near Silsbee,
Texas. Gulf State owns and operates three pipelines which connect the South
Hampton refinery to a natural gas line, to South Hampton's truck and rail
loading terminal and to a marine terminal owned by an unaffiliated third party.
The Company also beneficially owns approximately 52%, and directly owns
approximately 44%, of the capital stock of an inactive Nevada mining company,
Pioche-Ely Valley Mines, Inc. ("Pioche").

Al Masane Project

Prior Feasibility Studies. In the years following the granting of the
exploration licenses in August 1971, substantial geological and geophysical
work was accomplished on the Al Masane and Wadi Qatan license areas. Core
drilling on the licensed areas and studies conducted by independent consulting
firms indicated that the copper, zinc, gold and silver prospects at Al Masane
had a chance of being put into production sooner than the nickel prospect at
Wadi Qatan. Metallurgical tests also showed difficulty in separating the
nickel at Wadi Qatan. During 1977, a

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pre-feasibility mining study was conducted at Al Masane by the mining consulting
firm of Watts, Griffis and McOuat Limited of Toronto, Canada ("WGM"). WGM
concluded that the Al Masane prospect should be further developed and
recommended an extensive development program for the area.

Phase I of the development program recommended by WGM for Al Masane
was completed in April 1981 and involved underground development in the form of
a decline (700 meters) and tunnels (3,100 meters) parallel to the ore bodies
from where extensive underground core drilling was done to prove the ore
reserves. The project was financed for the most part with an $11 million
interest-free loan from the Saudi Arabian government (Ministry of Finance).
After completion of Phase I, the Company's consultants concluded that
sufficient ore reserves had been established to justify a full bank feasibility
study to determine the economic potential of establishing a commercial mining
and ore treatment operation at Al Masane. The study was conducted principally
by WGM, assisted by SNC/GECO of Montreal, Canada in engineering and costing.
The consultants concluded in their 1982 study that the Al Masane deposits would
support commercial production of copper, zinc, gold and silver and recommended
implementation of Phase II of the Al Masane development program, which involves
the construction of mining, ore treatment and support facilities. WGM
reevaluated the Al Masane project in September 1984 and concluded that the
cumulative effect of the factors considered in the reevaluation was positive.

Additional exploration work conducted at Al Masane and substantial
changes in metal prices and capital and operating costs occurring since 1984
led the Company to request WGM to reevaluate the project in early 1989. The
additional exploration occurring after 1984 in the Al Houra and Moyeath zones
resulted in a better definition of and addition to these zones. Consequently,
the consultants revised their reserve estimates. Some of the reserves
previously defined as possible were reclassified as proven or probable. Based
on its reevaluation of the Al Masane project, WGM again concluded that under
the most realistic scenarios the proposed mining operation was economically
viable and had the potential to provide a satisfactory return on investment.

In May 1992, WGM, at the Company's request, revised its cash flow
projections for the Al Masane project based on then current metal prices. The
cash flow projections were positive.

In both the 1989 reevaluation and the 1992 cash flow projections, WGM
continued to regard Al Masane as having high potential for the discovery of
additional ore zones.

1994 Feasibility Study. Following the granting of the mining lease to
the Al Masane area on May 22, 1993, the Company commissioned WGM to prepare a
new fully bankable feasibility study for presentation to financial institutions
in connection with obtaining financing for the project. The feasibility study
includes more metallurgical work incorporating advances in grinding of the ore;
incorporation of the latest advances in technology and reagents developed
during the past ten years; incorporation of new mill designs and the latest
water recycling methods; investigation into the shipping and marketing of zinc
and copper concentrates; and an economic analysis of the project. The
feasibility study contains specific recommendations to insure that the
construction of the project is accomplished as expeditiously and economically
as possible. Engineering design and costing of the project was done by Davy
International of Toronto, Canada. The feasibility study cost the Company
approximately $1 million and was presented to the Company on July 22, 1994.

The Al Masane ore is located in three mineralized zones known as
Saadah, Al Houra and Moyeath. The following table sets forth a summary of the
diluted minable, proven and probable ore reserves at the Al Masane project,
along with the estimated average grades of these reserves:

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=========================================================================================================================
Reserve Copper Zinc Gold Silver
Zone (Tonnes) (%) (%) (g/t) (g/t)
- -------------------------------------------------------------------------------------------------------------------------

Saadah 3,872,400 1.67 4.73 1.00 28.36

Al Houra 2,465,230 1.22 4.95 1.46 50.06

Moyeath 874,370 0.88 8.92 1.29 64.85
--------- ---- ---- ---- -----

Total 7,212,000 1.42 5.31 1.19 40.20
- -------------------------------------------------------------------------------------------------------------------------

For purposes of calculating, proven and probable reserves, a dilution
of 5% at zero grade on the Saadah zone and 15% at zero grade on the Al Houra
and Moyeath zones was assumed. A mining recovery of 80% has been used for the
Saadah zone and 88% for the Al Houra and Moyeath zones. Mining dilution is the
amount of wallrack adjacent to the ore body which is included in the ore
extraction process.

Proven reserves are those mineral deposits for which quantity is
computed from dimensions revealed in outcrops, trenches, workings or
drillholes, and grade is computed from results of detailed sampling. For ore
deposits to be proven, the sites for inspection, sampling and measurement must
be spaced so closely and the geologic character must be so well defined that
the size, shape, depth and mineral content of reserves are well established.
Probable reserves are those for which quantity and grade are computed from
information similar to that used for proven reserves, but the sites for
inspection, sampling and measurement are farther apart or are otherwise less
adequately spaced. However, the degree of assurance, although lower than that
for proven reserves, must be high enough to assume continuity between points of
observation.

A review by WGM of the equipment and process flowsheet contained in
the 1982 feasibility study prepared by WGM indicated that new technology
developed during the past ten years could be used to reduce the capital cost
and improve the metallurgical recoveries. In particular, the use of
semi-autogenous grinding to reduce the capital cost of the grinding section and
developments in reagents were believed to hold the greatest potential for
improving the economies of the project. A detailed metallurgical testwork
program was undertaken by Lakefield Research in 1994 to address potential
improvements and provide detailed design criteria for the concentrator design.
Results from this testwork program showed that copper recovery could be
improved by 5.7% and zinc recoveries improved by 13% compared to the 1982
results.

The metallurgical studies conducted on the ore samples taken from the
zones indicated that 87.7% of the copper and 82.6% of the zinc could be
recovered in copper and zinc concentrates. Overall, gold and silver recovery
from the ore was estimated to be 77.3% and 81.3%, respectively, partly into
copper concentrate and partly as bullion through cyanide processing of zinc
concentrates and mine tailings.

A test program to evaluate the economies of the cyanidation of the
zinc concentrate and tailings in order to improve gold and silver recoveries
found gold and silver recoveries to range from 50% to 77%. To recover gold and
silver from the zinc concentrate and tailings, WGM recommended that a
cyanidation plant be included in the process flowsheet. Dore bullion would be
produced. WGM concluded that the inclusion of a cyanidation plant would make a
positive contribution to the economies of the project under the base
conditions.

The mining and milling operation recommended by WGM for Al Masane
would involve the production of 2,000 tonnes of ore per day (700,000 tonnes per
year), with a mine life of over ten years. Annual production is estimated to
be 34,900 tonnes of copper concentrate (25% copper per tonne) containing
precious metal and 58,000 tonnes of zinc concentrate (54% zinc per tonne).
Total output per year of gold and silver is estimated to be 22,000

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ounces of gold and 800,000 ounces of silver from the copper concentrate and
bullion produced. The construction of mining, milling and infrastructure
facilities is estimated to take 18 months to complete. Construction necessary
to bring the Al Masane project into production includes the construction of a
2,000 tonne per day concentrator, infrastructure with a 300 man housing
facility and the installation of a cyanidation plant to increase the recovery
of precious metals from the deposit. Project power requirements will be met by
diesel generated power.

WGM recommended that the Al Masane reserves be mined by underground
methods using trackless mining equipment. Once the raw ore is mined, it would
be subjected to a grinding and treating process resulting in three products to
be delivered to smelters for further refining. These products are zinc
concentrate, copper concentrate and dore bullion. The copper concentrate will
contain valuable amounts of gold and silver. These concentrates are estimated
to be 22,000 ounces of gold and 800,000 ounces of silver and will be sold to
copper and zinc custom smelters and refineries worldwide. After smelter
refining process, the metals could be sold by the Company or the smelter for
the Company's account in the open market.

