<PAGE>   1
================================================================================

                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                   FORM 10-K

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

                    For the Fiscal Year Ended December 31, 1996

                                         OR

   [ ]            TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
              OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)

                          COMMISSION FILE NO. 0-19279

                        EVERFLOW EASTERN PARTNERS, L.P.
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

             DELAWARE                                         34-1659910
   (STATE OR OTHER JURISDICTION OF                         (I.R.S. EMPLOYER
    INCORPORATION OR ORGANIZATION)                        IDENTIFICATION NO.)

         585 WEST MAIN STREET
             P.O. BOX 629
            CANFIELD, OHIO                                       44406
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)                      (ZIP CODE)

       REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (330) 533-2692

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

                                                         NAME OF EACH EXCHANGE
         TITLE OF EACH CLASS                              ON WHICH REGISTERED
         -------------------                              -------------------

                                      None

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

                     Units of Limited Partnership Interest
                     -------------------------------------

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

        There are 5,061,576 Units of limited partnership interest held by
non-affiliates of the Registrant as of March 20, 1997. The Units generally do
not have any voting rights, but, in certain circumstances, the Units are
entitled to one vote per Unit.



        Except as otherwise indicated, the information contained in this Report
is as of December 31, 1996.
<PAGE>   2




                                     PART I
                                     ------

ITEM 1.         BUSINESS
------------------------

Introduction
------------

                  Everflow Eastern Partners, L.P. (the "Company"), a Delaware
limited partnership, engages in the business of oil and gas exploration and
development. The Company was formed for the purpose of consolidating the
business and oil and gas properties of Everflow Eastern, Inc., an Ohio
corporation ("EEI"), and the oil and gas properties owned by certain limited
partnerships and working interest programs managed or operated by EEI (the
"Programs"). Everflow Management Company, an Ohio general partnership, is the
general partner of the Company.

                  EXCHANGE OFFER. The Company made an offer (the "Exchange
Offer") to acquire the common shares of EEI (the "EEI Shares") and the interests
of investors in the Programs (collectively the "Interests") in exchange for
units of limited partnership interest (the "Units"). The Exchange Offer was made
pursuant to a Registration Statement on Form S-1 declared effective by the
Securities and Exchange Commission on December 19, 1990 (the "Registration
Statement") and the Prospectus dated December 19, 1990 as filed with the
Commission pursuant to Rule 424(b).

                  The Exchange Offer terminated on February 15, 1991 and holders
of Interests with an aggregate value (as determined by the Company for purposes
of the Exchange Offer) of $66,996,249 accepted the Exchange Offer and tendered
their Interests. Effective on such date, the Company acquired such Interests,
which included partnership interests and working interests in the Programs, and
all of the outstanding EEI Shares. Of the Interests tendered in the Exchange
Offer, $28,565,244 was represented by the EEI Shares and $38,431,005 by the
remaining Interests.

                  The parties who accepted the Exchange Offer and tendered their
Interests received an aggregate of 6,632,464 Units. Everflow Management Company,
as General Partner of the Company, contributed Interests with an aggregate
Exchange Value of $670,980 in exchange for a 1% interest in the Company.

                  THE COMPANY. The Company was organized in September, 1990. The
principal executive offices of the Company, Everflow Management Company and EEI
are located at 585 West Main Street, Canfield, Ohio 44406 (telephone number
(330)533-2692).

General
-------

                  This Annual Report on Form 10-K contains forward-looking
statements which involve risks and uncertainties. The Company's actual results
may differ significantly from the results discussed in the forward-looking
statements. Factors that may cause such a difference include, but are not
limited to, the competition within the oil and gas industry, the price of oil
and gas in the Appalachian Basin area, the number of Units tendered pursuant to
the Repurchase Right and the ability to locate productive oil and gas prospects
for development by the Company.

Description of the Business
---------------------------

                  GENERAL. Following the consummation of the Exchange Offer, the
Company has participated on an on-going basis in the acquisition and development
of undeveloped oil and gas properties and has pursued the acquisition of
producing oil and gas properties.



                                      -1-
<PAGE>   3


                  SUBSIDIARIES. The Company has two subsidiaries. EEI was
organized as an Ohio corporation in February, 1979 and, since the consummation
of the Exchange Offer, has been a wholly-owned subsidiary of the Company. EEI is
engaged in the business of drilling, developing and operating oil and gas
properties and acting as the general partner or sponsor of the Programs. Prior
to the consummation of the Exchange Offer, EEI had acted as general contractor
in the drilling and completion of more than 550 wells and had served as operator
of more than 650 producing wells, the substantial majority of which are located
in the State of Ohio.

