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

                                    FORM 10-Q

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

                For the quarterly period ended September 30, 1998

                                       OR

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

          For the transition period from.............. to .............

                         Commission file number 0-22149

                           EDGE PETROLEUM CORPORATION
             (Exact name of registrant as specified in its charter)


                               Delaware 76-0511037
                (State or other jurisdiction of (I.R.S. Employer
               incorporation or organization) Identification No.)


                              Texaco Heritage Plaza
                             1111 Bagby, Suite 2100
                              Houston, Texas 77002
                    (Address of principal executive offices)

                                 (713) 654-8960
              (Registrant's telephone number, including area code)

         Indicate by checkmark  whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the  Securities  Exchange Act of
1934  during  the  preceding  12 months  (or for such  shorter  period  that the
registrant was required to file such reports),  and (2) has been subject to such
filing requirements for the past 90 days.

                                   Yes X   No
                                      ---    ---

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

                Class                      Outstanding at November 12, 1998
             ------------                  --------------------------------
             Common Stock                              7,772,280




<PAGE>



                                      PART I. FINANCIAL INFORMATION
Item 1. Financial Statements


EDGE PETROLEUM CORPORATION

CONSOLIDATED BALANCE SHEETS (Unaudited)
<TABLE>
-----------------------------------------------------------------------------------------------------------------------


                                                                                        September 30,    December 31,
                                                                                             1998            1997
                                                                                        ---------------  --------------
ASSETS
CURRENT ASSETS:
<S>                                                                                        <C>            <C>
   Cash and cash equivalents                                                               $   707,648    $  3,777,950
   Accounts receivable, trade                                                                2,612,838       2,394,497
   Accounts receivable, joint interest owners, net                                           3,682,697       6,547,619
   Accounts receivable, related parties                                                        235,292         385,192
   Other current assets                                                                        471,280         352,571
                                                                                          ------------    ------------
                Total current assets                                                         7,709,755      13,457,829

PROPERTY AND EQUIPMENT, Net - full cost method of accounting
     for oil and natural gas properties                                                     60,790,274      36,662,521

INVESTMENT IN FRONTERA                                                                       3,628,264       3,628,264

OTHER ASSETS                                                                                     7,789          17,232
                                                                                          ------------    ------------
TOTAL ASSETS                                                                              $ 72,136,082    $ 53,765,846
                                                                                          ============    ============
LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
   Accounts payable, trade                                                                $  4,956,911    $  4,794,037
   Accounts payable to related party                                                                            40,000
   Accrued liabilities                                                                       1,683,440       1,020,645
                                                                                          ------------    ------------
                Total current liabilities                                                    6,640,351       5,854,682

NOTES PAYABLE                                                                               13,850,000

DEFERRED INCOME TAXES                                                                        1,159,883
                                                                                          ------------    ------------
                Total liabilities                                                           21,650,234       5,854,682
                                                                                          ------------    ------------
COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS' EQUITY:
   Preferred stock, $.01 par value; 5,000,000 shares authorized; none outstanding
   Common stock,  $.01 par value;  25,000,000  shares  authorized;  7,772,280 and
   7,760,869 shares issued and outstanding at September 30, 1998 and December 31, 1997, 
    respectively                                                                                77,723          77,609
   Additional paid-in capital                                                               47,769,739      47,629,822
   Retained earnings                                                                         5,903,037       3,825,009
   Unearned compensation - restricted stock                                                 (3,264,651)     (3,621,276)
                                                                                          ------------    ------------
                Total stockholders' equity                                                  50,485,848      47,911,164
                                                                                          ------------    ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                                                $ 72,136,082    $ 53,765,846
                                                                                          ============    ============
</TABLE>

See accompanying notes to consolidated financial statements.
 
                                      2
<PAGE>

EDGE PETROLEUM CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
<TABLE>
---------------------------------------------------------------------------------------------------------------------------


                                                                     Three Months Ended             Nine Months Ended
                                                                       September 30,                  September 30,
                                                                 ---------------------------   ----------------------------
                                                                      1998         1997             1998          1997

<S>                                                               <C>           <C>             <C>            <C>
OIL AND NATURAL GAS REVENUES                                      $ 3,981,256   $ 3,200,768     $ 11,615,967   $ 9,657,854

OPERATING EXPENSES:
   Oil and natural gas operating expenses                             916,098       542,964        2,458,629     1,842,202
   Depletion, depreciation and amortization                         2,383,371       643,663        5,283,394     1,822,257
   General and administrative expenses                              1,072,924     1,109,454        2,989,751     3,166,283
   Unearned compensation expense                                      165,148       155,052          496,656       358,341
                                                                  -----------   -----------      -----------   -----------
                Total operating expenses                            4,537,541     2,451,133       11,228,430     7,189,083
                                                                  -----------   -----------      -----------   -----------
OPERATING INCOME (LOSS)                                              (556,285)      749,635          387,537     2,468,771

OTHER INCOME AND EXPENSE:
   Interest expense                                                   (25,193)         (673)         (37,810)     (182,597)
   Interest income                                                     22,124       266,647          124,383       766,324
                                                                  -----------   -----------      -----------   -----------
NET INCOME (LOSS) BEFORE INCOME TAX (EXPENSE) BENEFIT AND
  CUMULATIVE EFFECT OF ACCOUNTING CHANGE                             (559,354)    1,015,609          474,110     3,052,498

INCOME TAX (EXPENSE) BENEFIT                                          190,945                       (176,917)
                                                                  -----------   -----------      -----------   -----------
CUMULATIVE EFFECT OF ACCOUNTING CHANGE                                                             1,780,835

NET INCOME  (LOSS)                                                 $ (368,409)  $ 1,015,609      $ 2,078,028   $ 3,052,498
                                                                  ===========   ===========      ===========   ===========
BASIC EARNINGS (LOSS) PER SHARE:

  Net income (loss) before cumulative effect of accounting change     $ (0.05)       $ 0.13           $ 0.04        $ 0.43

  Cumulative effect of accounting change                                                                0.23
                                                                      --------     --------         --------      --------
  Basic earnings (loss) per share                                     $ (0.05)       $ 0.13           $ 0.27        $ 0.43
                                                                      ========     ========         ========      ========
DILUTED  EARNINGS (LOSS) PER SHARE:

  Net income (loss) before cumulative effect of accounting change     $ (0.05)       $ 0.13           $ 0.04        $ 0.43

  Cumulative effect of accounting change                                                                0.23
                                                                      --------     --------         --------      --------
  Diluted earnings (loss) per share                                   $ (0.05)       $ 0.13           $ 0.27        $ 0.43
                                                                      ========     ========         ========      ========
BASIC WEIGHTED AVERAGE NUMBER OF
   COMMON SHARES OUTSTANDING                                        7,772,580     7,727,774        7,771,903     7,110,752

DILUTED WEIGHTED AVERAGE NUMBER OF
   COMMON SHARES OUTSTANDING                                        7,772,580     7,783,462        7,802,701     7,175,340
</TABLE>


See accompanying notes to consolidated financial statements.
 