WGM prepared an economic analysis of the project utilizing cash flow
projections. In the feasibility study, WGM recommends that the Company bring
the Al Masane mine into production.

In the feasibility study, WGM states that there is potential to find
more reserves within the lease area, as the ore zones are all open at depth.
Further diamond drilling, which will be undertaken by the Company, is required
to quantify the additional mineralization associated with these zones. A
significant feature of the Al Masane ore zones is that they tend to have a much
greater vertical plunge than strike length; relatively small surface exposures
such as the Moyeath zone are being developed into sizeable ore tonnages by
thorough and systematic exploration. Similarly, systematic prospecting of the
small gossans in the area could yield significant tonnages of new ore.

1996 Update. The Company requested WGM and Davy International to
update the 1994 feasibility study of the project. The update details various
changes required to update the 1994 feasibility study to reflect costs as of
the first quarter of 1996. Capital and operating cost updates to the surface
infrastructure and mill components were done by Davy International of Toronto,
Canada. WGM was responsible for updating mining, mining related activities and
an economic analysis.

The 1996 update shows the estimated capital cost to bring the project
into operation to be $88.6 million, a 9% increase over the $81.3 million
capital cost estimated in the 1994 feasibility study. At a production rate of
700,000 tonnes per year, the operating cost of the project (excluding
concentrate freight, ship loading, smelter charges, depreciation, interests and
taxes) was estimated to be $38.49 per tonne of ore milled compared to $36.86
per tonne of ore milled estimated in the 1994 feasibility study.

WGM prepared an economic analysis of the project utilizing cash flow
projections. A base case was prepared that included those project elements
which are most likely to be achieved. WGM believed that a majority of the base
case assumptions used in the 1994 feasibility study remained valid, including
the ore reserves, mill feed grade, production rate, metal recoveries and
concentrate grade and smelter returns. Metal prices, capital costs, operating
costs and the corporate structure were adjusted to reflect more current
information. Capital and operating costs were adjusted in conformity with the
updated estimates prepared by Davy International.

The base case assumes the corporate structure of the entity to be
formed to operate the project, currently planned to be a Saudi limited
liability company, will be owned 50% by the Company and 50% by Saudi Arabian
investors and that the owners of this entity would contribute an aggregate of
$21.2 million to the cost of the project. The base case further assumes
financing for the project from commercial loans in the aggregate amount of
$21.2 million bearing interest at the rate of 8% per year and a loan in the
amount of $43.8 million from the Saudi Industrial Development Fund ("SIDF")
repayable in equal annual installments over the initial life of the mine. The
remainder of the project financing would be contributed by cash generated by
the operation of the project. The base case assumes that the $11 million loan
outstanding to the Saudi Arabian government will be paid by the Company in
accordance with a repayment schedule to be agreed upon with the Saudi Arabian
government from the Company's share of the project's cash flows. Based on these
assumptions, and assuming the average prices of metal over the life of the mine
to be $1.05 per pound for copper,

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$.60 per pound for zinc, $400 per ounce of gold and $6.00 per ounce of silver,
WGM's economic analysis of the base case shows the project will realize an
internal rate of return of 13.1%, the Company's and the Saudi Arabian
investors' internal rates of return would be 27.3% and 12.1%, respectively, and
projected net cash flow from the project of $95.1 million. The 1994
feasibility study base case showed the project would realize a 14.05% internal
rate of return. Cash flow under the base case is exclusive of income tax as
the base case assumes that any such tax would be paid by individual investors
and not by the project. Assuming a 10% discount rate, the net present value of
the project as shown in the update is $12.16 million compared to the $15.5
million net present value of the project shown in the 1994 feasibility study.
Based on the update, WGM believes that the economic analysis shows that the
project remains viable.

Project Financing and Mining Lease. The 1996 update to the 1994
feasibility study shows the estimated total capital cost to bring the Al Masane
project into production to be $88.6 million. At the present time, the Company
does not have sufficient funds to bring the project into production. The
Company and its Saudi Arabian advisors are in the process of forming a Saudi
limited liability company to own and operate the project. On November 5, 1997,
the Company and Al Mashreq initialed a joint venture agreement to form a Saudi
limited liability company which will be owned 50% by the Company and 50% by Al
Mashreq. The new company, called "The Arabian Shield Company for Mining
Industries Ltd.", is now under formation, and has applied to the Saudi Ministry
of Commerce for a charter to operate the mine.

On May 20, 1996, the Company entered into a Financial and Legal
Services and Advice Agreement with Nasir Ali Kadasah, for legal advice, and Dar
Al Khaleej, for research and economic advice. The purpose of this agreement
was for the two Saudi Arabian advisors to assist the Company in obtaining
financing for the Al Masane project. To this end, the agreement contemplated
that the Saudi Arabian advisors would perform the following:

1. The formation of a Saudi limited liability company, 50% of which
would be owned by the Company and the remaining 50% of which would be owned by
Saudi Arabian investors who will contribute 25% of the total capital cost of the
project.

2. Obtain an industrial license for the project from The Ministry of
Industry and Electricity. This license was a necessary prerequisite for
obtaining an interest-free loan from the SIDF to fund 50% of the capital cost
of the project.

3. Finalize the necessary procedures to obtain such loan from the
SIDF, the application for which was submitted on September 30, 1995.

4. Apply for and receive loans from commercial banks necessary to
finance the project.

5. Apply for and obtain the Ministerial Resolution from the Minister
of Petroleum and Mineral Resources approving the transfer of the mining lease
to the Saudi limited liability company.

The agreement provided that the Saudi Arabian advisors would be solely
responsible for the performance of the foregoing obligations and that the
Company had no obligation therefor.

As consideration for performing these obligations, the Company agreed
to pay Mr. Kadasah and Dar Al Khaleej $10,000 each upon the issuance of the
industrial license and Mr. Kadasah $10,000 upon approval of the loan by the
SIDF. The Company also agreed to issue to Mr. Kadasah and Mr. Tawfiq Abdulaziz
Al-Sowailim, as agent for Dar Al Khaleej, up to 1,025,000 and 975,000 shares of
the Company's Common Stock, respectively, and to grant Mr. Kadasah and Mr.
Tawfiq Abdulaziz Al-Sowailim, as agent for Dar Al Khaleej, options to purchase
up to 1,425,000 and 875,000 shares of the Company's Common Stock, respectively.
The Company was obligated to issue

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such shares and grant such options in designated amounts upon completion of
each of the foregoing obligations. The issuance of the shares would be for
consideration consisting solely of services rendered to the Company. The
options are immediately exercisable on the date of grant, have a five-year term
commencing on the date of formation of the Saudi limited liability company and
an exercise price of $1.00 per share. On December 3, 1996, the industrial
license was issued to the Company and its Saudi Arabian advisors. As a result,
the Company paid the advisors $20,000 in the aggregate and was obligated at
December 31, 1997 to issue to these advisors 300,000 shares of the Company's
Common Stock in the aggregate and options to purchase 345,000 shares of the
Company's Common Stock in the aggregate having an exercise price of $1.00 per
share. The agreement was terminated in August 1997 and negotiations are being
held to complete a new agreement, although there can be no assurances that any
such agreement can be reached.

A loan application was submitted to SIDF on September 30, 1995 and
conditional approval was received on December 17, 1997 for a $38.08 million
loan. The SIDF makes interest-free loans to industrial projects in Saudi Arabia
and charges a 2.5% service fee. The Company believes that it may also be able
to finance the remaining cost of the project through arrangements with suppliers
and equipment manufacturers, custom smelters and additional debt or equity
financing secured by the Company, however, there can be no assurances to that
effect.

The joint venture agreement with Al Mashreq contemplates the formation
of a new Saudi limited liability company, "The Arabian Shield Company for Mining
Industries Ltd.", to be owned 50% by the Company and 50% by Al Mashreq. As
contemplated, the Saudi limited liability company will be responsible for the
construction and operation of the mining facilities. Title to the mining lease
would be transferred to the Saudi limited liability company. The joint venture
agreement further contemplates the Company transferring its beneficial
interest in the Al Masane project to the Saudi limited liability company when
title to the mining lease is transferred to the Saudi limited liability company.
The Company and Al Mashreq agree to attempt to obtain financing for the project,
and that if firm commitments for such financing on acceptable terms are not
obtained by November 5, 1998, either party may terminate the agreement without
liability, except that the Company will return to Al Mashreq any consideration
paid for the assignment of the beneficial interest in the project and full title
to the mining lease will revert to the Company.