                  Everflow Nominee, Inc. ("Everflow Nominee") was organized as
an Ohio corporation in May 1987 and is a wholly-owned subsidiary of EEI and is
indirectly controlled by the Company. Everflow Nominee's sole business is to
serve as a nominee and agent to hold legal or record title to working interests
in drillsites developed by the Programs since 1987. Everflow Nominee, as nominee
of and agent for various Programs, holds the legal or record title to the
working interests in drillsites and wells beneficially owned by certain of the
Programs.

                  A-1 Storage of Canfield, Ltd. ("A-1 Storage") was organized an
Ohio Limited Liability Company in late 1995 and is 99% owned by the Company and
1% owned by EEI. A-1 Storage's business includes leasing of office space to the
Company as well as rental of storage units to non-affiliated parties.

                  CURRENT OPERATIONS. The properties acquired in the Exchange
Offer consist in large part of fractional undivided working interests in
properties containing Proved Reserves of oil and gas located in the Appalachian
Basin region of Ohio and Pennsylvania. Approximately 84% of the estimated future
gross cash flow from the oil and gas properties owned by the Company are
attributable to natural gas reserves. The substantial majority of such
properties are located in Ohio and consist primarily of proved producing
properties with established production histories.

                  The Company's operations since February 1991, following
consummation of the Exchange Offer, primarily involve the production and sale of
oil and gas from the properties acquired pursuant to the Exchange Offer and the
drilling and development of an additional 174 (net) wells. The Company serves as
the operator of approximately 60% of the gross wells and 75% of the net wells
which comprise the Company's properties.

                  The Company expects to hold its producing properties acquired
pursuant to the Exchange Offer until the oil and gas reserves underlying such
properties are substantially depleted. However, the Company may from time to
time sell any of its producing or other properties or leasehold interests if the
Company believes that such sale would be in its best interest.

                  BUSINESS PLAN. The Company intends to conduct its business to
enable it to maintain and possibly expand its reserve base. In order to further
this plan, the Company primarily intends to acquire and subsequently drill and
develop non-producing oil and gas properties and possibly acquire producing oil
and gas properties. Based on the current costs of drilling and development
activities, the current prices of oil and gas, and EEI's historical experience
with regard to finding oil and gas in commercially productive quantities as well
as estimates for such costs, prices and success rates in the immediate future,
the Company estimates it will need to acquire and drill approximately 25 to 35
(net) wells each year to maintain and possibly expand its reserve base. See
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS."

                  ACQUISITION OF PROSPECTS. The Company, through its
wholly-owned subsidiary EEI, maintains a leasehold inventory from which Everflow
Management Company will select oil and gas prospects for development by the
Company. EEI makes additions to such leasehold inventory on an ongoing basis.
The Company may also acquire leases from third parties. Historically, EEI
generated approximately 90% of the prospects which were drilled by the


                                      -2-
<PAGE>   4


Programs. The Company expects EEI's ability to generate drilling prospects
internally to continue in order to further the Company's activities. EEI's
current leasehold inventory consists of approximately 164 prospects in various
stages of maturity representing approximately 2,800 net acres under lease.

                  In choosing oil and gas prospects for the Company, Everflow
Management Company does not attempt to manage the risks of drilling through a
policy of selecting diverse prospects in various geographic areas or with the
potential of oil and gas production from different geological formations.
Rather, substantially all prospects are expected to be located in the
Appalachian Basin of Ohio (and, to a lesser extent, Pennsylvania) and to be
drilled primarily to the Clinton/Medina Sands geological formation or closely
related oil and gas formations in such area.

                  ACQUISITION OF PRODUCING PROPERTIES. As a potential means of
increasing its reserve base, the Company expects to evaluate opportunities which
it may be presented with to acquire oil and gas producing properties from third
parties in addition to its ongoing leasehold acquisition and development
activities. To date, the Company has acquired only a very limited amount of
producing oil and gas properties.

                  The Company will continue to evaluate properties for
acquisition. Such properties may include, in addition to working interests,
royalty interests, net profit interests and production payments, other forms of
direct or indirect ownership interests in oil and gas production, and properties
associated with the production of oil and gas. The Company also may acquire
general or limited partner interests in general or limited partnerships and
interests in joint ventures, corporations or other entities that have, or are
formed to acquire, explore for or develop, oil and gas or conduct other
activities associated with the ownership of oil and gas production.

                  FUNDING FOR ACTIVITIES. The Company finances its current
operations and proposed undeveloped leasehold acquisition activities through
cash generated from operations and the proceeds of borrowings. Historically, EEI
had relied upon the formation of investor drilling programs to fund a portion of
its operations; but to date, the Company has elected not to pursue such
activities. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - Results of Operations."