                                      3
<PAGE>

EDGE PETROLEUM CORPORATION

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Unaudited)
<TABLE>
----------------------------------------------------------------------------------------------------------------------------


                                                                                                       Unearned
                                                      Common Stock         Additional                 Compensation -     Total
                                               --------------------------    Paid-in       Retained     Restricted    Stockholders'
                                                  Shares        Amount       Capital       Earnings        Stock         Equity
                                                ----------     -------    ------------   -----------   ------------  --------------
<S>                                              <C>           <C>        <C>            <C>          <C>             <C>
BALANCE,
  JANUARY 1, 1998                               7,760,869     $ 77,609   $ 47,629,822   $ 3,825,009  $ (3,621,276)   $ 47,911,164

   Issuance of restricted common stock             11,733          117        143,900                    (144,017)

   Forfeited nonvested restricted common stock       (322)          (3)      $ (3,983)                      3,986

   Unearned compensation expense                                                                          496,656         496,656

   Net income                                                                             2,078,028                     2,078,028

BALANCE,                                        ---------    ---------   ------------   -----------  ------------    ------------
   SEPTEMBER 30, 1998                           7,772,280     $ 77,723   $ 47,769,739   $ 5,903,037  $ (3,264,651)   $ 50,485,848
                                               ==========    =========   ============   ===========  ============    ============
</TABLE>

See accompanying notes to consolidated financial statements.

                                       4
<PAGE>

EDGE PETROLEUM CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
<TABLE>
-------------------------------------------------------------------------------------------------------------------------

                                                                                                   Nine Months Ended
                                                                                                     September 30,
                                                                                             ------------------------------
                                                                                                  1998           1997
<S>                                                                                            <C>             <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
   Net income                                                                                 $ 2,078,028    $ 3,052,498
   Adjustments to reconcile net income to net cash provided by operating activities:
      Cumulative effect of accouning change                                                    (1,780,835)
      Depletion, depreciation and amortization                                                  5,283,394      1,822,257
      Deferred income taxes                                                                       176,917
      Unearned compensation expense                                                               496,656        358,341
   Changes in assets and liabilities:
      Accounts receivable, trade                                                                 (218,341)    (1,250,336)
      Accounts receivable, joint interest owners, net                                           2,864,922     (3,283,815)
      Accounts receivable, related parties                                                        149,900        (68,107)
      Other current assets                                                                        (65,160)      (265,303)
      Other assets                                                                                  9,443          1,088
      Accounts payable, trade                                                                     162,872      2,571,394
      Accounts payable, related party                                                             (40,000)
      Accrued interest payable                                                                    233,184        (74,354)
      Accrued liabilities                                                                         453,667       (627,487)
                                                                                              -----------     -----------
                 Net cash provided by operating activities                                      9,804,647      2,236,176
                                                                                              -----------     -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
   Oil and gas property and equipment purchases                                               (29,734,069)   (17,196,668)
   Proceeds from the sale of oil and gas properties                                             3,009,120        473,750
   Investment in Frontera                                                                                     (3,628,264)
                                                                                              -----------    -----------
                 Net cash used in investing activities                                        (26,724,949)   (20,351,182)
                                                                                              -----------    -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
  Proceeds from notes payable                                                                  13,850,000        867,350
  Payment on notes payable                                                                                   (11,017,348)
  Payment on long-term notes payable                                                                            (393,893)
  Payment on related party subordinated loans                                                                 (1,300,000)
  Net proceeds from issuance of common stock                                                                  41,028,258
  Net proceeds from exercise of stock options                                                                    100,000
                                                                                              -----------    -----------
                Net cash provided by financing activities                                      13,850,000     29,284,367
                                                                                              -----------    -----------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS                                           (3,070,302)    11,169,361

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD                                                  3,777,950      1,543,228
                                                                                              -----------   ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD                                                        $ 707,648   $ 12,712,589
                                                                                              ===========   ============
SUPPLEMENTAL CASH FLOW DISCLOSURES - Cash paid for interest, net of amounts capitalized           $ 5,682      $ 256,951

NON-CASH TRANSACTIONS:
  Combination transactions                                                                                   $ 3,599,635
  Deferred offering costs at December 31, 1996 capitalized to equity                                         $ 1,006,379
  Issuance of restricted common stock                                                           $ 144,017    $ 4,134,669
  Forfeited nonvested restricted common stock                                                     $ 3,986
  Tax benefit of exercise of stock options                                                                     $ 224,617
</TABLE>


See accompanying notes to consolidated financial statements.

                                       5
<PAGE>
EDGE PETROLEUM CORPORATION
     NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

1.     SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

              The  financial  statements  included  herein have been prepared by
       Edge  Petroleum  Corporation,  a Delaware  corporation  (the  "Company"),
       without audit pursuant to the rules and regulations of the Securities and
       Exchange  Commission,  and  reflect  all  adjustments  which are,  in the
       opinion  of  management,  necessary  to present a fair  statement  of the
       results for the  interim  periods on a basis  consistent  with the annual
       audited consolidated financial statements.  All such adjustments are of a
       normal  recurring  nature.  The  results of  operations  for the  interim
       periods are not necessarily  indicative of the results to be expected for
       an entire year.  Certain  information,  accounting  policies and footnote
       disclosures   normally  included  in  financial  statements  prepared  in
       accordance  with  generally  accepted  accounting  principles  have  been
       omitted  pursuant  to such rules and  regulations,  although  the Company
       believes  that the  disclosures  are  adequate  to make  the  information
       presented   not   misleading.   Certain  prior  year  amounts  have  been
       reclassified   to  conform  to  the  current  year   presentation.   Such
       reclassifications  do not affect net income.  These financial  statements
       should be read in  conjunction  with the Company's  audited  consolidated
       financial statements included in the Company's Annual Report on Form 10-K
       for the year ended December 31, 1997.

              Accounting  Change - The  Company  uses the  full-cost  method  of
       accounting for its oil and natural gas properties. Under this method, all
       acquisition,   exploration  and  development   costs  that  are  directly
       attributable  to the Company's  acquisition,  exploration and development
       activities  are  capitalized  in a "full-cost  pool" as incurred.  In the
       second quarter of 1998 and effective January 1, 1998, the Company changed
       its method of accounting for direct  internal  geological and geophysical
       ("G&G") costs to one of capitalization of such costs,  which are directly
       attributable to acquisition,  exploration and development activities,  to
       oil and natural gas properties.  Prior to the change the Company expensed
       these costs as  incurred.  The Company  believes  the  accounting  change
       provides for a better  matching of revenues and expenses and enhances the
       comparability of it's financial  statements with those of other companies
       that follow the full-cost method of accounting. The $1,780,835 cumulative
       effect of the change in prior years (after  reduction for income taxes of
       $958,910) is included in income for the nine months ended  September  30,
       1998.  The  effect of the  accounting  change on the three  months  ended
       September 30, 1998 was to decrease the net loss by $294,736  ($0.04 basic
       and diluted loss per share);  the effect of the accounting  change on the
       nine months ended  September  30, 1998 was to increase net income  before
       cumulative  effect of  accounting  change by  $911,936  ($0.12  basic and
       diluted earnings per share) and net income by $2,692,771 ($0.35 basic and
       diluted earnings per share).

              The following pro forma amounts  reflect the effect of retroactive
       application  of the  accounting  change  on  general  and  administrative
       expenses, depletion and related income taxes.