Pursuant to the mining lease agreement, when the profitability of the
project is established, the Company is obligated to form a Saudi public stock
company with Petromin. It is contemplated that the Saudi limited liability
company then will be transformed into a Saudi public stock company, that the
Company and Al Mashreq will own no less than 50% of the shares of the Saudi
public stock company, that Petromin will have an option to acquire up to 25% of
the shares and that the remaining shares will be offered for sale in Saudi
Arabia pursuant to a public subscription. Title to the mining lease and the
other obligations specified in the mining lease will be transferred to the Saudi
public stock company. Responsibility for the repayment of the $11 million loan
from the Saudi Arabian government will remain with the Company. In December
1994, the Company received instructions from the office of the Minister of
Petroleum and Mineral Resources stating that it is possible for the Company to
form the Saudi public stock company without Petromin but that the sale of stock
to the Saudi public could occur only after two years of profits from commercial
operations of the mine. The instructions added that Petromin will still have
the right to purchase shares in the Saudi public stock company any time it
desires.

As the holder of the Al Masane mining lease, the Company is solely
responsible to the Saudi Arabian government for the rental payments and other
obligations provided for by the mining lease and repayment of the $11 million
loan secured by the Company from the Saudi Arabian government. The mining lease
provides that the Company intends to repay the loan in accordance with a
repayment schedule to be agreed upon with the Saudi Arabian government from its
share of project cash flows. The initial term of the lease is for a period of
thirty (30) years from May 22, 1993, with the Company having the option to renew
or extend the term of the lease for additional periods not to exceed twenty (20)
years. Under the lease, the Company agreed to pay in advance a surface rental at
the rate of ten thousand Saudi Riyals (approximately $2,667 at the current
exchange rate) per square kilometer per year (approximately $117,300 annually)
during the period of the lease. The Company has made all rental payments under
the

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lease. It is contemplated that responsibility for the payment of all future
rental payments would be assumed by the Saudi limited liability company when
title to the Al Masane mining lease is transferred to it. In addition, the
Company must pay income tax in accordance with the income tax laws of Saudi
Arabia then in force and pay all infrastructure costs. Under the Saudi Arabian
Mining Code, income tax will not be due during the first stage of mining
operations, which is the period of five years starting from the earlier of (i)
the date of the first sale of products or (ii) the beginning of the fourth year
since the issue of the mining lease. The lease gives the Saudi Arabian
government priority to purchase the Company's whole production of gold or any
part thereof from the project. The lease also gives the Saudi Arabian
government the right to purchase up to 10% of the Company's annual production of
other minerals on the same terms and conditions then available to other similar
buyers and at current prices then prevailing in the free market. The lease
contains provisions requiring that preference be given to Saudi Arabian
suppliers and contractors and that the Company employ Saudi Arabian citizens and
provide training to Saudi Arabian personnel.

Reference is made to the map on page 13 of this Report for information
concerning the location of the Al Masane project.

Other Exploration Areas in Saudi Arabia

During the course of the exploration and development of the Al Masane
area, the Company has carried on exploration work in other areas in Saudi
Arabia and is planning to apply for an additional exploration license for these
areas. With respect to these other areas, the Company has an agreement with
Petromin which governs the rights of the parties if the exploration licenses
granted to the Company are converted into a mining lease. Under this
agreement, Petromin is granted an option to acquire, at any time, a 25%
interest in any project to mine minerals in Saudi Arabia the exploration for
which has been conducted under the exploration licenses.

U.S. Mineral Interests

The Company's mineral interests in the United States include its
equity interest in the Coal Company and Pioche. The Coal Company no longer owns
or holds any mineral interests and is presently inactive. The future of the
Coal Company's operations is uncertain. Pioche has been inactive for many
years, but in October 1997, Pioche entered into an Exploration Agreement and
Option to Purchase with a large mining company which provides for annual
payments to Pioche of $50,000 for seven years until, or unless, the mining
company exercises an option to purchase an 85% interest in the mining claims for
$3 million. The agreement can be terminated upon 60 days written notice by the
mining company. The mining company has agreed to expend at least $50,000 in
exploration work each year and to drill at least one hole in the first year.

Special Products Refinery

South Hampton owns and operates a special products refinery near
Silsbee, Texas and currently employs 50 people. The refinery is presently
devoted to specialized processing activities. The refinery currently consists
of seven operating units which, while interconnected, make distinct products
through differing processes: (i) a pentane-hexane unit; (ii) a catalytic
reformer; (iii) an aromatics hydrotreating and fractionation unit; (iv) a
cyclopentane unit; (v) an Aromax(R) unit; (vi) an aldehyde hydrogenation unit;
and (vii) a specialty fractionation unit. All of these units are presently in
operation.

The design capacity of the pentane-hexane unit is approximately 2,200
BPD of feedstock. The unit averaged 1,945 barrels per stream day during 1997.
The unit consists of a series of fractionation towers and hydrotreaters capable
of producing high purity solvents which are sold primarily to expandable
polystyrene and high density polyethylene producers. South Hampton purchases
most of its feedstock for this unit on the spot market.

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The catalytic reforming unit is a standard industry design using
platinum-rhenium catalyst which produces an aromatics concentrate used as
feedstock for an aromatics extraction unit, as well as hydrogen which is
utilized in other processes. The design capacity of the reformer is 4,000 BPD.
The unit is operated as a source of hydrogen for the pentane-hexane unit and
operates in tandem with the Aromax(R) unit as feedstock balances dictate. The
unit averaged 417 barrels per stream day during 1997.

The aromatics hydrotreating and fractionation unit consists of a
hydrotreating reactor and a single fractionation tower and has a design
capacity of 500 BPD. By-product chemical streams have historically been
processed by this unit into two products, high octane gasoline blendstocks and
heavy aromatic oils sold as fuel oil blending stock. This unit is leased to a
customer for its own use pursuant to a contract providing for the payment of a
minimum daily charge.

The cyclopentane unit consists of three specialized fractionation
towers designed to produce a consistently high quality product which is used in
the expandable polystyrene industry. The design capacity of the cyclopentane
unit is 400 BPD. The unit operates according to the feedstock supplied by the
pentane-hexane unit and averaged 192 barrels per stream day during 1997.

The Aromax(R) unit is the world's first commercial unit using a
proprietary process of Chevron Research Company to produce a high benzene
content product which is sold as feedstock to refiners operating benzene
extraction units. The process converts petroleum naphtha into liquid
hydrocarbons having a higher aromatic hydrocarbon content. The aromax unit
capacity is 400 BPD and uses a by-product of the pentane-hexane unit as
feedstock. The unit operates according to the feedstock supplied from the
pentane-hexane unit and the other hydrotreaters. The unit averaged throughput
of 122 barrels per stream day during 1997. Chevron Research has agreed to
continue development of the Aromax(R) process. The unit has continued to
successfully operate as designed.

The specialty fractionation unit consists of two fractionation towers
and has a design capacity of 1,000 BPD. This unit is leased to a customer for
its own use pursuant to a contract providing for the payment of a minimum daily
charge.

South Hampton also owns approximately 70 storage tanks with a total
capacity of approximately 250,000 barrels. The refinery is situated on 100
acres of land, approximately 70 acres of which is developed. South Hampton
owns a truck and railroad loading terminal consisting of eight storage tanks, a
rail spur and truck and tank car loading facilities.

As a result of an expansion program of the production capacity of the
South Hampton refinery completed in 1990, essentially all of the standing
equipment at South Hampton is operational. The Company has surplus equipment
in storage on site with which to assemble further processing units, such as a
hydrocracking unit with a 2,000 BPD capacity.

Gulf State owns and operates three 8" pipelines aggregating
approximately 50 miles in length which connect the South Hampton refinery to a
natural gas line, to South Hampton's truck and rail loading terminal and to a
marine terminal owned by an unaffiliated third party. South Hampton leases
storage facilities at the marine terminal.