                  The Company is permitted to incur indebtedness for any
partnership purpose. It is currently anticipated that any such indebtedness will
consist primarily of borrowings from commercial banks. The Company and EEI has a
revolving credit facility with Bank One, Texas, National Association, pursuant
to which it had borrowed up to $4,800,000 in 1996 with a principal indebtedness
of $1,700,000 outstanding as of March 20, 1997. See "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Liquidity and
Capital Resources."

                  Although the Partnership Agreement does not contain any
specific restrictions on borrowings, the Company has no specific plans to borrow
to acquire any producing oil and gas properties. The Company expects that
borrowings may be made to acquire undeveloped acreage for future drilling and
development and to fund the Company's costs of drilling and completing wells. In
addition, the Company could borrow funds to enable it to repurchase any Units
tendered in connection with the Repurchase Right. See "MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Liquidity and
Capital Resources."

                  The Company has a substantial amount of oil and gas reserves
which have not been pledged as collateral for its existing loans. The Company
generally would not expect to borrow funds, from whatever source, in excess of
40% of its total Proved Reserves (as determined using the Company's Standardized
Measure of Discounted Future Net Cash Flows), although there can


                                      -3-
<PAGE>   5


be no  assurance  that  circumstances  would not lead to the  necessity  of
borrowings in excess of this amount. Based upon its current business plan,
management has no present intention to have the Company borrow in excess of this
amount. The Company has estimated Proved and Proved Developed Reserves,
determined as of December 31, 1996, which aggregate $50,507,000 (Standardized
Measure of Discounted Future Net Cash Flows) with $4,000,000 of bank debt under
the revolving credit facility (as of such date).

Marketing
---------
 
                 The ability of the Company to market oil and gas found in and
produced on its properties will depend on many factors beyond its control, the
effect of which cannot be accurately anticipated or predicted. These factors
include, among others, the amount of domestic oil and gas production and foreign
imports available from other sources, the capacity and proximity of pipelines,
governmental regulations, and general market demand.

                  OIL. Any oil produced from the properties can be sold at the
prevailing field price to one or more of a number of unaffiliated purchasers in
the area. Generally, purchase contracts for the sale of oil are cancelable on 30
days' notice. The price paid by these purchasers is generally an established or
"posted" price which is offered to all producers. All posted prices in the areas
where the Company's properties are located are generally somewhat lower than the
spot market prices, although there have been substantial fluctuations in crude
oil prices in recent years.

                  The price of crude oil has decreased since the end of the
conflict in the Persian Gulf in March 1991, dropping from a high of $28.50 per
barrel in January 1991 to $13.50 in December 1993 and $22.50 in December 1996.
As of March 20, 1997 the posted field price in the Appalachian Basin area, the
Company's principal area of operation, was $17.75 per barrel of oil. There can
be no assurance that prices will not be subject to continual fluctuations.
Future oil prices are difficult to predict because of the impact of worldwide
economic trends, supply and demand variables, and such non-economic factors as
the political impact on pricing policies by the Organization of Petroleum
Exporting Countries ("OPEC") and the possibility of supply interruptions. To the
extent prices which the Company receives for its crude oil production decline or
remain at current levels, the Company's revenues from oil production will be
reduced accordingly.

                  Beginning in January 1993, the Company began selling the
majority of its crude oil production to Quaker State under the terms of the
Quaker State Full Load Crude Oil Purchase Agreement. This agreement provided the
Company with a $0.40 per barrel premium price for 80 net barrel minimum
quantities and an $0.80 per barrel premium price for 160 net barrel minimum
quantities. The term of the agreement was three years and included substantially
all of the Company's Appalachian Basin oil production. The nature of the
business has now made the provisions of this agreement customary for crude oil
production purchased in the Appalachian Basin. As a result, the Company
continues to receive pricing consistent with the terms of the agreement without
a formal agreement in place.

                  NATURAL GAS. The deliverability and price of natural gas is
subject to various factors affecting the supply and demand of natural gas as
well as the effect of federal regulations. During the past several years, there
has been a surplus of natural gas available for delivery to pipelines and other
purchasers. This oversupply, reduced demand due to economic conditions and
several mild winters have resulted in significant decreases in prices for
natural gas throughout the U.S., including the Appalachian Basin. From time to
time, especially in summer months, seasonal restrictions on natural gas
production have occurred as a result of distribution system restrictions.
Certain of the wells acquired by the Company in the Exchange Offer have been
subject to these limited, seasonal shut-ins and restrictions.