  <TABLE>
                                                   Three Months Ended           Nine Months Ended
                                                         September 30,               September 30,
                                                  -------------------------- ----------------------------
                                                       1998         1997          1998          1997
<S>                                                <C>         <C>             <C>          <C>
Net income (loss)                                  $ (368,409) $ 1,170,130     $ 297,193    $ 3,582,444
                                                   =========== ===========     ===========  ===========
Basic earnings (loss) per share                       $ (0.05)      $ 0.15        $ 0.04         $ 0.50
                                                   =========== ===========     ===========  ===========
Diluted earnings (loss) per share                     $ (0.05)      $ 0.15        $ 0.04         $ 0.50
                                                   =========== ===========     ===========  ===========
Basic weighted average number of
  common shares outstanding                          7,772,580    7,727,774     7,771,903      7,110,752
                                                   =========== ===========     ===========  ===========
Diluted weighted average number of
  common shares outstanding                          7,772,580    7,783,462     7,802,701      7,175,340
                                                   =========== ===========     ===========  ===========
</TABLE>

                                       6
<PAGE>
2.     LONG TERM DEBT

              During July 1995,  the  Company  entered  into a revolving  credit
       facility  (the  "Revolving  Credit  Facility")  with  a bank  to  finance
       temporary  working capital  requirements.  The Revolving  Credit Facility
       provided up to $20,000,000 in borrowings  limited by a borrowing base, as
       defined by the Revolving Credit  Facility.  The Revolving Credit Facility
       provided  for  interest  at the  lender's  prime  rate  plus  0.75%.  The
       borrowing base was subject to review by the bank on a quarterly basis and
       could be  adjusted  subject to the  provisions  of the  Revolving  Credit
       Facility. On March 3, 1997, the Company repaid the outstanding balance of
       $11,017,348  plus accrued  interest with proceeds from its initial public
       offering.  Effective  April 1, 1998, the Company amended and restated its
       Revolving  Credit Facility to provide a revolving line of credit of up to
       $100 million bearing interest at a rate equal to prime or LIBOR plus 1.5%
       - 2% depending on the level of borrowing base utilization.  The Company's
       initial  borrowing  base  authorized by the banks was  approximately  $15
       million.  Beginning  September  1,  1998,  the  borrowing  base  will  be
       redetermined  semi-annually  by  unanimous  consent of the banks and from
       time to time at the  Company's or the banks'  request.  Beginning  May 1,
       1998 and on the first day of each month thereafter, the borrowing base is
       required to be reduced by $525,000.

              Effective  September 29, 1998,  the Company had its borrowing base
       redetermined  and amended its Revolving  Credit Facility with a bank. The
       initial  borrowing  base  authorized  by the bank was  approximately  $15
       million.  Beginning  October 1, 1998,  and on the first day of each month
       thereafter, the borrowing base is required to be reduced by $550,000. The
       borrowing base will be redetermined  semi-annually by consent of the bank
       and from time to time at the Company's or the bank's request.

              At September  30, 1998,  borrowings  under this  Revolving  Credit
       Facility  totaled  $13.85  million  with   approximately   $1.15  million
       available for future  borrowings.  The weighted average debt and interest
       rate during the nine months ended  September 30, 1998 were  approximately
       $5.1 million and 7.2%,  respectively.  There were no borrowings under the
       Revolving Credit Facility during the first quarter of 1998. Subsequent to
       September 30, 1998,  the Company repaid  approximately  $3 million of its
       prior  borrowings  with  proceeds  from  the  sales of an  interest  in a
       prospect and a promoted  interest in a 3-D seismic survey,  both in South
       Louisiana.

               The Revolving Credit Facility provides for certain  restrictions,
       including but not limited to,  limitations  on additional  borrowings and
       issues of capital  stock,  sales of its oil and natural gas properties or
       other  collateral,  engaging in merger or consolidation  transactions and
       prohibitions of dividends and certain distributions of cash or properties
       and certain  liens.  The  Revolving  Credit  Facility  also  contains the
       following  financial  covenants:  (i) tangible  net worth  (total  assets
       exclusive of certain  intangibles minus liabilities) must be at least $43
       million plus 50% of positive net income and 100% of equity raised for all
       quarterly periods  subsequent to December 31, 1997; (ii) the ratio at the
       end of any  quarter of cash flow (net  income  plus  proceeds  of certain
       project sales, depletion,  depreciation,  amortization and other non-cash
       expenses  less non-cash net income for such quarter) to debt service must
       be at least 1.25 to 1.00;  and (iii) the ratio at the end of any  quarter
       of EBIT (net income plus interest expense and taxes,  excluding non-cash,
       extraordinary expenses and income) to interest expense for the proceeding
       12-month  period  must be at least  4.5 to  1.00.  The  Revolving  Credit
       Facility is secured by substantially all the assets of the Company.

3.     EARNINGS PER SHARE

              During  1997,  the  Company  implemented  Statement  of  Financial
      Accounting Standard No. 128 - "Earnings per Share," ("SFAS No. 128") which
      establishes the  requirements  for presenting  earnings per share ("EPS").
      SFAS No. 128 requires the presentation of "basic" and "diluted" EPS on the
      face of the income statement.  Basic earnings per common share amounts are
      calculated  using the average number of common shares  outstanding  during
      each period.  Diluted earnings per share assumes the exercise of all stock
      options having  exercise  prices less than the average market price of the
      common stock using the treasury stock method.  The earnings per share data
      for prior years has been restated following the standards in SFAS No.
      128.

                                       7
<PAGE>

           The following is presented as a reconciliation  of the numerators and
      denominators  of basic and diluted  earnings  per share  computations,  in
      accordance with SFAS No. 128.

<TABLE>

                               Three Months Ended September 30, 1998      Three Months Ended September 30, 1997
                               -------------------------------------      -------------------------------------

                                  Income       Shares      Per-Share         Income       Shares      Per-Share
                               (Numerator)  (Denominator)    Amount       (Numerator)  (Denominator)    Amount
                               -----------  -------------  ---------      -----------  -------------  ---------
Basic EPS
Income available to common
<S>                            <C>             <C>            <C>         <C>             <C>            <C>
  stockholders                 $  (368,409)    7,772,580     $(0.05)      $ 1,015,609     7,727,774      $ 0.13

Effect of Dilutive Securities
  Common stock options                                                                       55,688
                               -----------     ---------     -------      -----------     ---------     -------
Diluted EPS
Income available to common
  stockholders                 $  (368,409)    7,772,580     $(0.05)      $ 1,015,609     7,783,462      $ 0.13
                               ===========     =========     =======      ===========     =========     =======


                               Nine Months Ended September 30, 1998       Nine Months Ended September 30, 1997
                               -------------------------------------      -------------------------------------

                                  Income       Shares      Per-Share         Income       Shares      Per-Share
                               (Numerator)  (Denominator)    Amount       (Numerator)  (Denominator)    Amount
                               -----------  -------------  ---------      -----------  -------------  ---------
Basic EPS
Income available to common
  stockholders                 $ 2,078,028     7,771,903      $ 0.27      $ 3,052,498     7,110,752      $ 0.43

Effect of Dilutive Securities
  Common stock options                            30,798                                     64,588
                               -----------     ---------     -------      -----------     ---------     -------
Diluted EPS

Income available to common
  stockholders                 $ 2,078,028     7,802,701      $ 0.27      $ 3,052,498     7,175,340      $ 0.43
                               ===========     =========     =======      ===========     =========     =======
</TABLE>

           The Company was organized  through an initial  public  offering and a
series of combination  transactions (the "Combination") which were accounted for
as a reorganization of entities under common control.  Accordingly, for the nine
months ended  September  30,  1997,  the number of shares  outstanding  has been
computed  assuming that 4,701,361  shares of common stock  originally  issued in
connection with the Combination,  effective  February 25, 1997, were outstanding
from the beginning of the period.

                                       8
<PAGE>

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

      The  following  is   management's   discussion  and  analysis  of  certain
significant  factors  that  have  affected  certain  aspects  of  the  Company's
financial  position and  operating  results  during the periods  included in the
accompanying  unaudited  condensed   consolidated  financial  statements.   This
discussion  should  be read  in  conjunction  with  the  accompanying  unaudited
condensed consolidated financial statements included elsewhere in this Form 10-Q
and with the Company's audited consolidated financial statements included in the
Company's  annual  report on Form 10-K for the year  ended  December  31,  1997.
Unless otherwise  indicated by the context,  references  herein to the "Company"
mean Edge Petroleum Corporation,  a Delaware corporation that is the registrant,
and its corporate and partnership subsidiaries and predecessors.