Revenues and Financing

The Company's revenues and cash flows have been insufficient to meet
its debt service and capital expenditure requirements. Accordingly, it has been
necessary for the Company continually to seek additional debt and equity
financing in order to have funds to continue development and other investing
activities.

In 1995, the Company (i) negotiated an extension until April 30, 1996
of the maturity of the Amended and Restated Credit Agreement with Den norske
Bank AS, (ii) borrowed $721,000 in the aggregate from four individuals,
including a stockholder of the Company who is the Vice Chairman of National
Mining Company, a stockholder of

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the Company, the President and Chief Executive Officer of the Company and a
relative of such executive officer, pursuant to loans payable on demand two
years after their issuance bearing interest at LIBOR plus 2%, such lenders
having the option for a period of five years from the date of the loan to
convert the principal amount of the loan and all accrued interest into shares
of the Company's Common Stock at the rate of $1.00 per share, (iii) received
$50,000 payment on a stockholder receivable from a 1993 sale of shares of its
Common Stock to a private Saudi company controlled by a director and (iv)
granted the President and Chief Executive Officer of the Company an option to
convert at any time $400,000 of deferred compensation for services rendered to
the Company into shares of the Company's Common Stock at the rate of $1.00 per
share.

In 1996, the Company (i) through South Hampton negotiated an Amended
and Restated Credit Agreement with Den norske Bank ASA, amending and restating
the then outstanding credit agreement to provide for a revolving credit
facility in an aggregate principal amount of up to $1,965,000, (ii)
restructured certain indebtedness of South Hampton owed to Saudi Fal Co., Ltd.,
a limited liability company owned by a stockholder of the Company ("Saudi
Fal"), and the Refining Company pursuant to promissory notes in the original
principal amounts of $1,945,773.49 and $1,694,605.08, respectively, which
promissory notes are subordinated to the Amended and Restated Credit Agreement
with Den norske Bank ASA, (iii) approved the sale of up to 1 million shares of
the Company's Common Stock through private placements at a price no less than
$1.00 per share, (iv) sold 450,000 shares of the Company's Common Stock at
$1.00 per share to a Saudi Arabian investor who is a stockholder of the Company
and approved the sale of an additional 450,000 shares of the Company's Common
Stock at $1.00 per share to the same investor, the purchase price for such
additional shares being payable in monthly installments of $100,000 and (v)
approved the sale of 50,000 shares of the Company's Common Stock to a Saudi
Arabian investor.

During 1997, the Company took certain actions designed to generate
additional equity capital and improve its financial condition, including: (i)
approval by the Company's Board of Directors in August 1997 of the sale of up
to 1 million shares of the Company's Common Stock through private placements at
a price no less than $1.00 per share; (ii) the sale of 450,000 shares of the
Company's Common Stock at $1.00 per share to a Saudi Arabian investor who is a
stockholder of the Company; (iii) the sale of 50,000 shares of the Company's
Common Stock at $1.00 per share to a Saudi Arabian investor; (iv) the issuance
of 10,000 shares of its Common Stock at $1.375 per share pursuant to an option
exercise by an officer of the Company; (v) the issuance of 345,000 shares of
its Common Stock in exchange for the cancellation of certain indebtedness; (vi)
borrowing $200,000 from a Saudi Arabian investor pursuant to a two- year demand
promissory note bearing interest at prime plus 2% per annum; (vii) the sale
by South Hampton Refining Company, an indirect, wholly owned subsidiary of the
Company ("South Hampton"), in June 1997 of an office building to a third party
for approximately $695,000, on terms which included a ten-year promissory note
having a principal amount of $610,000 and bearing interest at 9% per annum; and
(viii) receiving conditional approval for a $38.08 million loan from the SIDF.

It may be necessary to secure funds to continue operations through the
sale of portions of the Company's properties, its investments or a portion of
the Company's interest therein. There are no assurances that these sales could
be arranged or that sufficient additional equity or debt financing can be
obtained.

On October 15, 1996, South Hampton entered into an Amended and
Restated Credit Agreement (the "Credit Agreement") with Den norske Bank ASA
(the "Bank"), amending and restating the then outstanding credit agreement to
provide for a revolving loan facility in an aggregate principal amount of up to
$1,965,000. The Bank's commitment to make funds available under the credit
facility will be reduced by (i) $75,000 on the last day of each fiscal quarter
commencing December 31, 1996 and (ii) the amount of any distribution by South
Hampton to Saudi Fal, the Company, the Refining Company or TOCCO in excess of
amounts permitted under the Credit Agreement. Advances under the Credit
Agreement may not at any time exceed the lesser of the commitment or a borrowing
base calculated based upon the cash collateral account, eligible accounts
receivable and inventory. Interest is payable monthly in arrears on all
outstanding advances under the credit facility at the Bank's prime lending rate,
as in effect from time to time, plus 1%. Principal and accrued and unpaid
interest was payable on December 31, 1998, but in March 1998 the maturity date
was extended to December 31, 1999. Subject to certain conditions and South
Hampton maintaining various financial covenants and ratios, the Credit Agreement
permits South Hampton to make distributions to (i) Saudi Fal, the Company, the
Refining Company and TOCCO for legal, auditing and accounting fees attributable
to the operations of South Hampton in an annual aggregate amount not in excess
of $60,000, (ii) Saudi Fal and the Company in respect of accrued interest on any
debt owned by South

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Hampton to Saudi Fal or the Company in an amount not in excess of $17,500 per
month and (iii) Saudi Fal and the Company in respect of principal on any debt
owed by South Hampton to Saudi Fal or the Company. The Credit Agreement is
secured by all of the assets of South Hampton and Gulf State and all of the
issued and outstanding shares of TOCCO, South Hampton and Gulf State. South
Hampton is required to collect all receivables through a cash collateral
account at a local bank.

In connection with South Hampton's entry into the Credit Agreement
with the Bank, South Hampton issued a Second Lien Promissory Note to Saudi Fal
and a Third Lien Promissory Note to the Refining Company in the original
principal amounts of $1,945,773.49 and $1,694,605.08, respectively, evidencing
certain indebtedness of South Hampton owed to such parties. The promissory
notes bear interest at the Bank's prime lending rate, as in effect from time to
time, plus 1%. Interest only is due and payable monthly on the promissory
notes, and the entire unpaid balance of principal and accrued and unpaid
interest was due on December 31, 1998, but in March 1998 the maturity date was
extended to December 31, 1999. The promissory notes are secured by all of the
assets of South Hampton and Gulf State. The promissory notes and related liens
are subordinated to the Credit Agreement. The promissory note issued to the
Refining Company and related liens are subordinate to the promissory note issued
to Saudi Fal.

The refinery had operating income of approximately $1,868,000, before
depreciation and amortization of approximately $420,000, on gross refined
product sales of approximately $25,600,000 for the 1997 fiscal year compared
with operating income of approximately $655,000, before depreciation and
amortization of approximately $413,000, on gross refined product sales of
approximately $21,367,000 for the 1996 fiscal year and operating income of
approximately $916,000, before depreciation and amortization of approximately
$396,000, on gross refined product sales of approximately $17,742,000 for the
1995 fiscal year.

There can be no assurance that the Company will successfully develop
any of its undeveloped mineral properties or, if developed, that they will be
commercially productive. None of the Company's undeveloped mineral properties
currently produces revenues, and such properties will not produce revenues from
operations to the Company unless and until exploration is completed and
successful development is accomplished. Meaningful progress in some of these
efforts is currently hampered by the Company's lack of sufficient operating
funds.

In the case of the Al Masane project, the Company must secure the
financing and construction of the mining and milling facilities before revenues
from that project may be realized. The Company believes that acceptable
financing for the estimated cost of the Al Masane project can be arranged,
although there can be no assurance that such financing could be obtained. The
results of the 1996 update to the 1994 feasibility study show the estimated
total capital costs of the project to be $88.6 million. The Coal Company's
lack of significant assets, combined with the Company's lack of operating
funds, inhibits any future activities of the Coal Company.

See Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations, Item 12. Security Ownership of Certain
Beneficial Owners and Management and Item 13. Certain Relationships and Related
Transactions for further discussion of these matters.

