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 June 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 August 12, 1998
         ------------                        ------------------------------
         Common Stock                                  7,772,602


<PAGE>

                                             PART I. FINANCIAL INFORMATION
Item 1. Financial Statements

EDGE PETROLEUM CORPORATION

CONSOLIDATED BALANCE SHEETS
<TABLE>
-----------------------------------------------------------------------------------------------------------------
                                                                                      June 30,     December 31,
                                                                                        1998           1997
                                                                                    -------------- --------------
ASSETS                                                                               (Unaudited)
CURRENT ASSETS:
<S>                                                                                     <C>          <C>
   Cash and cash equivalents                                                            $ 832,529    $ 3,777,950
   Accounts receivable, trade                                                           2,345,005      2,394,497
   Accounts receivable, joint interest owners, net                                      4,892,104      6,547,619
   Receivable from related parties                                                        238,548        385,192
   Other current assets                                                                   486,656        352,571
                                                                                     ------------   ------------
                Total current assets                                                    8,794,842     13,457,829

PROPERTY AND EQUIPMENT, Net - full cost method of accounting
  for oil and natural gas properties                                                   53,727,867     36,662,521

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

OTHER ASSETS                                                                                7,789         17,232
                                                                                     ------------   ------------
TOTAL ASSETS                                                                         $ 66,158,762   $ 53,765,846
                                                                                     ============   ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
   Accounts payable, trade                                                            $ 5,036,693    $ 4,794,037
   Accounts payable to related party                                                                      40,000
   Accrued liabilities                                                                  1,082,132      1,020,645
                                                                                     ------------    -----------
                Total current liabilities                                               6,118,825      5,854,682
                                                                                     ------------    -----------
LONG-TERM DEBT                                                                          8,000,000

DEFERRED INCOME TAXES                                                                   1,350,828
                                                                                     ------------    -----------
                Total liabilities                                                      15,469,653      5,854,682
                                                                                     ------------    -----------
COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS' EQUITY:
   Preferred stock, $.01par value; 5,000,000 shares authorized; none outstanding
   Common stock, $.01par value; 25,000,000 shares authorized; 7,772,602 shares
     issued and outstanding                                                                77,726         77,609
   Additional paid-in capital                                                          47,773,722     47,629,822
   Retained earnings                                                                    6,271,446      3,825,009
   Unearned compensation - restricted stock                                            (3,433,785)    (3,621,276)
                                                                                     ------------   ------------
                Total stockholders' equity                                             50,689,109     47,911,164
                                                                                     ------------   ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                                           $ 66,158,762   $ 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             Six Months Ended
                                                                          June 30,                      June 30,
                                                                 ---------------------------   ---------------------------
                                                                      1998          1997            1998          1997
<S>                                                               <C>           <C>             <C>           <C>
OIL AND NATURAL GAS REVENUES                                      $ 3,849,045   $ 3,016,085     $ 7,634,711   $ 6,457,086

OPERATING EXPENSES:
   Oil and natural gas operating expenses                             871,347       670,825       1,542,531     1,299,238
   Depletion, depreciation and amortization                         1,713,437       562,830       2,900,023     1,178,594
   General and administrative expenses                              1,050,516     1,136,249       1,916,827     2,056,829
   Unearned compensation expense                                      176,456       155,051         331,508       203,289
                                                                  -----------   -----------     -----------    ----------
                Total operating expenses                            3,811,756     2,524,955       6,690,889     4,737,950
                                                                  -----------   -----------     -----------    ----------
OPERATING INCOME                                                       37,289       491,130         943,822     1,719,136

OTHER INCOME AND EXPENSE:
   Interest expense                                                   (12,535)       (1,617)        (12,617)     (181,924)
   Interest income                                                     56,049       391,451         102,259       499,677
                                                                  -----------   -----------     -----------    ----------
NET INCOME BEFORE INCOME TAX (EXPENSE) BENEFIT AND
  CUMULATIVE EFFECT OF ACCOUNTING CHANGE                               80,803       880,964       1,033,464     2,036,889

INCOME TAX (EXPENSE) BENEFIT                                          (33,981)      224,574        (367,862)
                                                                  -----------   -----------     -----------   -----------
NET INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE               46,822     1,105,538         665,602     2,036,889

CUMULATIVE EFFECT OF ACCOUNTING CHANGE                                                            1,780,835
                                                                  -----------   -----------     -----------   -----------
NET INCOME                                                        $    46,822   $ 1,105,538     $ 2,446,437   $ 2,036,889
                                                                  ===========   ===========     ===========   ===========