Overview

         Edge Petroleum  Corporation is an independent energy company engaged in
the  exploration,  development  and  production  of oil and  natural  gas.  Edge
conducts its operations  primarily along the onshore Gulf Coast with its primary
emphasis  in  South  Texas  and  South  Louisiana  where it  currently  controls
interests in excess of 262,000  gross acres under lease and option.  The Company
explores for oil and natural gas by  emphasizing  an integrated  application  of
highly advanced data visualization  techniques and computerized 3-D seismic data
analysis to identify potential hydrocarbon  accumulations.  The Company believes
its approach to processing and analyzing geophysical data differentiates it from
other  independent  exploration  and production  companies and is more effective
than  conventional  3-D seismic data  interpretation  methods.  The Company also
believes it maintains  one of the largest  databases of onshore South Texas Gulf
Coast 3-D seismic data of any  independent  oil and natural gas company,  and is
continuously acquiring additional data within this core region.

         The Company  acquires  3-D seismic  data by  organizing  and  designing
regional data  acquisition  surveys for its proprietary  use, as well as through
selective  participation in regional  non-proprietary  3-D surveys.  The Company
negotiates  seismic  options  for a  majority  of the areas  encompassed  by its
proprietary surveys, thereby allowing it to secure identified prospect leasehold
interests  on  a   non-competitive,   pre-arranged   basis.   In  the  Company's
non-proprietary 3-D survey areas, the Company's technical  capabilities allow it
to rapidly and  comprehensively  evaluate  large volumes of regional 3-D seismic
data,  facilitating  its  ability  to  identify  attractive  prospects  within a
surveyed  region and to secure the  corresponding  leasehold  interests ahead of
other industry participants.

         The  Company's   extensive   technical  expertise  has  enabled  it  to
internally  generate  substantially all of its 3-D prospects drilled to date and
to assemble a large  portfolio of 3-D based prospects for future  drilling.  The
Company  pursues  drilling  opportunities  that  include  a blend of  shallower,
normally pressured reservoirs that generally involve moderate costs and risks as
well as deeper,  over-pressured  reservoirs that generally involve greater costs
and risks, but have higher economic potential. During the past year, the Company
has  expanded  its  relative  focus to  increase  its  exposure  to  exploration
opportunities  in the deeper  geological  section.  The  Company  mitigates  its
exposure  to  exploration  costs  and risk by  conducting  its  operations  with
industry partners,  including major oil companies and large  independents,  that
generally pay a disproportionately  greater share of seismic acquisition and, in
many  instances,  leasing and drilling  costs than the Company.  The Company may
seek to participate in an increased  number of externally  generated  prospects,
including those in which the Company pays a disproportionate  share of the cost,
depending  upon the  quality,  size,  price and other  factors  relating to such
prospects.

         The Company uses the  full-cost  method of  accounting  for its oil and
natural gas  properties.  Under this method,  all  acquisition,  exploration and
development costs that are directly  attributable to the Company's  acquisition,
exploration  and  development  activities  including  certain  payroll and other
internal costs are  capitalized in a "full-cost  pool" as incurred.  The Company
records depletion of its full-cost pool using the unit of production  method. To
the extent that such capitalized  costs in the full cost pool (net of depletion,
depreciation  and  amortization  and related  deferred taxes) exceed the present
value (using a 10% discount  rate) of estimated  future net after-tax cash flows
from  proved oil and  natural gas  reserves,  such  excess  costs are charged to
operations. Once incurred, a write-down of oil and natural gas properties is not
reversible  at a later date.  As of September  30, 1998 no write down of oil and
natural gas properties was deemed necessary.

                                       9
<PAGE>
         Due to the  instability of oil and natural gas prices,  the Company has
entered  into,  from time to time,  price  risk  management  transactions  for a
portion of its natural gas production to achieve a more  predictable  cash flow,
as well as to reduce  exposure from price  fluctuations.  While the use of these
arrangements  limits the  benefit to the  Company of  increases  in the price of
natural gas it also limits the downside  risk of adverse  price  movements.  The
Company's  hedging  arrangements  apply to only a portion of its  production and
provide only partial price protection against declines in natural gas prices and
limits potential gains from future increases in prices. The Company accounts for
these transactions as hedging activities and, accordingly,  gains and losses are
included  in  oil  and  natural  gas  revenues  during  the  period  the  hedged
transactions occur. During the nine months ended September 30, 1998, the Company
had in place several natural gas commodity collars with a financial institution.
These collars covered 5,000 - 10,000 MMbtu per day, or approximately  62% of the
Company's  daily  production,  with floating  floor and ceiling  prices  ranging
between  $2.15  and  $3.15 per  MMbtu,  (delivered  price  basis,  Houston  Ship
Channel),  with  settlement for each calendar month occurring five business days
following the  publishing of the Inside  F.E.R.C.  Gas Marketing  Report.  Total
natural gas production  marketed under these  arrangements was 1.1 BMbtu and 2.7
BMbtu, respectively,  for the three-month and nine-month periods ended September
30,  1998.  Included  within  natural gas  revenues for the three and nine month
periods  ended  September  30, 1998 was  $304,100  and  $370,800,  respectively,
representing  net gains from current collar activity.  Additionally,  during the
three months ended  September  30,  1998,  the Company  entered into four collar
arrangements  with a financial  institution  that begin and expire on October 1,
1998 and December 31, 1998, respectively. These collar arrangements cover 20,000
MMbtus per day with floating floor and ceiling prices ranging  between $2.00 and
$2.65 per MMbtu.  There was no material  hedging  activity  during the three and
nine-month periods ended September 30, 1997.

         The  Company's  revenue,  profitability  and future  rate of growth and
ability to borrow funds or obtain additional capital,  and the carrying value of
its properties,  are substantially  dependent upon prevailing prices for oil and
natural  gas.  These  prices are  dependent  upon  numerous  factors  beyond the
Company's control, such as economic,  political and regulatory  developments and
competition from other sources of energy. Oil prices have declined significantly
during the past year and more  recently  natural gas prices  have shown  similar
declines.  A substantial or extended decline in oil and natural gas prices could
have a material adverse effect on the Company's financial condition,  results of
operation  and access to capital,  as well as the  quantities of oil and natural
gas reserves that the Company may economically produce.

RESULTS OF OPERATIONS

Three Months Ended September 30, 1998 Compared to the Three Months Ended
September 30, 1997

Revenue and Production

      Oil and natural gas revenues for the three months ended September 30, 1998
increased  24% from $3.2 million to $4 million,  as compared to the three months
ended  September 30, 1997.  Production  volumes for oil and  condensate  for the
three months ended September 30, 1998 increased 8% from 31 MBbls to 34 MBbls, as
compared to the three months ended  September 30, 1997.  The increase in oil and
condensate production during the three months ended September 30, 1998 increased
revenues by $41,559 (based on 1997 comparable quarter average prices), offset by
a 36%  decrease in the average oil and  condensate  sales price which  decreased
revenues by $212,309 (based on current quarter  production).  Production volumes
for natural gas for the three months ended September 30, 1998 increased 54% from
1,041 MMcfs to 1,599 MMcfs,  as compared to the three months ended September 30,
1997.  The  increase in natural gas  production  during the three  months  ended
September 30, 1998 increased revenues by $1.4 million,  offset by a 11% decrease
in the average natural gas sales price which decreased revenues by $472,435. The
increase in oil and natural gas  production was primarily due to 73 gross (31.17
net)  new  successful  exploratory  and  development  wells  being  drilled  and
completed  since  September 30, 1997 offset by normal  production  declines from
existing  wells.  During the three months ended  September 30, 1998 and 1997 the
Company  marketed  its natural gas  produced  from a certain gas field under the
terms of various fixed price natural gas  contracts.  The terms of the contracts
require no minimum volume commitment and provided  incremental  pricing based on
certain levels of  production.  Prices  received for  production  marketed under
these  agreements  averaged $1.92 and $2.25 for the three months ended September
30,  1998  and  1997,  respectively.  Total  production,  (net to the  Company's

                                       10
<PAGE>

interest)  marketed  under these  agreements for the  three-month  periods ended
September  30, 1998 and  September  30, 1997 was  approximately  358,000 Mcf and
355,000 Mcf, respectively, representing approximately 20% and 29%, respectively,
of total  production,  on a Mcfe basis.  As  described  above,  included  within
natural gas revenues for the three months ended  September 30, 1998 was $304,100
representing  gains  from  current  collar  activity.   The  collar  settlements
increased the effective natural gas sales price by approximately  $0.19 per Mcf,
or 9%, for the  three-months  ended  September  30, 1998.  There was no material
hedging activity during the three months ended September 30, 1997.