Foreign Operations

Since a substantial portion of the Company's mineral properties and
interests are located outside of the United States, its business and properties
are subject to foreign laws and foreign conditions, with the attendant varying
risks and advantages. Foreign exchange controls, foreign legal and political
concepts, foreign government instability, international economics and other
factors create risks not necessarily comparable with those involved in doing
business in the United States.

Competition

If it reaches the point of engaging in commercial mineral production,
the Company expects to encounter strong competition from established mining
companies which in many cases will be more extensively capitalized and have
more extensive facilities and more numerous personnel than does the Company.

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Personnel

In order to conserve all available funds, the Company continues to
keep its general and administrative personnel to a minimum. Its only officers
resident in the United States are Mr. John A. Crichton, Chairman of the Board,
Mr. Jonathan Cocks, Vice President, and Mr. Drew Wilson, Jr., Secretary and
Treasurer. The other employees of the Company, numbering approximately 28,
consist of the office personnel and field crews conducting core drilling and
other exploration activities in Saudi Arabia under the supervision of Mr. Hatem
El-Khalidi, President and Chief Executive Officer of the Company. South
Hampton currently employs 50 persons.

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[map]

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Item 2. Properties.

Saudi Arabia Mining Properties

Al Masane. The Al Masane project, which consists of an area of
approximately 44 square kilometers, contains extensive ancient mineral workings
and smelters. From ancient inscriptions in the area, it is believed that
mining activities went on sporadically from 1000 B.C. to 700 A.D. The ancients
are believed to have extracted mainly gold, silver and copper. The discussion
of the Al Masane project set forth under Item 1. Business is incorporated
herein by reference.

Other Saudi Arabian Areas. In 1971, the government of Saudi Arabia
awarded the Company exclusive mineral exploration licenses to explore and
develop the Wadi Qatan area in southwestern Saudi Arabia. The Company was
subsequently awarded an additional license in August of 1977 covering an area to
the north of Wadi Qatan at Jebel Harr. The licenses have expired by their
terms, and although the Company has received verbal assurance from Saudi Arabian
government officials that the licenses will be extended as long as exploratory
work is being carried out on the areas which they cover, formal extensions from
the government have not been obtained.

The Company has applied for a license covering an area surrounding the
Al Masane mining lease area, which is referred to as the Greater Al Masane area.
Although a license has not been formally granted for the Greater Al Masane area,
the Company was authorized in writing by the Saudi Arabian government to carry
out exploration work on the area. Exploration work has been carried on and paid
for exclusively by the Company.

When financing for the Al Masane project is completed, the Company
plans to make an application for an expanded exploration license for an area of
approximately 2,800 square kilometers which includes the original Greater Al
Masane area plus the Wadi Qatan and Jebel Harr areas.

Reference is made to the map on page 13 of this Report for information
concerning the location of the foregoing areas.

The absence of current formal exploration licenses covering the areas
on which the Company has conducted, and is continuing to conduct, exploration
and development work in Saudi Arabia creates uncertainty concerning the
Company's rights and obligations concerning those areas. However, the Company
believes that it has satisfied the government's requirements concerning the
license areas and that the government should honor the Company's claims to
those areas.

In the event of the establishment of commercially exploitable
minerals, exploration licenses granted by the Saudi Arabian government may be
converted into mining leases upon application to the Saudi Arabian Ministry of
Petroleum and Mineral Resources. The Company is a party to an agreement with
Petromin, the official mining and petroleum company of the Saudi Arabian
government, which governs the rights of the parties if an exploration license
granted to the Company is converted into a mining lease. Reference is made to
the discussion concerning the agreement under Item 1. Business.

Wadi Qatan and Jebel Harr. The Wadi Qatan area is located in
southwestern Saudi Arabia. Jebel Harr is north of Wadi Qatan. Both areas are
approximately 30 kilometers east of the Al Masane area. These areas consist of
40 square kilometers, plus a northern extension of an additional 13 square
kilometers. Geological and geophysical work by the Company and limited core
drilling disclose the existence of massive sulfides containing nickel.
Preliminary core drilling to shallow depths disclosed the existence of massive
sulfides containing an average of 1.2% nickel. Reserves for these areas have
not been classified and more drilling is needed to classify them as proven or
probable. Initial metallurgical studies by consultants to the Company in 1976
indicated difficulty in concentrating

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the nickel minerals. However, in 1983 the ore was examined by a metallurgical
consulting company and it was demonstrated that the ore can be treated to
produce ferronickel and iron which can be used to produce steel. The proposed
method could be commercially viable if enough ore is proven. Further
metallurgical work by another consulting company in 1985 indicated that the ore
can be treated by hydrometallurgical methods. An exploration license which
includes the Wadi Qatan and Jebel Harr areas will enable the Company to
continue its drilling program to prove enough ore for a viable mining
operation. Although the indications are encouraging there is no assurance that
a viable mining operation could be established.

Greater Al Masane. An application has been made and verbally approved
for an exploration license covering approximately 1,100 square kilometers
around Al Masane, sometimes referred to as Greater Al Masane, which includes an
ancient gold mining prospect at Jubal Guyan, about six miles east of the
original Al Masane prospect and seven miles west of Wadi Qatan. The Saudi
Arabian government has given the Company written authorization to conduct
exploration work on the area, although the license has not been formally
granted. Core samples indicate an average grade of 7 grams of gold per tonne.
Additional sampling is being conducted at Jubal Guyan, and after the results of
the sampling are obtained, an evaluation will be made as to future drilling
locations. Geological, geochemical and geophysical work on the Greater Al
Masane area has disclosed mineralization similar to that discovered at Al
Masane.

Refining Operations

South Hampton owns and operates a special products refinery near
Silsbee, Texas. Gulf State owns and operates three pipelines which connect the
South Hampton refinery to a natural gas line, to South Hampton's truck and rail
loading terminal and to a marine terminal owned by an unaffiliated third party.
The properties owned by South Hampton and Gulf State are more fully described
in Item 1. Business.

Nevada Mining Properties

There are 48 patented and 81 unpatented claims totaling approximately
3,600 acres in the Pioche properties. All the claims are located in the Pioche
District, Lincoln County, in southeastern Nevada. There are prospects and
mines on these claims which formerly produced silver, gold, lead, zinc and
copper. The ore bodies are both oxidized and sulfide deposits, classified into
three groups: fissure veins in quartzite, mineralized granite porphyry and
replacement deposits in carbonate rocks (limestone and dolomites). In October
1997, Pioche entered into an Exploration Agreement and Option to Purchase with
a large mining company which provides for annual payments to Pioche of $50,000
for seven years until, or unless, the mining company exercises an option to
purchase an 85% interest in the mining claims for $3 million. The agreement
can be terminated upon 60 days written notice by the mining Company. The mining
company has agreed to expend at least $50,000 in exploration work each year and
to drill at least one hole in the first year.

There is a 300-ton-a-day processing mill on property owned by Pioche.
The mill is not currently in use and a significant expenditure would be
required in order to put the mill into continuous operation.

Colorado Coal Properties

The Coal Company had a net operating loss carryforward of
approximately $5.9 million at December 31, 1997 which is limited to any future
net income.

Offices

The Company has a year-to-year lease on space in an office building in
Jeddah, Saudi Arabia, used for office occupancy. The Company also leases a
house in Jeddah which is used as a technical office and for staff housing. The
Company continues to lease office space in an office building in Dallas, Texas
on a month-to-month basis. It also has a base camp and accompanying facilities
and equipment at its license areas in Saudi Arabia.

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Item 3. Legal Proceedings.

South Hampton, together with over twenty-five other companies, was a
defendant in two proceedings pending in the 60th Judicial District Court in
Jefferson County, Texas and in the 136th Judicial District Court of Jefferson
County, Texas, respectively, brought on July 21, 1993 and July 18, 1994,
respectively, by two former employees of the Goodyear Tire & Rubber Company
plant located in Beaumont, Texas, claiming illness and diseases resulting from
alleged exposure to chemicals, including benzene, butadiene and/or isoprene,
during their employment with Goodyear. Plaintiffs claimed that the defendant
companies engaged in the business of manufacturing, selling and/or distributing
these chemicals in a manner which subjects each and all of them to liability
for unspecified actual and punitive damages. South Hampton entered into
settlement agreements with the two plaintiffs in March 1997 and January 1998,
respectively, by agreeing to pay each plaintiff the amount of $25,000 in full
and final settlement of all claims by each such plaintiff against South
Hampton. A lawsuit by another former Goodyear employee was filed in a
Jefferson County District Court on December 16, 1997 alleging the same injuries
and seeking unspecified actual and punitive damages. South Hampton intends to
vigorously defend against this lawsuit.