BASIC EARNINGS PER SHARE:
  Net income before cumulative effect of accounting change             $ 0.01        $ 0.14          $ 0.08        $ 0.30
  Cumulative effect of accounting change                                                               0.23
                                                                       ------        ------          ------        ------
  Basic earnings per share                                             $ 0.01        $ 0.14          $ 0.31        $ 0.30
                                                                       ======        ======          ======        ======
DILUTED  EARNINGS PER SHARE:
  Net income before cumulative effect of accounting change             $ 0.01        $ 0.14          $ 0.08        $ 0.30
  Cumulative effect of accounting change                                                               0.23
                                                                       ------        ------          ------        ------
  Diluted earnings per share                                           $ 0.01        $ 0.14          $ 0.31        $ 0.30
                                                                       ======        ======          ======        ======
BASIC WEIGHTED AVERAGE NUMBER OF
   COMMON SHARES OUTSTANDING                                        7,771,711     7,711,947       7,771,558     6,797,128
                                                                    =========     =========       =========     =========
DILUTED WEIGHTED AVERAGE NUMBER OF
   COMMON SHARES OUTSTANDING                                        7,804,165     7,789,065       7,803,393     6,850,812
                                                                    =========     =========       =========     =========
</TABLE>


See accompanying accompanying notes to consolidated financial statements.




                                       3
<PAGE>


EDGE PETROLEUM CORPORATION

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
------------------------------------------------------------------------------------------------------------------------------------

                                                                                                       Unearned
                                                 Common Stock          Additional                    Compensation-      Total
                                           -------------------------     Paid-in        Retained      Restricted     Stockholders'
                                              Shares        Amount       Capital        Earnings        Stock           Equity
                                           ----------      --------   ------------    -----------   --------------  --------------
BALANCE,
<S>        <C>                              <C>            <C>        <C>             <C>           <C>             <C>
   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
      (unauadited)                             11,733           117        143,900                      (144,017)

   Unearned compensation expense(unaudited)                                                              331,508         331,508

   Net income (unaudited)                                                               2,446,437                      2,446,437
                                           ----------     ---------   ------------    -----------   -------------   ------------
BALANCE,
   JUNE 30, 1998 (unaudited)                7,772,602      $ 77,726   $ 47,773,722    $ 6,271,446   $ (3,433,785)   $ 50,689,109
                                           ==========     =========   ============    ===========   =============   ============
</TABLE>


See accompanying notes to consolidated financial statements.


                                       4
<PAGE>


EDGE PETROLEUM CORPORATION

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

                                                                                                 Six Months Ended
                                                                                                     June 30,
                                                                                           ------------------------------
                                                                                                  1998           1997
CASH FLOWS FROM OPERATING ACTIVITIES:
<S>                                                                                           <C>            <C>
   Net income                                                                                 $ 2,446,437    $ 2,036,889
   Adjustments to reconcile net income to net cash provided by operating activities:
      Cumulative effect of accouning change                                                    (1,780,835)
      Depletion, depreciation and amortization                                                  2,900,023      1,178,594
      Deferred income taxes                                                                       367,862
      Unearned compensation expense                                                               331,508        203,289
   Changes in assets and liabilities:
      Accounts receivable, trade                                                                   49,492     (1,107,589)
      Accounts receivable, joint interest owners, net                                           1,655,515     (3,914,250)
      Receivable from related parties                                                             146,644        (48,799)
      Other current assets                                                                       (134,085)      (295,622)
      Other assets                                                                                  9,443         10,532
      Accounts payable, trade                                                                     242,654      2,807,854
      Accounts payable, related party                                                             (40,000)
      Accrued liabilities                                                                          85,543        114,055
                                                                                              -----------    -----------
                 Net cash provided by operating activities                                      6,280,201        984,953
                                                                                              -----------    -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
   Oil and gas property and equipment purchases                                               (19,961,191)    (6,545,289)
   Proceeds from the sale of oil and gas properties                                             2,735,569        250,000
                                                                                              -----------    -----------
                 Net cash used in investing activities                                        (17,225,622)    (6,295,289)
                                                                                              -----------    -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
  Proceeds from long-term debt                                                                  8,000,000        867,350
  Payment on long-term debt                                                                                  (11,017,348)
  Payment on long-term notes payable                                                                            (387,580)
  Payment on related party subordinated loans                                                                 (1,300,000)
  Net proceeds from issuance of common stock                                                                  41,028,258
                                                                                              -----------   ------------
                Net cash provided by financing activities                                       8,000,000     29,190,680
                                                                                              -----------   ------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS                                           (2,945,421)    23,880,344