       The following  table sets forth certain  operational  data of the Company
for the periods presented:
<TABLE>
                                                    Three Months Ended           1998 Period Compared
                                                      September 30,                 to 1997 Period
                                                ------------------------   ------------------------------
                                                                              Increase      % Increase
                                                   1998           1997       (Decrease)      (Decrease)
<S>                                               <C>            <C>             <C>             <C>
Production volumes:
   Oil and condensate (Bbls)                      33,607         31,220          2,387           8 %
   Natural gas (Mcf)                           1,598,529      1,040,860        557,669          54 %

   Natural gas equivalents (Mcfe)              1,800,171      1,228,180        571,991          47 %

Average sales prices:
   Oil and condensate ($ per Bbl)                $ 11.09        $ 17.41        $ (6.32)        (36)%
   Natural gas ($ per Mcf)                        $ 2.26         $ 2.55        $ (0.29)        (11)%

Operating revenues:
   Oil and condensate                          $ 372,806      $ 543,556     $ (170,750)        (31)%
   Natural gas                                 3,608,450      2,657,212        951,238          36 %
                                             -----------    -----------    -----------
Total                                        $ 3,981,256    $ 3,200,768     $  780,488          24 %
                                             ===========    ===========    ===========
</TABLE>

Costs and Operating Expenses

       Oil and  natural  gas  operating  expenses  for the  three  months  ended
September  30, 1998  increased  69% from $542,964 to $916,098 as compared to the
three  months  ended  September  30, 1997,  due  primarily to increased  oil and
natural gas  production.  Oil and natural gas operating  expenses were $0.51 per
Mcfe and $0.44 per Mcfe for the three-month periods ended September 30, 1998 and
1997, respectively.

       Depletion,  depreciation and amortization  expense ("DD&A") for the three
months ended September 30, 1998 increased 270% from $643,663 to $2.4 million, as
compared to the three months ended September 30, 1997.  Included within DD&A for
the  three-month  periods ended September 30, 1998 and 1997 was $2.2 million and
$553,641,  respectively,  representing  depletion expense of oil and natural gas
property,  which  increased by 294%.  Increased  oil and natural gas  production
increased  depletion  expense by  $257,393  and a 169%  increase  in the overall
depletion rate further increased depletion expense by $1.4 million. The increase
in the depletion rate was primarily  attributable  to downward  revisions to oil
and natural gas reserve  estimates  used in computing  depletion  expense during
1998 and for the year ended 1997.  The downward  revision in oil and natural gas
reserve  estimates used to compute 1998  depletion  expense was partially due to
the drilling of an unsuccessful well on a proved undeveloped prospect during the
second  quarter of 1998 and a negative  adjustment to a producing  well that was
drilled in 1997 that did not  maintain  initial  production  volumes.  Increased
finding costs since  September 30, 1997 also  contributed to the increase in the
depletion  rate.  Additionally,  depletion  expense  was  further  increased  by
approximately  $144,000  during the three months ended September 30, 1998 due to
the change in  accounting  method (See note 1).  Depletion  expense on a unit of
production  basis for the three-month  periods ended September 30, 1998 and 1997
was $1.21 per Mcfe and $0.45 per Mcfe,  respectively.  The remaining increase in
DD&A is due primarily to  depreciation  of new computer  hardware,  software and
office  improvements  purchased since September 30, 1997 and the amortization of
deferred loan cost on the Credit Facility.

       General and  administrative  expenses  ("G&A") for the three months ended
September 30, 1998 decreased 3% from  $1,109,454 to  $1,072,924,  as compared to
the three months  ended  September  30, 1997.  The decrease in G&A is due to the
change in  accounting  method,  which  decreased  G&A by $597,454  (See note 1).
Excluding  the effects of the change in  accounting  method,  G&A  increased  by
$560,924 which was primarily  attributable to the hiring of additional employees
to support the  Company's  increased  level of  exploration  activities  and 3-D
project  generation and costs associated with being a public company and general
office  overhead.  Included within general and  administrative  expenses for the
three months ended  September 30, 1998 and 1997, is  approximately  $250,000 and

                                       11
<PAGE>

$171,000,  respectively, of overhead reimbursements and management fees received
from  various  management,   operating  and  seismic  agreements.   General  and
administrative  expenses  on a unit of  production  basis  for  the  three-month
periods  ended  September  30,  1998 and 1997 were  $0.60 per Mcfe and $0.90 per
Mcfe, respectively.

       Unearned  compensation  expense for the three months ended  September 30,
1998 increased from $155,052 to $165,148,  as compared to the three months ended
September  30,  1997.  The  increase is due to the  amortization  of  additional
restricted  common stock granted to the Board of Directors of the Company during
the three months ended June 30, 1998 and to employees  during the fourth quarter
of 1997.

       Interest  expense  for the three  months  ended  September  30,  1998 was
$25,193 net of amounts capitalized of $173,772,  as compared to interest expense
of $673 for the three months ended  September 30, 1997. The increase in interest
expense is due to  increased  borrowings  under the  Company's  Credit  Facility
during 1998.  The weighted  average debt was $10.8  million for the three months
ended September 30, 1998. There was no significant  debt outstanding  during the
three-month period ended September 30, 1997.

        Interest  income for the three months ended September 30, 1998 decreased
from  $266,647 to $22,124,  as compared to the three months ended  September 30,
1997.  The  decrease  in  interest  income is due to the  overall  reduction  in
invested funds.

       Income tax  benefit for the three  months  ended  September  30, 1998 was
$190,945.  Prior to December  31, 1997,  the  Company's  available  deferred tax
assets and net operating  loss carry forwards  completely  offset the effects of
any current or deferred tax expense.  The Company began providing federal income
taxes at the statutory rate, which  approximates the effective rate,  during the
first quarter of 1998.

       For the three  months  ended  September  30,  1998,  the  Company  had an
operating  loss of $556,285  compared to  operating  income of $749,635  for the
three month period ended September 30, 1997,  primarily reflecting increased oil
and natural gas  production  offset by lower natural gas and oil and  condensate
prices,  increased  operating expenses and increased DD&A expense.  Net loss was
$368,409  for the three  months ended  September  30,  1998,  or $0.05 basic and
diluted  loss per  share,  as  compared  to net  income  of $1  million  for the
three-month period ended September 30, 1997, or $0.13 basic and diluted earnings
per share.