In 1993, while remediating a small spill area, the Texas Natural
Resources Conservation Commission ("TNRCC") requested South Hampton to drill a
well to check the groundwater under the spill area. Based on the results,
estimated costs of $60,000 were accrued at December 31, 1996 to cover the
recovery and remediation activity expected to take place in 1997. However, no
action was taken other than further study, and another $50,000 was accrued at
December 31, 1997 for a total of $110,000. This amount is considered adequate
in that various alternative and less expensive means of recovery are being
developed. Approximately $85,000 has been expended over a three-year period to
develop recovery alternatives. The consulting engineers expect approximately
10,000 barrels of recoverable material may be available to South Hampton for
use in their refining process, but no reduction has been made in the accrual
for estimated remediation costs due to the uncertainties relating to the
recovery process. There can be no assurances that any such recovery can be
made.

In November 1996, South Hampton agreed to a proposed settlement with
the TNRCC's Air Permit Section for various alleged violations identified during
the 1991 through 1994 inspections. An agreed fine of $50,000 in the aggregate
was paid in 1997 and 1996. South Hampton vigorously denied many of the
allegations in the settlement document, but determined that further protest of
the TRNCC's interpretation and application of the rules would result in higher
expenses.

On August 18, 1997, the Executive Director of the TNRCC filed a
preliminary report and petition with the TNRCC recommending that the TNRCC
enter an enforcement order assessing administrative penalties against and
requiring certain actions of South Hampton. The TNRCC alleges that South
Hampton has violated various TNRCC rules, TNRCC permits issued to South
Hampton, a TNRCC order issued to South Hampton, the Texas Water Code, the Texas
Clean Air Act and the Texas Solid Waste Disposal Act. The violations generally
relate to the management of volatile organic compounds in a manner that
allegedly violates the TNRCC's air quality rules and the storage, processing
and disposal of hazardous waste in a manner that allegedly violates the TNRCC's
industrial and hazardous waste rules. The Executive Director of the TNRCC
recommends that the TNRCC enter an order assessing administrative penalties
against South Hampton in the amount of $709,408, and recommends that the TNRCC
order South Hampton to undertake such actions as are necessary to bring its
operations at its refinery and its bulk terminal into compliance with Texas
Water Code, the Texas Health and Safety Code, TNRCC rules, permits and orders.
South Hampton intends to vigorously defend against this proceeding. A
preliminary hearing was held in November 1997, but no further action has been
taken to date.

On May 15, 1991, the Company filed a complaint with the U.S.
Department of Justice ("DOJ") against Hunt Oil Company of Dallas, Texas
("Hunt"), alleging violations of the Foreign Corrupt Practices Act ("FCPA") by
Hunt in obtaining its Petroleum Production Sharing Agreement ("PSA") in Yemen
in 1981, subsequent to the Company presenting a bid to the Yemen government for
the same area before Hunt made its application. The Company's Washington, D.C.
attorneys opined that, because the PSA of Hunt is still ongoing, and under its
auspices, payments and receipts occur daily, the DOJ still has jurisdiction to
continue its investigation. A letter from the DOJ on December 19, 1995 stated
its interest in receiving additional documentation regarding the Company's
allegations.

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On February 28, 1996, the Company sent more documents to the DOJ which it
believed further supported its allegations. The Company's Washington, D.C.
attorneys opined also that the Victim Restitution Act provides for restitution
to the Company of monies lost as a result of the alleged wrongdoing by Hunt, if
Hunt is convicted under the FCPA. A letter from the DOJ dated October 1, 1996
stated that the documents presented did not suggest any criminal events
occurred within the statute of limitations, and that, at that time, the DOJ did
not intend to pursue the investigation. On November 18, 1996, legal counsel
retained by the Company, after studying the facts of the case, sent the DOJ an
analysis concluding that while the statute of limitations of FCPA may have
lapsed, the statute of limitations for conspiracy to violate the FCPA had not
lapsed, and that, as a consequence, the DOJ could criminally prosecute Yemen
Hunt for conspiracy to violate the FCPA. The Company's legal counsel met with
the Fraud Section of the DOJ on December 13, 1996 and were told that the DOJ
would take a more aggressive stance if more information of evidentiary quality
were presented to the DOJ. The Company intends to vigorously pursue obtaining
such further information in the United States and in Yemen.

Late in 1994, articles were published in two prominent Yemen
newspapers in which Yemen Hunt Oil Company, a wholly owned subsidiary of Hunt
Oil Company of Dallas, Texas ("Yemen Hunt"), was accused of obtaining a
petroleum production sharing agreement in Yemen in 1981 through the corruption
of Yemen officials in order to exclude the application of the Company and its
then partner, Dorchester Gas Company, from consideration for the same area. A
letter to the editor of one of these newspapers, published on December 7, 1994
and signed by the executive vice president of Yemen Hunt, after explicitly
mentioning the Company and Dorchester Gas Company, stated that "[Yemen Hunt]
knows well those suspicious companies who are mainly engaged in political
activities for the purpose of undermining the economic interest of Yemen...."
On December 26, 1995, the Company filed a complaint of criminal libel with the
Yemen Attorney General for Publications in Sana'a, Yemen against Yemen Hunt,
alleging that Yemen Hunt, in its published letter to the prominent Yemen
newspaper, had criminally libeled the Company, which, if not addressed, could
seriously affect the business and reputation of the Company and its employees
in the Middle East. In October 1996, the Company received the official
decision from the Deputy Attorney General for Publications of Yemen which
stated that, after taking the statement of the President of the Company and the
statement of the chief of the legal department of Yemen Hunt, it was evident
that the letter from Yemen Hunt published in the Yemen newspaper on December 7,
1994 was libelous to the Company. However, since the four month statute of
limitations period under Yemen criminal law had run, Yemen Hunt could not be
prosecuted for criminal libel. The Company intends to vigorously pursue the
matter under the civil libel laws of Yemen.

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

No matter was submitted to a vote of the Company' stockholders during
the fourth quarter of 1997.

PART II

Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.

This information is set forth under the caption "Market for the
Company's Common Stock and Related Stockholder Matters" of the Company's 1997
Annual Report to Stockholders filed herein as Exhibit 13, which portion of such
Annual Report is incorporated herein by reference.

Item 6. Selected Financial Data.

This information is set forth under the caption "Selected Financial
Data" for each of the five years in the period ended December 31, 1997, of the
Company's 1997 Annual Report to Stockholders filed herein as Exhibit 13, which
portion of such Annual Report is incorporated herein by reference.

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Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.

This information is set forth under the caption "Management's
Discussion and Analysis of Financial Condition and Results of Operations" of
the Company's 1997 Annual Report to Stockholders filed herein as Exhibit 13,
which portion of such Annual Report is incorporated herein by reference.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk.

This information is set forth under the caption "Other
Matters-Quantitative and Qualitative Disclosures About Market Risks" of the
Company's Annual Report to Stockholders filed herein as Exhibit 13, which
portion of such Annual Report is incorporated herein by reference.

Item 8. Financial Statements and Supplementary Data.

The financial statements of the Company including the independent
auditor's report thereon of the Company's 1997 Annual Report to Stockholders
filed herein as Exhibit 13, are incorporated herein by reference.

Item 9. Disagreements on Accounting and Financial Disclosure.

On May 6, 1996, Price Waterhouse LLP resigned as the independent
accountants of the Company. The resignation of Price Waterhouse LLP was
previously reported in a Current Report on Form 8-K dated May 6, 1996.

PART III

Item 10. Directors and Executive Officers of the Registrant.

This information is set forth under the captions "Nominees for
Election as Directors", "Executive Officers" and "Section 16(a) Beneficial
Ownership Reporting Compliance" of the Company's Proxy Statement for the
Company's Annual Meeting of Stockholders.

Item 11. Executive Compensation.

This information is set forth under the caption "Executive
Compensation" of the Company's Proxy Statement for the Company's Annual Meeting
of Stockholders.

Item 12. Security Ownership of Certain Beneficial Owners and Management.