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD                                                  3,777,950      1,543,228
                                                                                              -----------   ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD                                                        $ 832,529   $ 25,423,572
                                                                                              ===========   ============

SUPPLEMENTAL CASH FLOW DISCLOSURES - Cash paid for interest, net of amounts capitalized           $ 3,696      $ 256,278

NON-CASH TRANSACTIONS:
  Combination transactions                                                                                   $ 3,599,635
  Deferred offering costs at December 31, 1996 capitalized to equity                                         $ 1,006,379
  Issuance of restricted stock                                                                  $ 144,017    $ 4,134,669
</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  property.  Prior to the change the Company  expensed
       these costs as incurred.  The Company believes that the accounting change
       provides for a better  matching of revenues and expenses and enhances the
       comparability  of its 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 six months  ended June 30, 1998.
       The effect of the  accounting  change on the three  months ended June 30,
       1998 was to increase  net income by  $309,902  ($0.03 per share basic and
       diluted);  the effect of the  accounting  change on the six months  ended
       June 30,  1998 was to increase  net income  before  cumulative  effect of
       accounting change by $574,423 ($0.07 per share basic and diluted) and net
       income by $2,355,258  ($0.30 per share basic and diluted).  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             Six Months Ended
                                                                   June 30,                      June 30,
                                                         ---------------------------   --------------------------
                                                             1998          1997            1998          1997

<S>                                                        <C>         <C>              <C>          <C>
            Net income                                     $ 46,822    $ 1,286,766      $ 665,602    $ 2,389,789
                                                          =========    ===========      =========    ===========
            Basic earnings per share                         $ 0.01         $ 0.17         $ 0.08         $ 0.35
                                                          =========    ===========      =========    ===========
            Diluted earnings per share                       $ 0.01         $ 0.17         $ 0.08         $ 0.35
                                                          =========    ===========      =========    ===========
            Basic weighted average number of
             common shares outstanding                    7,771,711      7,711,947      7,771,558      6,797,128
                                                          =========    ===========      =========    ===========
            Diluted weighted average number of
             common shares outstanding                    7,804,165      7,789,065      7,803,393      6,850,812
                                                          =========    ===========      =========    ===========
</TABLE>

                                       6
<PAGE>

          The effect of the  accounting  change on the results of operations for
     the three months ended March 31, 1998 is as follows:
<TABLE>

                                                Three Months Ended
                                                  March 31, 1998
                                                 ----------------

<S>                                                  <C>
     Net income as originally reported               $ 358,466

     Effect of accounting change                       260,231
                                                   -----------
     Income before cumulative effect of
       accounting change                               618,697

     Cumulatiove effect on prior years of
       accounting change                             1,780,835
                                                   -----------
     Net income as restated                        $ 2,399,532
                                                   ===========
     PER SHARE AMOUNTS:

          Basic Earnings Per Share:

     Net income as originally reported                 $ 0.05
     Effect of accounting change                         0.03
                                                       ------
     Income before cumulative effect of
       accounting change                                 0.08

     Cumulative effect on prior years of
       accounting change                                 0.23
                                                       ------
     Net income as restated                            $ 0.31
                                                       ======
     Diluted Earnings Per Share:

     Net income as originally reported                 $ 0.05
     Effect of accounting change                         0.03
                                                       ------
     Income before cumulative effect of
       accounting change                                 0.08

     Cumulative effect on prior years of
      accounting change                                  0.23
                                                       ------
     Net income as restated                            $ 0.31
                                                       ======
</TABLE>

2.     NOTES PAYABLE AND 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.

              At June 30,  1998,  borrowings  under  this  facility  totaled  $8
       million with approximately $5.95 million available for future borrowings.
       The weighted average interest rate during the three months ended June 30,
       1998 was approximately 7.2%. There were no borrowings under the Revolving
       Credit Facility during the first quarter of 1998.

              The Revolving Credit Facility  provides for certain  restrictions,
       including but not limited to,  limitations  on additional  borrowings and


                                       7
<PAGE>

       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  (SFAS)  No.  128  -  "Earnings  per  Share,"  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.