Nine Months Ended September 30, 1998 Compared to the Nine Months Ended
September 30, 1997

Revenue and Production

      Oil and natural gas revenues for the nine months ended  September 30, 1998
increased 20% from $9.7 million to $11.6 million, as compared to the nine months
ended September 30, 1997. Production volumes for oil and condensate for the nine
months ended  September 30, 1998  increased  19% from 97 MBbls to 115 MBbls,  as
compared to the nine months ended  September  30, 1997.  The increase in oil and
condensate  production  increased revenues by $354,201 (based on 1997 comparable
period average  prices),  and a 37% decrease in average oil and condensate sales
price  decreased  revenue  by  $815,653  (based  on  current  year  production).
Production  volumes  for  natural  gas  increased  36% from 3,276 MMcfs to 4,442
MMcfs,  as compared to the nine months ended September 30, 1997. The increase in
natural  gas  production  increased  revenues  by $2.8  million,  offset by a 3%
decrease  in  average  natural  gas sales  price  which  decreased  revenues  by
$354,201.  This increase in oil and natural gas  production  was due to 73 gross
(31.17 net) new successful  exploratory and development  wells being drilled and
completed  since  September 30, 1997 offset by normal  production  declines from
existing  wells.  During the nine months ended  September  30, 1998 and 1997 the
Company  marketed  its natural gas  produced  from a certain gas field under the
terms of various fixed price natural gas  contracts.  The terms of the contracts
require no minimum volume commitment and provided  incremental  pricing based on
certain levels of  production.  Prices  received for  production  marketed under
these  agreements  averaged  $2.07 per Mcf and $2.20 per Mcf for the nine months
ended  September  30,  1998 and 1997,  respectively.  Total  volume  sold by the
Company under these contracts for the nine month period ended September 30, 1998
and  1997  was  approximately  1.1  Bcf  and 1 Bcf,  respectively,  representing
approximately 21% and 26%, respectively,  of total production,  on a Mcfe basis.
As described  above,  included  within  natural gas revenues for the nine months
ended  September 30, 1998 was $370,800  representing  gains from current  collar
activity. The collar settlements increased the effective natural gas sales price
by  approximately  $0.09 per Mcf, or 4%, for the nine months ended September 30,

                                       12
<PAGE>

1998.  There was no  material  hedging  activity  during the nine  months  ended
September 30, 1997.

      The following table sets forth certain operational data of the Company for
the periods presented:
<TABLE>
                                                 Nine Months Ended          1998 Period Compared
                                                   September 30,               to 1997 Period
                                             -------------------------  ---------------------------
                                                                           Increase     % Increase
                                                 1998           1997      (Decrease)     (Decrease)
<S>                                            <C>             <C>            <C>            <C>
Production volumes:
   Oil and condensate (Bbls)                   115,098         96,791        18,307          19 %
   Natural gas (Mcf)                         4,441,921      3,275,526     1,166,395          36 %

   Natural gas equivalents (Mcfe)            5,132,509      3,856,272     1,276,237          33 %

Average sales prices:
   Oil and condensate ($ per Bbl)              $ 12.26        $ 19.35       $ (7.09)        (37)%
   Natural gas ($ per Mcf)                      $ 2.30         $ 2.38       $ (0.08)         (3)%

Operating revenues:
   Oil and condensate                      $ 1,411,248    $ 1,872,699      (461,451)        (25)%
   Natural gas                              10,204,719      7,785,155     2,419,564          31 %
                                           -----------    -----------   -----------
Total                                      $11,615,967    $ 9,657,854   $ 1,958,113          20 %
                                           ===========    ===========   ===========
</TABLE>

Costs and Operating Expenses

      Oil and natural gas operating expenses for the nine months ended September
30, 1998  increased  33% from $1.8 million to $2.5  million,  as compared to the
nine months ended September 30, 1997, due primarily to increased oil and natural
gas production.  Oil and natural gas operating  expenses on a unit of production
basis were $0.48 per Mcfe for both  nine-month  periods ended September 30, 1998
and 1997, respectively.

       Depletion,  depreciation and  amortization  expense ("DD&A") for the nine
months  ended  September  30,  1998  increased  190% from $1.8  million  to $5.3
million,  as compared to the nine months  ended  September  30,  1997.  Included
within DD&A for the  nine-month  periods  ended  September 30, 1998 and 1997 was
$4.7 million and $1.6 million,  respectively,  representing depletion expense of
oil and natural gas property, which increased by 194%. Increased oil and natural
gas production  increased  depletion  expense by $523,256 and a 124% increase in
the overall depletion rate further increased  depletion expense by $2.6 million.
The  increase  in the  depletion  rate was  primarily  attributable  to downward
revisions to oil and natural gas reserve  estimates used in computing  depletion
expense during 1998 and for the year ended 1997. These downward revisions in oil
and natural gas  reserve  estimates  were  primarily  due to the  drilling of an
unsuccessful well on a proved undeveloped  prospect during the second quarter of
1998 and a negative adjustment to a producing well that was drilled in 1997 that
did not  maintain  initial  production  volumes.  Increased  finding  cost since
September  30, 1997 also  contributed  to the  increase in the  depletion  rate.
Additionally,  depletion expense was further increased by approximately $389,000
during the nine months ended  September 30, 1998 due to the change in accounting
method (See note 1).  Depletion  expense on a unit of  production  basis for the
nine-month  periods  ended  September  30,  1998 and 1997 was $0.92 per Mcfe and
$0.41 per Mcfe, respectively. The remaining increase in DD&A is due primarily to
depreciation  of  new  computer  hardware,   software  and  office  improvements
purchased since September 30, 1997 and the amortization of deferred loan cost on
the Credit Facility.

      General and  administrative  expenses for the nine months ended  September
30, 1998  decreased 6% from $3.2 million to $3 million,  as compared to the nine
months ended  September  30,  1997.  The decrease in G&A is due to the change in
accounting  method,  which decreased G&A by $1.8 million (See note 1). Excluding
the effects of the change in  accounting  method,  G&A increased by $1.6 million
which was  primarily  attributable  to the  hiring of  additional  employees  to
support the Company's increased level of exploration  activities and 3-D project
generation and costs  associated  with being a public company and general office
overhead.  Included  within  general and  administrative  expenses  for the nine
months  ended  September  30,  1998 and  1997,  is  approximately  $674,000  and
$566,000,  respectively, of overhead reimbursements and management fees received

                                       13
<PAGE>

from  various  management,   operating  and  seismic  agreements.   General  and
administrative expenses on a unit of production basis for the nine-month periods
ended  September  30,  1998 and 1997  were  $0.58  per Mcfe and  $0.82 per Mcfe,
respectively.

       Unearned  compensation  expense for the nine months ended  September  30,
1998 increased  from $358,341 to $496,656,  as compared to the nine months ended
September  30,  1997.  The  increase is due to the  amortization  of  additional
restricted  common stock  granted to employees and the Board of Directors of the
Company  during the nine months ended  September  30, 1998 and due to restricted
stock grants being issued to executive management upon completion of the initial
public offering during March 1997.

      Interest expense for the nine months ended September 30, 1998 was $37,810,
net of interest  capitalized to oil and natural gas  properties of $242,158,  as
compared to interest expense of $182,597 for the nine months ended September 30,
1997.  The  weighted  average  debt was $5.1  million for the nine months  ended
September 30, 1998 compared to $2.7 million for the nine months ended  September
30, 1997.

       Interest income for the nine months ended September 30, 1998 was $124,383
compared to $766,324 for the nine months ended  September 30, 1997. The decrease
in interest income is due to the overall reduction in invested funds.

       Income tax  expense  for the nine  months  ended  September  30, 1998 was
$176,917.  Prior to December  31, 1997,  the  Company's  available  deferred tax
assets and net operating  loss carry forwards  completely  offset the effects of
any current or deferred tax expense.  The Company began providing federal income
taxes at the statutory rate, which  approximates the effective rate,  during the
first quarter of 1998.