This information is set forth under the caption "Outstanding Capital
Stock" of the Company's Proxy Statement for the Company's Annual Meeting of
Stockholders.

Item 13. Certain Relationships and Related Transactions.

This information is set forth under the caption "Other Matters" of the
Company's Proxy Statement for the Company's Annual Meeting of Stockholders.

-18-
20
PART IV

Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K.

(a) 1. The following financial statements are incorporated by
reference from the Company's 1997 Annual Report to
Stockholders filed herein as Exhibit 13:

Reports of Independent Accountants.
Consolidated Balance Sheets dated December 31, 1997 and 1996.
Consolidated Statement of Operations for the three years ended
December 31, 1997.
Consolidated Statement of Stockholders' Equity for the three
years ended December 31, 1997.
Consolidated Statement of Cash Flows for the three years ended
December 31, 1997.
Notes to Consolidated Financial Statements.

2. The following financial statement schedules are filed with
this Report:

Schedule II - Valuation and Qualifying Accounts for the three
years ended December 31, 1997.

3. The following documents are filed or incorporated by reference
as exhibits to this Report:

3(a) Certificate of Incorporation of the Company as
amended through the Certificate of Amendment filed
with the Delaware Secretary of State on January 29,
1993 (incorporated by reference to Exhibit 3(a) to
the Company's Quarterly Report on Form 10-Q/A for the
quarter ended September 30, 1994 (File No. 0-6247)).

3(b) Bylaws of the Company, as amended through July 6,
1994 (incorporated by reference to Exhibit 3(b) to
the Company's Quarterly Report on Form 10-Q/A for the
quarter ended September 30, 1994 (File No. 0-6247)).

10(a) Contract dated July 29, 1971 between the Company,
National Mining Company and Petromin (incorporated by
reference to Exhibit 10(a) to the Company's Quarterly
Report on Form 10-Q/A for the quarter ended September
30, 1994 (File No. 0-6247)).

10(b) Loan Agreement dated January 24, 1979 between the
Company, National Mining Company and the Government
of Saudi Arabia (incorporated by reference to Exhibit
10(b) to the Company's Quarterly Report on Form
10-Q/A for the quarter ended September 30, 1994 (File
No. 0-6247)).

10(c) Mining Lease Agreement effective May 22, 1993 by and
between the Ministry of Petroleum and Mineral
Resources and the Company, together with English
translation thereof (incorporated by reference to
Exhibit 10(d) to the Company's Quarterly Report on
Form 10-Q/A for the quarter ended September 30, 1994
(File No. 0-6247)).

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21
10(d) Stock Option Plan of the Company, as amended
(incorporated by reference to Exhibit 10(e) to the
Company's Quarterly Report on Form 10-Q/A for the
quarter ended September 30, 1994 (File No. 0-6247)).

10(e) 1987 Non-Employee Director Stock Plan (incorporated
by reference to Exhibit 10(f) to the Company's
Quarterly Report on Form 10-Q/A for the quarter ended
September 30, 1994 (File No. 0-6247)).

10(f) Phantom Stock Plan of Texas Oil & Chemical Co. II,
Inc. (incorporated by reference to Exhibit 10(g) to
the Company's Quarterly Report on Form 10-Q/A for the
quarter ended September 30, 1994 (File No. 0-6247)).

10(g) Agreement dated March 10, 1988 between Chevron
Research Company and South Hampton Refining Company,
together with related form of proposed Contract of
Sale by and between Chevron Chemical Company and
South Hampton Refining Company (incorporated by
reference to Exhibit 10(o) to the Company's Quarterly
Report on Form 10-Q/A for the quarter ended September
30, 1994 (File No. 0-6247)).

10(h) Addendum to the Agreement Relating to AROMAX(R)
Process -- Second Commercial Demonstration dated June
13, 1989 by and between Chevron Research Company and
South Hampton Refining Company (incorporated by
reference to Exhibit 10(p) to the Company's Quarterly
Report on Form 10-Q/A for the quarter ended September
30, 1994 (File No. 0-6247)).

10(i) Vehicle Lease Service Agreement dated September 28,
1989 by and between Silsbee Trading and
Transportation Corp. and South Hampton Refining
Company (incorporated by reference to Exhibit 10(q)
to the Company's Quarterly Report on Form 10-Q/A for
the quarter ended September 30, 1994 (File No.
0-6247)).

10(j) Letter Agreement dated May 3, 1991 between Sheikh
Kamal Adham and the Company (incorporated by
reference to Exhibit 10(t) to the Company's Quarterly
Report on Form 10-Q/A for the quarter ended September
30, 1994 (File No. 0-6247)).

10(k) Promissory Note dated February 17, 1994 from Hatem
El-Khalidi to the Company (incorporated by reference
to Exhibit 10(u) to the Company's Quarterly Report on
Form 10-Q/A for the quarter ended September 30, 1994
(File No. 0-6247)).

10(l) Letter Agreement dated August 15, 1995 between Hatem
El-Khalidi and the Company (incorporated by reference
to Exhibit 10(v) to the Company's Annual Report on
Form 10-K for the year ended December 31, 1995 (File
No. 0-6247)).

10(m) Letter Agreement dated August 24, 1995 between Sheikh
Kamal Adham and the Company. (incorporated by
reference to Exhibit 10(w) to the Company's Annual
Report on Form 10-K for the year ended December 31,
1995 (File No. 0-6247)).

10(n) Letter Agreement dated October 23, 1995 between
Sheikh Fahad Al-Athel and the Company (incorporated
by reference to Exhibit 10(x) to the Company's Annual
Report on Form 10-K for the year ended December 31,
1995 (File No. 0-6247)).

10(o) Amended and Restated Credit Agreement dated October
15, 1996 between South Hampton Refining Company and
Den norske Bank ASA, together with related Promissory
Note, Ratification of Security Agreement,
Ratification of Pledge Agreement, Ratification of
Assignment of Insurance, Subordination Agreement,

-20-
22
Termination Agreement, Ratification of Subordination
Agreement, Renewal, Extension and Modification
Agreement, Second Lien Promissory Note and Third Lien
Promissory Note of even date therewith (incorporated
by reference to Exhibit 10(aa) to the Company's
Annual Report on Form 10-K for the year ended
December 31, 1996 (File No. 0-6247)).

10(p) Letter Agreement dated November 30, 1996 between
Sheikh Fahad Al-Athel and the Company (incorporated
by reference to Exhibit 10(bb) to the Company's
Annual Report on Form 10-K for the year ended
December 31, 1996 (File No. 0-6247)).

10(q) Financial and Legal Services and Advice Agreement
dated May 20, 1996 by and among Nasir Ali Kadasah,
Dar Al Khaleej and the Company, as amended by Letter
Agreement dated March 3, 1997 (incorporated by
reference to Exhibit 10(cc) to the Company's Annual
Report on Form 10-K for the year ended December 31,
1996 (File No. 0-6247)).

10(r) Joint Venture Agreement dated November 5, 1997
initialed by Al Mashreq Company for Mining
Investments and the Company.

10(s) Exploration Agreement and Option to Purchase dated as
of October 21, 1997 between Homestake Mining Company
of California and Pioche-Ely Valley Mines, Inc.

10(t) Amendment No. 1 to Amended and Restated Credit
Agreement dated as of December 31, 1997 between South
Hampton Refining Company and Den norske Bank ASA.

13 1997 Annual Report to Stockholders.

With the exception of the information incorporated by
reference into Items 5, 6, 7, 7A, 8 and 14 of this
Form 10-K, the 1997 Annual Report to Stockholders is
not to be deemed filed as part of this Report.

21 Subsidiaries (incorporated by reference to Exhibit 21
to the Company's Quarterly Report on Form 10-Q/A for
the quarter ended September 30, 1994 (File No.
0-6247)).

27 Financial Data Schedule.

(b) The following report on Form 8-K was filed during the last
quarter of the period covered by this Report:

Current Report on Form 8-K dated October 30, 1997.