              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 June 30, 1998            Three Months Ended Jun 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                 $    46,822     7,771,711      $ 0.01      $ 1,105,538     7,711,947      $ 0.14

Effect of Dilutive Securities
  Common stock options                            32,454                                     77,118
                               -----------     ---------     -------      -----------     ---------     -------
Diluted EPS
Income available to common
  stockholders                 $    46,822     7,804,165      $ 0.01      $ 1,105,538     7,789,065      $ 0.14
                               ===========     =========     =======      ===========     =========     =======

                                   Six Months Ended June 30, 1998             Six Months Ended June 30, 1997
                               -------------------------------------      -------------------------------------

                                  Income       Shares      Per-Share         Income       Shares      Per-Share
                               (Numerator)  (Denominator)    Amount       (Numerator)  (Denominator)    Amount
                               -----------  -------------  ---------      -----------  -------------  ---------
Basic EPS
Income available to common
  stockholders                 $ 2,466,437     7,771,558      $ 0.31      $ 2,036,889     6,797,128      $ 0.30

Effect of Dilutive Securities
  Common stock options                            31,835                                     53,684
                               -----------     ---------     -------      -----------     ---------     -------
Diluted EPS

Income available to common
  stockholders                 $ 2,466,437     7,803,393      $ 0.31      $ 2,036,889     6,850,812      $ 0.30
                               ===========     =========     =======      ===========     =========     =======
</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 six months ended June 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 267,000  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 that 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  with  deeper  targets.  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 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,  effective  Aptil 1, 1998,
certain payroll and other internal costs are  capitalized in a "full-cost  pool"
as incurred (See ntoe 1). 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  futurenet  after-tax  cash flows  from  proved  oil and  natural  gas


                                       9
<PAGE>

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 June 30, 1998 no write down of oil and natural gas  properties  was deemed
necessary.

      Due to the  instability  of oil and natural  gas  prices,  the Company has
entered into, from time to time, price risk management transactions (e.g., swaps
and  collars)  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 six months  ended
June 30, 1998, the Company had in place three natural gas commodity collars with
a financial  institution,  expiring on January 31,  April 30, and June 30, 1998,
respectively. These collars covered 5,000-10,000 MMbtu per day, or approximately
45% 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 1,060,000 Mmbtu and
1,510,000 Mmbtu,  respectively,  for the three-month and six-month periods ended
June 30, 1998.  Included within natural gas revenues for the three and six month
periods ended June 30, 1998 were $30,000 and $66,700, respectively, representing
net gains from current collar  activity.  Additionally,  during the three months
ended June 30, 1998,  the Company has entered into a collar  arrangement  with a
financial  institution that begins and expires on July 1, 1998 and September 30,
1998, respectively.  This collar arrangement covers 10,000 MMbtus per day with a
floating  floor and ceiling  price  ranging  between  $2.25 and $2.88 per MMbtu.
There was no material  hedging  activity during the three and six-month  periods
ended June 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.  The energy markets have  historically
been very  volatile,  and there can be no  assurance  that oil and  natural  gas
prices will not be subject to wide  fluctuations in the future.  Oil prices have
declined  significantly  during the past year. A substantial or extended decline
in oil and  natural  gas  prices  could  have a  material  advers  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 June 30, 1998 Compared to the Three Months Ended June 30,
1997

Revenue and Production

      Oil and  natural gas  revenues  for the three  months  ended June 30, 1998
increased 28% from $3 million to $3.8  million,  as compared to the three months
ended June 30, 1997.  Production  volumes for oil and  condensate  for the three
months ended June 30, 1998  increased 8% from 37 MBbls to 39 MBbls,  as compared
to the three  months ended June 30,  1997.  The  increase in oil and  condensate
production  during the three  months ended June 30, 1998  increased  revenues by
$51,961  (based on 1997  comparable  quarter  average  prices),  offset by a 36%
decrease in the average oil and condensate sales price which decreased  revenues
by  $261,675  (based on current  quarter  production).  Production  volumes  for
natural gas for the three  months ended June 30, 1998  increased  25% from 1,213
MMcfs to 1,520 MMcfs,  as compared to the three months ended June 30, 1997.  The
increase in natural gas  production  during the three months ended June 30, 1998
increased  revenues by  $594,838,  further  increased  by a 16%  increase in the
average  natural gas sales  price which  increased  revenues  by  $447,836.  The
increase in oil and natural gas  production was primarily due to 76 gross (33.62
net)  new  successful  exploratory  and  development  wells  being  drilled  and
completed since June 30, 1997 offset by normal production declines from existing
wells. During the three months ended June 30, 1998 and 1997 the Company marketed


                                      10
<PAGE>

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  $2.10 and $1.98 for the three  months  ended  June 30,  1998 and 1997,
respectively.  Total production,  (net to the Company's interest) marketed under
these  agreements for the  three-month  periods ended June 30, 1998 and June 30,
1997 was approximately 373,000 Mcf and 337,000 Mcf,  respectively,  representing
approximately 21% and 24%, respectively,  of total production,  on a Mcfe basis.
As described  above,  included  within natural gas revenues for the three months
ended June 30, 1998 was $30,000 representing gains from current collar activity.
The  collar  settlement  increased  the  effective  natural  gas sales  price by
approximately  $0.02 per Mcf, or 1%, for the  three-months  ended June 30, 1998.
There was no material  hedging  activity  during the three months ended June 30,
1997.