      For the nine months ended  September  30, 1998,  the Company had operating
income of $387,537  compared to  operating  income of $2.5  million for the nine
months ended September 30, 1997,  primarily reflecting increased oil and natural
gas  production  offset  by lower  natural  gas and oil and  condensate  prices,
increased  operating  expenses and increased  DD&A expense.  Net income was $2.1
million,  $297,193 before cumulative effect of accounting  change,  for the nine
months ended  September 30, 1998, or $0.27 ($0.04  before  cumulative  effect of
accounting  change) per basic and diluted earnings per share, as compared to net
income of $3.1 million for the nine months ended  September  30, 1997,  or $0.43
per basic and diluted earnings per share.

LIQUIDITY AND CAPITAL RESOURCES

         In March 1997, the Company  completed its initial public  offering (the
"Offering")  of 2,760,000  shares of common stock at a public  offering price of
$16.50  per  share.   The  Offering   provided  the  Company  with  proceeds  of
approximately $40 million, net of expenses. The Company used approximately $12.7
million  to repay its  long-term  outstanding  indebtedness  incurred  under its
revolving credit facility (the " Revolving Credit Facility"), subordinated loans
and equipment  loans.  The remaining  proceeds from the Offering,  together with
cash flows from  operations,  were used to fund  planned  capital  expenditures,
commitments,  other  working  capital  requirements  and for  general  corporate
purposes.

         The  Company had cash and cash  equivalents  at  September  30, 1998 of
$707,648  consisting  primarily  of  short-term  money  market  investments,  as
compared to $3.8 million at December 31, 1997.  Working capital was $1.1 million
at September 30, 1998, as compared to $7.6 million at December 31, 1997.

         Operating cash flow was approximately $6.2 million and $5.2 million for
the  nine-month  periods  ended  September  30,  1998  and  1997,  respectively.
Operating cash flow, a measure of  performance  for  exploration  and production
companies,  represents cash flows from operating  activities prior to charges in
assets  and  liabilities.  Operating  cash  flow  should  not be  considered  in
isolation or as a substitute for net income,  operating income,  cash flows from
operating activities or any other measure of financial  performance presented in
accordance  with  generally  accepted  accounting  principles or as a measure of
profitability or liquidity.

         During the nine months ended September 30, 1998, the Company  continued
to reinvest a substantial  portion of its cash flows to increase its 3-D project
portfolio,  improve  its 3-D  seismic  interpretation  technology  and  fund its
drilling program.  Capital  expenditures  during the nine months ended September

                                       14
<PAGE>

30, 1998 were $29.7 million as compared to $17.2 million  during the same period
in 1997.  The Company's  drilling  efforts  resulted in the drilling of 79 gross
(33.23 net) wells during the nine months ended September 30, 1998 as compared to
72 gross (28.69 net) wells during the same period in 1997.  Additionally  during
1997, the Company  purchased shares of Preferred Stock of Frontera at a price of
$3.6 million which are convertible into approximately 10% of the common stock of
Frontera.  The  Company  expects  capital  expenditures  in 1998 to be about $34
million. A substantial portion of capital  expenditures in 1998 will be invested
in the  Company's  portfolio of 3-D projects to fund  drilling  activities in an
effort to expand its reserve base. In addition,  the Company expects to continue
to  expand  and  improve  its  technological  and  3-D  seismic   interpretation
capabilities.

         Due to the Company's active  exploration and development and technology
enhancement  programs,  the Company has  experienced  and expects to continue to
experience substantial working capital requirements. The Company intends to fund
its 1998 capital  expenditures,  commitments  and working  capital  requirements
through cash flows from  operations,  borrowings  and, to the extent  necessary,
other financing activities. The Company believes it will have sufficient capital
resources and liquidity to fund its capital expenditures and meet such financial
obligations  as they  come due.  In the event  such  capital  resources  are not
available to the Company, its drilling and other activities may be curtailed.

Revolving Credit Facility

         During July 1995, the Company entered into a revolving  credit facility
(the  "Revolving  Credit  Facility")  with a bank to finance  temporary  working
capital  requirements.  The Revolving Credit Facility provided up to $20,000,000
in borrowings  limited by a borrowing  base, as defined by the Revolving  Credit
Facility.  The Revolving  Credit Facility  provided for interest at the lender's
prime rate plus 0.75%. The borrowing base was subject to review by the bank on a
quarterly basis and could be adjusted subject to the provisions of the Revolving
Credit Facility. On March 3, 1997, the Company repaid the outstanding balance of
$11,017,348  plus  accrued  interest  with  proceeds  from  its  initial  public
offering.  Effective  April 1,  1998,  the  Company  amended  and  restated  its
Revolving  Credit  Facility to provide a revolving  line of credit of up to $100
million  bearing  interest  at a rate  equal to prime  or LIBOR  plus  1.5% - 2%
depending on the level of borrowing  base  utilization.  The  Company's  initial
borrowing base authorized by the banks was approximately $15 million.  Beginning
September 1, 1998,  the borrowing  base will be  redetermined  semi-annually  by
unanimous  consent  of the banks and from time to time at the  Company's  or the
banks'  request.  Beginning  May 1,  1998  and on the  first  day of each  month
thereafter, the borrowing base is required to be reduced by $525,000.

         Effective  September  29,  1998,  the  Company had its  borrowing  base
redetermined  and amended its Revolving Credit Facility with a bank. The initial
borrowing base authorized by the bank was approximately  $15 million.  Beginning
October 1, 1998 and on the first day of each  month  thereafter,  the  borrowing
base  is  required  to be  reduced  by  $550,000.  The  borrowing  base  will be
redetermined  semi-annually  by consent of the bank and from time to time at the
Company's or the bank's request.

         At September 30, 1998,  borrowings  under this facility  totaled $13.85
million with approximately  $1.15 million available for future  borrowings.  The
weighted  average debt and interest rate during the nine months ended  September
30, 1998 were approximately $5.1 million and 7.2%,  respectively.  There were no
borrowings under the Revolving Credit Facility during the first quarter of 1998.
Subsequent to September 30, 1998, the Company repaid approximately $3 million of
its prior  borrowings  from proceeds from the sales of an interest in a prospect
and a promoted interest in a 3-D seismic survey, both in South Louisiana.

         The  Revolving  Credit  Facility  provides  for  certain  restrictions,
including but not limited to, limitations on additional borrowings and issues of
capital stock,  sales of its oil and natural gas properties or other collateral,
engaging in merger or  consolidation  transactions and prohibitions of dividends
and certain distributions of cash or properties and certain liens. The Revolving
Credit Facility also contains the following  financial  covenants:  (i) tangible
net worth (total assets exclusive of certain intangibles minus liabilities) must
be at least $43  million  plus 50% of  positive  net  income  and 100% of equity
raised for all quarterly periods subsequent to December 31, 1997; (ii) the ratio
at the end of any  quarter of cash flow (net  income  plus  proceeds  of certain
project sales, depletion, depreciation, amortization and other non-cash expenses
less non-cash net income for such quarter) to debt service must be at least 1.25
to 1.00;  and (iii) the ratio at the end of any quarter of EBIT (net income plus

                                       15
<PAGE>

interest  expense and taxes,  excluding  non-cash,  extraordinary  expenses  and
income) to interest expense for the proceeding  12-month period must be at least
4.5 to 1.00. The Revolving Credit Facility is secured by  substantially  all the
assets of the Company.