-21-
23
POWER OF ATTORNEY

KNOW ALL MEN BY THESE PRESENTS that each of Arabian Shield Development
Company, a Delaware corporation, and the undersigned directors and officers of
Arabian Shield Development Company, hereby constitutes and appoints John A.
Crichton its or his true and lawful attorney-in-fact and agent, for it or him
and in its or his name, place and stead, in any and all capacities, with full
power to act alone, to sign any and all amendments to this Report, and to file
each such amendment to the Report, with all exhibits thereto, and any and all
other documents in connection therewith, with the Securities and Exchange
Commission, hereby granting unto said attorney-in-fact and agent full power and
authority to do and perform any and all acts and things requisite and necessary
to be done in and about the premises as fully to all intents and purposes as it
or he might or could do in person, hereby ratifying and confirming all that
said attorney-in- fact and agent may lawfully do or cause to be done by virtue
hereof.

SIGNATURES

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

ARABIAN SHIELD DEVELOPMENT COMPANY

By: /s/ HATEM EL-KHALIDI
--------------------------------------
Hatem El-Khalidi, President
and Chief Executive Officer

Dated: March 30, 1998

-22-
24
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
Company in the capacities indicated on March 30, 1998.

Signature Title
- --------- -----

/s/ HATEM EL-KHALIDI President, Chief Executive Officer and
- ----------------------------- Director (principal executive officer)
Hatem El-Khalidi

/s/ DREW WILSON, JR. Secretary and Treasurer
- ----------------------------- (principal financial and accounting
Drew Wilson, Jr. officer)

/s/ JOHN A. CRICHTON Chairman of the Board and Director
- -----------------------------
John A. Crichton

/s/ MOHAMMED O. AL-OMAIR Director
- -----------------------------
Mohammed O. Al-Omair

/s/ GHAZI SULTAN Director
- -----------------------------
Ghazi Sultan

-23-
25
EXHIBIT INDEX

PAGE

3(a) Certificate of Incorporation of the Company as
amended through the Certificate of Amendment filed
with the Delaware Secretary of State on January 29,
1993 (incorporated by reference to Exhibit 3(a) to
the Company's Quarterly Report on Form 10-Q/A for
the quarter ended September 30, 1994 (File No.
0-6247)).

3(b) Bylaws of the Company, as amended through July 6,
1994 (incorporated by reference to Exhibit 3(b) to
the Company's Quarterly Report on Form 10-Q/A for
the quarter ended September 30, 1994 (File No.
0-6247)).

10(a) Contract dated July 29, 1971 between the Company,
National Mining Company and Petromin (incorporated
by reference to Exhibit 10(a) to the Company's
Quarterly Report on Form 10-Q/A for the quarter
ended September 30, 1994 (File No. 0-6247)).

10(b) Loan Agreement dated January 24, 1979 between the
Company, National Mining Company and the Government
of Saudi Arabia (incorporated by reference to
Exhibit 10(b) to the Company's Quarterly Report on
Form 10-Q/A for the quarter ended September 30,
1994 (File No. 0-6247)).

10(c) Mining Lease Agreement effective May 22, 1993 by
and between the Ministry of Petroleum and Mineral
Resources and the Company, together with English
translation thereof (incorporated by reference to
Exhibit 10(d) to the Company's Quarterly Report on
Form 10-Q/A for the quarter ended September 30,
1994 (File No. 0-6247)).

10(d) Stock Option Plan of the Company, as amended
(incorporated by reference to Exhibit 10(e) to the
Company's Quarterly Report on Form 10-Q/A for the
quarter ended September 30, 1994 (File No.
0-6247)).

10(e) 1987 Non-Employee Director Stock Plan (incorporated
by reference to Exhibit 10(f) to the Company's
Quarterly Report on Form 10-Q/A for the quarter
ended September 30, 1994 (File No. 0-6247)).

10(f) Phantom Stock Plan of Texas Oil & Chemical Co. II,
Inc. (incorporated by reference to Exhibit 10(g) to
the Company's Quarterly Report on Form 10-Q/A for
the quarter ended September 30, 1994 (File No.
0-6247)).

26

PAGE

10(g) Agreement dated March 10, 1988 between Chevron
Research Company and South Hampton Refining
Company, together with related form of proposed
Contract of Sale by and between Chevron Chemical
Company and South Hampton Refining Company
(incorporated by reference to Exhibit 10(o) to the
Company's Quarterly Report on Form 10-Q/A for the
quarter ended September 30, 1994 (File No.
0-6247)).

10(h) Addendum to the Agreement Relating to AROMAX(R)
Process -- Second Commercial Demonstration dated
June 13, 1989 by and between Chevron Research
Company and South Hampton Refining Company
(incorporated by reference to Exhibit 10(p) to the
Company's Quarterly Report on Form 10-Q/A for the
quarter ended September 30, 1994 (File No.
0-6247)).

10(i) Vehicle Lease Service Agreement dated September 28,
1989 by and between Silsbee Trading and
Transportation Corp. and South Hampton Refining
Company (incorporated by reference to Exhibit 10(q)
to the Company's Quarterly Report on Form 10-Q/A
for the quarter ended September 30, 1994 (File No.
0-6247)).

10(j) Letter Agreement dated May 3, 1991 between Sheikh
Kamal Adham and the Company (incorporated by
reference to Exhibit 10(t) to the Company's
Quarterly Report on Form 10-Q/A for the quarter
ended September 30, 1994 (File No. 0-6247)).

10(k) Promissory Note dated February 17, 1994 from Hatem
El-Khalidi to the Company (incorporated by
reference to Exhibit 10(u) to the Company's
Quarterly Report on Form 10-Q/A for the quarter
ended September 30, 1994 (File No. 0-6247)).

10(l) Letter Agreement dated August 15, 1995 between
Hatem El-Khalidi and the Company (incorporated by
reference to Exhibit 10(v) to the Company's Annual
Report on Form 10-K for the year ended December 31,
1995 (File No. 0-6247)).

10(m) Letter Agreement dated August 24, 1995 between
Sheikh Kamal Adham and the Company. (incorporated
by reference to Exhibit 10(w) to the Company's
Annual Report on Form 10-K for the year ended
December 31, 1995 (File No. 0-6247)).

10(n) Letter Agreement dated October 23, 1995 between
Sheikh Fahad Al-Athel and the Company (incorporated
by reference to Exhibit 10(x) to the Company's
Annual Report on Form 10-K for the year ended
December 31, 1995 (File No. 0-6247)).

27

PAGE

10(o) Amended and Restated Credit Agreement dated October
15, 1996 between South Hampton Refining Company and
Den norske Bank ASA, together with related
Promissory Note, Ratification of Security
Agreement, Ratification of Pledge Agreement,
Ratification of Assignment of Insurance,
Subordination Agreement, Termination Agreement,
Ratification of Subordination Agreement, Renewal,
Extension and Modification Agreement, Second Lien
Promissory Note and Third Lien Promissory Note of
even date therewith (incorporated by reference to
Exhibit 10(aa) to the Company's Annual Report on
Form 10-K for the year ended December 31, 1996
(File No. 0-6247)).

10(p) Letter Agreement dated November 30, 1996 between
Sheikh Fahad Al-Athel and the Company (incorporated
by reference to Exhibit 10(bb) to the Company's
Annual Report on Form 10-K for the year ended
December 31, 1996 (File No. 0-6247)).

10(q) Financial and Legal Services and Advice Agreement
dated May 20, 1996 by and among Nasir Ali Kadasah,
Dar Al Khaleej and the Company, as amended by
Letter Agreement dated March 3, 1997 (incorporated
by reference to Exhibit 10(cc) to the Company's
Annual Report on Form 10-K for the year ended
December 31, 1996 (File No. 0-6247)).

10(r) Joint Venture Agreement dated November 5, 1997
initialed by Al Mashreq Company for
Mining Investments and the Company.

10(s) Exploration Agreement and Option to Purchase dated as
of October 21, 1997 between Homestake Mining Company
of California and Pioche-Ely Valley Mines, Inc.

10(t) Amendment No. 1 to Amended and Restated Credit
Agreement dated as of December 31, 1997 between South
Hampton Refining Company and Den norske Bank ASA.

13 1997 Annual Report to Stockholders.

With the exception of the information incorporated by
reference into Items 5, 6, 7, 7A, 8 and 14 of this Form
10-K, the 1997 Annual Report to Stockholders is not
to be deemed filed as part of this Report.

21 Subsidiaries (incorporated by reference to Exhibit
21 to the Company's Quarterly Report on Form 10-Q/A
for the quarter ended September 30, 1994 (File No.
0-6247)).

27 Financial Data Schedule.