         The following table sets forth certain  operational data of the Company
for the periods presented:
<TABLE>

                                                 Three Months Ended            1998 Period Compared
                                                       June 30,                   to 1997 Period
                                            ----------------------------     ------------------------
                                                                               Increase   % Increase
                                                1998            1997          (Decrease)   (Decrease)
Production volumes:
<S>                                              <C>             <C>             <C>           <C>
   Oil and condensate (Bbls)                     39,351          36,532          2,819         8 %
   Natural gas (Mcf)                          1,520,368       1,212,502        307,866        25 %

   Natural gas equivalents (Mcfe)             1,756,474       1,431,694        324,780        23 %

Average sales prices:
   Oil and condensate ($ per Bbl)               $ 11.78         $ 18.43        $ (6.65)      (36)%
   Natural gas ($ per Mcf)                         2.23            1.93           0.30        16 %

Operating revenues:
   Oil and condensate                         $ 463,658       $ 673,372     $ (209,714)      (31)%
   Natural gas                                3,385,387       2,342,713      1,042,674        45 %
                                            -----------     -----------     ----------
Total                                       $ 3,849,045     $ 3,016,085      $ 832,960        28 %
                                            ===========     ===========     ==========
</TABLE>

Costs and Operating Expenses

       Oil and natural gas  operating  expenses  for the three months ended June
30, 1998 increased 30% from $670,825 to $871,347 as compared to the three months
ended June 30, 1997, due primarily to increased oil and natural gas  production.
Oil and natural gas  operating  expenses  were $0.50 per Mcfe and $0.47 per Mcfe
for the three-month periods ended June 30, 1998 and 1997, respectively.

       Depletion,  depreciation and amortization  expense ("DD&A") for the three
months ended June 30, 1998  increased  204% from  $562,830 to $1.7  million,  as
compared to the three months ended June 30, 1997.  Included  within DD&A for the
three-month  periods ended June 30, 1998 and 1997 was $1.5 million and $477,565,
respectively,  representing  depletion  expense of oil and natural gas property,
which  increased by 220%.  Increased  oil and natural gas  production  increased
depletion  expense by $108,336 and a 164% increase in the overall depletion rate
further increased  depletion expense by $943,259.  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. The depletion rate also increased as a result of increased cost associated
with  reserve  additions  since June 30,  1997.  Depletion  expense  was further
increased by approximately  $171,000 during the three months ended June 30, 1998
due to the change in  accounting  (See note 1).  Depletion  expense on a unit of
production  basis for the  three-month  periods ended June 30, 1998 and 1997 was
$0.87 per Mcfe and $0.33 per Mcfe, respectively.  The remaining increase in DD&A
is due primarily to depreciation of new computer  hardware,  software and office
improvements purchased since June 30, 1997 and the amortization of deferred loan
cost on the new Credit Facility.

       General and  administrative  expenses  ("G&A") for the three months ended
June 30, 1998  decreased 8% from  $1,136,249 to  $1,050,516,  as compared to the


                                       11
<PAGE>

three months  ended June 30,  1997.  The decrease in G&A is due to the change in
accounting  principle,  which decreased G&A by $654,777 (See note 1).  Excluding
the effects of the change in  accounting  principle,  G&A  increased by $569,044
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.  Included within
general and administrative expenses for the three months ended June 30, 1998 and
1997,  is  approximately  $224,000  and  $159,000,   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 June 30, 1998 and 1997 were
$0.60 per Mcfe and $0.79 per Mcfe, respectively.

       Unearned  compensation  expense for the three  months ended June 30, 1998
increased from $155,051 to $176,456,  as compared to the three months ended June
30,  1997.  The increase is due to the  amortization  of  additional  restricted
common stock  granted to  employees  and to  nonemplyee  members of the Board of
Directors of the Company during 1998.

       Interest  expense for the three  months  ended June 30, 1998 was $12,535,
net of amounts  capitalized  of  $65,484,  as  compared  to $1,617 for the three
months  ended  June  30,  1997.  The  increase  in  interest  expense  is due to
borrowings  under the Company's  Credit Facility  during the three-month  period
ended  June 30,  1998.  There was no  significant  debt  outstanding  during the
three-month period ended June 30, 1997.