Year 2000

         The Company has  completed its  assessment of the year 2000  processing
issues of its internal  technolgy  systems,  considering  current financial and
accounting,  production,  land and  geological  computer  systems  and  software
utilized by the Company. Due to the need for improved management reporting,  the
Company is in the process of replacing its existing  financial  and  accounting,
production and land applications with new software which is year 2000 compliant.
Implementation  is expected to be completed on or before  December 31, 1998 at a
total cost of approximately  $200,000. As of September 30, 1998, the Company has
incurred  approximately  $180,000 converting to its new financial and accounting
system and software with a majority of the remaining  cost to be incurred  prior
to December 31, 1998. Production and land applications will be operational on or
before  March 31,  1999.  These  costs  have been  funded  from cash  flows from
operations  and a  majority  of these  costs  have  been  capitalized.  Based on
assertions  made by vendors,  the Company  believes its  geological  systems and
software are year 2000 compliant.

         The Company is also in the process of evaluating  the risk presented by
potential Year 2000  non-compliance  by third  parties.  Because such risks very
substantially, companies are being contacted based on the estimated magnitude of
risk  posed to the  Company  by their  year  2000  non-compliance.  The  Company
anticipates that these efforts will continue through 1999 and will not result in
significant costs to the Company.

         The  Company's  assessment  of  its  Year  2000  issues  involves  many
assumptions. There can be no assurance that the Company's assumptions will prove
accurate, and actual results could differ significantly from the assumptions. In
conducting its Year 2000 compliance efforts, the Company has relied primarily on
vendor  representations  with  respect  to  internal  computerized  systems  and
representations   from  third  parties  with  which  the  Company  has  business
relationships and has not independently verified  representations.  There can be
no assurance that these representations will prove accurate. A Year 2000 failure
could result in a business  interruption  that  adversely  effects the Company's
business,  financial  condition  or results of  operations.  Although  it is not
currently aware of any likely business disruptions,  the Company is developing a
contingency  plans to  address  and  assessing  the  readiness  of its  material
suppliers,  customers and other  entities as it relates to year 2000  processing
issues and expects this work to be completed on or before December 31, 1998.

ACCOUNTING CHANGE

         The Company uses the  full-cost  method of  accounting  for its oil and
natural gas  properties.  Under this method,  all  acquisition,  exploration and
development costs that are directly  attributable to the Company's  acquisition,
exploration and development  activities are capitalized in a "full-cost pool" as
incurred.  In the second  quarter  of 1998 and  effective  January 1, 1998,  the
Company  changed its method of accounting  for direct  internal  geological  and
geophysical  ("G&G")  costs to one of  capitalization  of such costs,  which are
directly attributable to acquisition, exploration and development activities, to
oil and natural gas  property.  Prior to the change the Company  expensed  these
costs as incurred.  The Company  believes the accounting  change  provides for a
better matching of revenues and expenses and enhances the  comparability  of its
results of  operations  with those of other oil and natural gas  companies  that
follow the full cost method of accounting (See note 1).

FORWARD LOOKING STATEMENTS

         The statements contained in all parts of this document,  including, but
not limited to, those relating to the Company's  drilling plans, its 3-D project
portfolio, capital expenditures,  use of Offering proceeds, future capabiliites,
the  sufficiency of capital  resources and liquidity to support  working capital
and capital expenditure  requirements,  reinvestment of cash flows and any other
statements  regarding  future  operations,  financial  results,  business plans,
sources of liquidity and cash needs and other statements that are not historical
facts are forward  looking  statements.  When used in this  document,  the words
"anticipate,"  "estimate,"  "expect,"  "may,"  "project,"  "believe" and similar
expressions  are  intended  to be among the  statements  that  identify  forward
looking statements. Such statements involve risks and uncertainties,  including,
but  not  limited  to,  those  relating  to  the  Company's  dependence  on  its
exploratory drilling  activities,  the volatility of oil and natural gas prices,

                                       16
<PAGE>

the need to replace reserves depleted by production,  operating risks of oil and
natural gas  operations,  the  Company's  dependence on its key  personnel,  the
Company's reliance on technological development and possible obsolescence of the
technology  currently used by the Company,  significant capital  requirements of
the Company's  exploration and development and technology  development programs,
the potential  impact of government  regulations,  litigation and  environmental
matters,  the  Company's  ability to manage its growth and achieve its  business
strategy,  competition,  the  uncertainty of reserve  information and future net
revenue estimates,  property acquisition risks and other factors detailed in the
Company's  Form  10-K  and  other  filings  with  the  Securities  and  Exchange
Commission.  Should one or more of these risks or uncertainties materialize,  or
should  underlying  assumptions  prove  incorrect,   actual  outcomes  may  vary
materially from those indicated.


                                       17
<PAGE>


                           PART II - OTHER INFORMATION


Item 1 - Legal Proceedings...............................................   None

Item 2 - Changes in Securities and Use of Proceeds......................    None

Item 3 - Defaults Upon Senior Securities.................................   None

Item 4 - Submission of Matters to a Vote of Security Holders - ..........   None

Item 5 - Other Information...............................................   None

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

        (A)  EXHIBITS.  The following exhibits are filed as part of this report:

                               
                                INDEX TO EXHIBITS

Exhibit No.
--------------

            *2.1  Amended and  Restated  Combination  Agreement by and among (i)
                  Edge  Group II  Limited  Partnership,  (ii)  Gulfedge  Limited
                  Partnership, (iii) Edge Group Partnership, (iv) Edge Petroleum
                  Corporation  of  Texas,  (v) Edge  Mergco,  Inc.  and (vi) the
                  Company,  dated  as  of  January  13,  1997  (Incorporated  by
                  reference to Exhibit 2.1 to the Registration Statement on Form
                  S-4 (Registration No. 333-17269) filed by the Company).

            *3.1  Restated  Certificate  of  Incorporation  of the  Company,  as
                  amended   (Incorporated   by   reference  to  Exhibit  3.1  to
                  Registration  Statement  on Form  S-4  (Registration  No.  333
                  -17269) filed by the Company).

            *3.2  Bylaws of the Company  (Incorporated  by  Reference to Exhibit
                  3.2 to the  Registration  Statement on Form S-4  (Registration
                  No. 333-17269) filed by the Company).

                    4.1 First  Amendment dated September 29, 1998 to the Amended
                  and Restated Credit  Agreement,  dated as of April 1, 1998, by
                  and between  Edge  Petroleum  Corporation  and Edge  Petroleum
                  Exploration  Company  (collectively  the  "Borrower")  and The
                  First  National Bank of Chicago as agent and a Lender  thereto
                  (Incorporated  by Reference to 4.1 to the Company's  Quarterly
                  Report on Form 10-Q for the  quarterly  period ended March 31,
                  1998).

            10.1  Employment  agreement  dated as of  December  19,  1996 by and
                   between the Company and Michael G. Long

            11.1  Computation of Earnings Per Share.

            27.1  Financial Data Schedule.

            *Incorporated by reference as indicated

             (B)  Reports on Form 8-K....................................   None

                                       18
<PAGE>

SIGNATURES



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



                                   EDGE PETROLEUM CORPORATION,
                                     A DELAWARE CORPORATION
                                          (REGISTRANT)



Date           11/12/98                             /S/  John E. Calaway
-------------------------------                  -------------------------------
                                                         John E. Calaway
                                                  Chief Executive Officer and
                                                      Chairman of the Board


Date           11/12/98                            /S/   James D. Calaway
-------------------------------                  -------------------------------
                                                         James D. Calaway
                                                      President and Director


Date           11/12/98                            /S/   Michael G. Long
-------------------------------                  -------------------------------
                                                         Michael G. Long
                                                     Chief Financial Officer


Date           11/12/98                            /S/   Brian C. Baumler
-------------------------------                  -------------------------------
                                                         Brian C. Baumler
                                                     Controller and Treasurer


                                       19