        Interest  income for the three months ended June 30, 1998 decreased from
$391,451 to $56,049,  as compared to the three months  ended June 30, 1997.  The
decrease in interest income is due to the overall reduction in invested funds.

       Income tax expense  for the three  months  ended June 30, 1998  increased
from a tax benefit of  $224,574  to tax  expense of $33,981,  as compared to the
three  months ended June 30, 1997.  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 June 30,  1998,  the Company  had  operating
income of $37,289  compared to operating  income of $491,130 for the three month
period ended June 30, 1997,  primarily  reflecting increased oil and natural gas
production  and lower  general  and  administrative  expenses as a result of the
accounting  change  offset  by lower oil and  condensate  prices  and  increased
operating expenses. Net income  was $46,822 for the  three months ended June 30,
1998 as compared to net income of $1.1 million for the three-month period ended
June 30, 1997.

The Six Months Ended June 30, 1998 Compared to the Six Months Ended June 30,
1997

      Oil and  natural  gas  revenues  for the six months  ended  June 30,  1998
increased 18% from $6.5 million to $7.6  million,  as compared to the six months
ended June 30,  1997.  Production  volumes  for oil and  condensate  for the six
months ended June 30, 1998 increased 24% from 66 MBbls to 81 MBbls,  as compared
to the six months  ended  June 30,  1997.  The  increase  in oil and  condensate
production  increased  revenues by  $323,550  (based on 1997  comparable  period
average  prices),  and a 37% decrease in average oil and condensate  sales price
decreased  revenue by $616,985  (based on current year  production).  Production
volumes for  natural  gas  increased  27% from 2,235  MMcfs to 2,843  MMcfs,  as
compared  to the six months  ended June 30,  1997.  The  increase in natural gas
production  increased  revenues  by  $1.4  million,  further  increased  by a 1%
increase in average natural gas sales price which increased revenues by $75,132.
This increase in oil and natural gas  production was due to 76 gross (33.62 net)
new successful  exploratory  and  development  wells being drilled and completed
since June 30, 1997 offset by normal  production  declines from existing  wells.
During the six months  ended June 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  $2.13 and  $2.19  for the six  months  ended  June 30,  1998 and 1997,
respectively. Total volume sold by the Company under these contracts for the six
month  period  ended June 30,  1998 and 1997 was  approximately  706,000 Mcf and


                                       12
<PAGE>

671,000 Mcf, respectively, representing approximately 21% and 26%, respectively,
of total  production,  on a Mcfe basis.  As  described  above,  included  within
natural  gas  revenues  for the six  months  ended  June 30,  1998  was  $66,700
representing  gains  from  current  collar  activity.   The  collar  settlements
increased the effective natural gas sales price by approximately  $0.02 per Mcf,
or 1%, for the six months  ended June 30,  1998.  There was no material  hedging
activity during the six months ended June 30, 1997.

      The following table sets forth certain operational data of the Company for
the periods presented:
<TABLE>

                                                  Six Months Ended            1998 Period Compared
                                                       June 30,                   to 1997 Period
                                            ----------------------------    ------------------------
                                                                               Increase   % Increase
                                                1998            1997          (Decrease)   (Decrease)
Production volumes:
<S>                                              <C>             <C>            <C>           <C>
   Oil and condensate (Bbls)                     81,482          65,571         15,921        24 %
   Natural gas (Mcf)                          2,843,391       2,234,666        608,725        27 %

   Natural gas equivalents (Mcfe)             3,332,343       2,628,092        704,251        27 %

Average sales prices:
   Oil and condensate ($ per Bbl)               $ 12.75         $ 20.32        $ (7.57)      (37)%
   Natural gas ($ per Mcf)                         2.32            2.29           0.03         1 %

Operating revenues:
   Oil and condensate                       $ 1,039,114     $ 1,332,549    $  (293,435)      (22)%
   Natural gas                                6,595,597       5,124,537      1,471,060        29 %
                                            -----------     -----------    -----------
Total                                       $ 7,634,711     $ 3,016,085    $ 1,177,625        18 %
                                            ===========     ===========    ===========
</TABLE>

Costs and Operating Expenses

      Oil and natural gas  operating  expenses for the six months ended June 30,
1998  increased  19% from $1.3 million to $1.5  million,  as compared to the six
months ended June 30,  1997,  due  primarily  to  increased  oil and natural gas
production. Oil and natural gas operating expenses on a unit of production basis
were $0.46 per Mcfe and $0.49 per Mcfe for the six-month  periods ended June 30,
1998 and 1997, respectively.

       Depletion,  depreciation  and  amortization  expense ("DD&A") for the six
months ended June 30, 1998 increased 146% from $1.2 million to $2.9 million,  as
compared to the six months  ended June 30,  1997.  Included  within DD&A for the
six-month  periods  ended  June 30,  1998 and  1997  was $2.5  million  and $1.0
million,  respectively,  representing  depletion  expense of oil and natural gas
property,  which  increased by 152%.  Increased  oil and natural gas  production
increased  depletion  expense by  $271,738  and a 97%  increase  in the  overall
depletion rate further increased depletion expense by $1.3 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.  The  depletion  rate  also  increased  as a result of
increased cost associated with reserve additions since June 30, 1997.  Depletion
expense was further  increased by  approximately  $311,000 during the six months
ended June 30,  1998 due to the  change in  accounting  (See note 1).  Depletion
expense on a unit of production  basis for the six-month  periods ended June 30,
1998 and 1997 was $0.77 per Mcfe and $0.39 per Mcfe, respectively. The remaining
increase in DD&A is due  primarily to  depreciation  of new  computer  hardware,
software  and  office  improvements  purchased  since  June  30,  1997  and  the
amortization of deferred loan cost on the new Credit Facility.

       General and  administrative  expenses  for the six months  ended June 30,
1998  decreased  7% from $2.1 million to $1.9  million,  as compared to the six
months  ended  June  30,  1997.  The  decrease  in G&A is due to the  change  in
accounting principle,  which decreased G&A by $1,194,742 (See note 1). Excluding
the effects of the change in accounting principle, G&A increased by $1.1 million
which was primarily attributable to additional  administrative  staffing and the


                                       13
<PAGE>

hiring of  additional  employees  to support the  Company's  increased  level of
drilling  activities  and 3-D project  generation.  Included  within general and
administrative  expenses  for the six months  ended June 30,  1998 and 1997,  is
approximately $424,000 and $393,000,  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  six-month  periods ended June 30, 1998 and 1997 were $0.58 per Mcfe and
$0.78 per Mcfe,  respectively.  The Company expects  general and  administrative
expenses on a per unit of  production  basis to  generally  decline over time as
expected production increases.

       Unearned  compensation  expense  for the six months  ended June 30,  1998
increased  from  $203,281 to $331,508,  as compared to the six months ended June
30,  1997.  The increase is due to the  amortization  of  additional  restricted
common stock  granted to employees  and to  nonemployee  members of the Board of
Directors of the Company during 1998,  further increased due to the amortization
of restricted stock granted to executives at the time of the Combination,  which
was effective March 3, 1997.

      Interest  expense for the six months ended June 30, 1998 was $12,617,  net
of  interest  capitalized  to oil and  natural gas  properties  of  $65,484,  as
compared  to  $181,924  for the six months  ended June 30,  1997.  The  weighted
average debt was $2.2 million for the six months ended June 30, 1998 compared to
$4.1 million for the six months ended June 30, 1997.

       Interest  income for the six  months  ended  June 30,  1998 was  $102,259
compared to $499,677  for the six months  ended June 30,  1997.  The decrease in
interest income is due to the overall reduction in invested funds.

       Income tax expense for the six months  ended June 30, 1998 was  $367,862.
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 six months ended June 30, 1998,  the Company had operating  income
of $943,822  compared  to  operating  income of $1.7  million for the six months
ended  June  30,  1997,  primarily  reflecting  increased  oil and  natural  gas
production  and lower  general  and  administrative  expenses as a result of the
accounting  change,  offset by lower oil and  condensate  prices  and  increased
operating  expenses.  Net income was $2.4 million,  $665,602  before  cumulative
effect of accounting  change, for the six months ended June 30, 1998 as compared
to net income of $2 million for the six months ended June 30, 1997.

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 June 30, 1998 of $832,529
consisting primarily of short-term money market investments, as compared to $3.8
million at December 31, 1997. Working capital was $2.7 million at June 30, 1998,
as compared to $7.6 million at December 31, 1997.

         Operating cash flow before changes in working capital was approximately
$4.3 million and $3.4 million for the six-month  periods ended June 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.

                                       14
<PAGE>

         During the six months  ended June 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 six months ended June 30, 1998
were $19.9  million as compared to $6.5 million  during the same period in 1997.
The Company's  drilling  efforts resulted in the drilling of 50 gross (23.9 net)
wells  during the six months  ended June 30, 1998 as compared to 42 gross (16.31
net)  wells  during  the  same  period  in 1997.  The  Company  expects  capital
expenditures in 1998 to be about $32 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
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 the 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 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.

         At June 30, 1998,  borrowings  under this  facility  totaled $8 million
with approximately  $5.95 million available for future borrowings.  The weighted
average  interest  rate  during  the  three  months  ended  June  30,  1998  was
approximately 7.2%. There were no borrowings under the Revolving Credit Facility
during the first quarter of 1998.

         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.

                                       15
<PAGE>

YEAR 2000

         The Company has evaluated the impact of the year 2000 processing issues
considering  current financial and accounting,  production,  land and geological
computer  systems and software  utilized by the  Company.  The Company is in the
process of replacing its existing financial and accounting,  production and land
applications  with  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.  The Company's geological systems and software are year
2000  compliant.  The  Company  currently  anticipates  that it will not incur a
material  disruption of operations  relating to year 2000 processing  issues but
there can be no assurance that the Company will not incur  unexpected  year 2000
costs or be adversely  affected by year 2000 issues of its suppliers,  customers
and other entities.

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 April 1, 1998, the Company expensed these
costs as incurred.  The Company believes that 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.

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,  general  and
administrative  expenses on a per unit of production  basis,  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,  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.

                                       16
<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 - .................

         (A) Annual Meeting of Shareholders on May 22, 1998. (C) Set forth below
         are the results of the voting with respect to each matter acted upon at


<TABLE>
                                                                                                Broker
                                                  For      Against     Withheld     Abstain    Non votes
                                                -------    -------     --------     -------    ---------
         Election of Directors:
<S>                                            <C>          <C>         <C>           <C>          <C>
            Stanley S. Raphael                 5,338,104               50,047
            Robert W. Shower                   5,338,404               49,747
            William H. White                   5,337,904               50,247

         Approval of the Appointment
            of Deloitte and Touche LLP
            as Independent Public
            Accountants                        5,372,392    6,927                     8,832

            Approval of the Increase in
               the shares of Common
               Stock Reserved under
               the Company's 1997
               Incentive Plan                  5,129,323  221,044                    37,784
</TABLE>

         In addition to the election of the directors indicated above, the
         term of the office of the following directors continued as directors
         following the meeting:  John E. Calaway, James D. Calaway, Vincent
         Andrews, David B. Benedict, Nils P. Perterson and John Sfondrini.

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


                                       17
<PAGE>

                  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  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 Compass Bank, a Texas state chartered banking institution,
                  as Agent for itself and The First National Bank of Chicago and
                  other lenders party 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).

             *4.2 Security Agreement,  dated as of April 1, 1998, by and between
                  Edge  Petroleum  Corporation  and Edge  Petroleum  Exploration
                  Company  (collectively the "Debtor") and Compass Bank, a Texas
                  state chartered banking  institution,  as Agent for itself and
                  The First  National  Bank of Chicago and other  lenders  party
                  thereto the Credit Agreement (Incorporated by Reference to 4.2
                  to the  Company's  Quarterly  Report  on  Form  10-Q  for  the
                  quarterly period ended March 31, 1998).

             *4.3 Security Agreement (Stock Pledge),  dated as of April 1, 1998,
                  by and between Edge Petroleum  Corporation (the "Pledgor") and
                  Compass Bank, a Texas state chartered banking institution,  as
                  Agent for itself and The First  National  Bank of Chicago  and
                  other lenders party thereto the Credit Agreement (Incorporated
                  by Reference to 4.34 to the Company's Quarterly Report on Form
                  10-Q  for  the   quarterly   period  ended  March  31,  1998).
                  (Incorporated  by Reference to 4.2 to the Company's  Quarterly
                  Report on Form 10-Q for the  quarterly  period ended March 31,
                  1998).

            11.1  Computation of Earnings Per Share.

            18.1  Preferability  letter of Deloitte  and Touche LLP on Change in
                  Accounting Principle.

            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           8/14/98                             /S/   John E. Calaway
-------------------------------                  -------------------------------
                                                         John E. Calaway
                                                  Chief Executive Officer and
                                                      Chairman of the Board


Date           8/14/98                            /S/    James D. Calaway
-------------------------------                  -------------------------------
                                                         James D. Calaway
                                                      President and Director


Date           8/14/98                            /S/    Michael G. Long
-------------------------------                  -------------------------------
                                                         Michael G. Long
                                                    Chief Financial Officer


Date           8/14/98                            /S/    Brian C. Baumler
-------------------------------                 -------------------------------
                                                         Brian C. Baumler
                                                     Controller and Treasurer


                                       19