                                      -4-
<PAGE>   6


                  Prior to the execution of the East Ohio Contract (discussed
below), EEI's historical practice had been to generally sell natural gas
pursuant to various purchase contracts with a number of natural gas brokerage
firms, pipeline companies or end-user customers. The provisions of these
contracts, both as to term and price, varied significantly. The term of these
contracts varied from short term, month-to-month arrangements up to the life of
a particular well. Most of these natural gas purchase contracts were for a term
of one year, expiring each October, and enabled the purchaser to renew the
contracts for additional one-year terms during the fourth quarter of the year.
Pricing provisions varied materially among the contracts.

                  The Company has various Intermediate Term Adjustable Price Gas
Purchase Agreements (the "East Ohio Contracts") with The East Ohio Gas Company
("East Ohio"). Pursuant to the East Ohio Contracts and subject to certain
restrictions and adjustments, East Ohio is obligated to purchase, and the
Company is obligated to sell, all natural gas production from a specified list
of wells (the "Contract Wells"). A summary of the Company's principal East Ohio
Contracts at December 31, 1996 follows:

<TABLE>
<CAPTION>
  Contract      Period      Termination     Number          Required             Shut-In           Limitation
    Date        Covered       Clause       of Wells         Purchases          Provisions          Provisions
   ------       -------      --------      --------         ---------          ----------          ----------
<S>           <C>              <C>            <C>         <C>                <C>                <C>
   9/3/91     11/91-10/01      11/97          449         275 days/year      Maximum of         May-Oct. - 50%
                                                                             60 days (Nov.-     of production
                                                                             April)             from prior 6
                                                                                                month period

   3/10/94     4/94-3/00       None            49         275 days/year      Maximum of         May-Oct. - 50%
                                                                             60 days (Nov.-     of production
                                                                             April)             from prior 6
                                                                                                month period

   8/10/94    11/94-10/00      None            28         Nov.-March         April-Oct.         Shut-in provisions
</TABLE>





<TABLE>
<CAPTION>
                                                       Net Price per MCF
            ------------------------------------------------------------------------------------------------------
                    Initially                                       Adjusted Prices
 Contract   ------------------------------------------------------------------------------------------------------
   Date     Nov.-April    May-Oct.   11/94-4/95   5/95-10/95    11/95-4/96    5/96-10/96    11/96-4/97  5/97-10/97
 --------   ----------    --------   ----------   ----------    ----------    ----------    ----------  ----------
<S>             <C>        <C>         <C>           <C>           <C>          <C>          <C>          <C>  
   9/3/91       $2.85      $2.22       $3.34         $2.71         $2.84        $2.21        $3.31        $2.68

  3/10/94       $2.98      $2.28           No adjustment           $2.48        $1.78        $2.95        $2.25

  8/10/94       $3.08        N/A           No adjustment           $2.82          N/A        $3.55          N/A
</TABLE>


                  As detailed above, the price paid for natural gas purchased
under the East Ohio Contracts varies with the production period. Pricing under
the East Ohio Contracts is adjusted annually (after the first adjustment), up or
down, by an amount equal to 80% of the increase or decrease in East Ohio's
average Gas Cost Recovery ("GCR") rates. The net price per MCF includes $.20 per
MCF for transportation less a $.02 per MCF metering charge. Additionally, the
August 10, 1994 contract provides for a price cap equal to the quarterly GCR,
which amounted to $3.87 and $2.82 in November 1996 and 1995, respectively.

                  In addition to the East Ohio Contracts described above, the
Company has various short-term contracts (covering production from 45 gross
wells at December 31, 1996) which have


                                      -5-
<PAGE>   7


a primary term of 15 months or less. Twenty-four of the wells are covered by
fixed price contracts that provide for the sale of the Company's gas at $2.65 to
$2.95 per MCF. The remaining twenty-one wells are covered by a variable rate
contract that provides for the sale of the Company's gas based on a monthly
NYMEX settlement, with no floor price provisions, plus $.35 (April-October) or
$.55 (November-March) per MCF (including transportation allowances). There are
no significant production restrictions under the Company's short-term contracts
as they relate to the Company's existing wells. Future wells can be added to
certain of the contracts subject to gross production restrictions under the
contracts. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - Inflation and Changes in Prices."

                  For the year ended December 31, 1996, with the exception of
The East Ohio Gas Company, which purchased approximately 83% of the Company's
natural gas production in 1996, no one natural gas purchaser has accounted for
more than 10% of the Company's gas sales. The Company expects that East Ohio
will be the only material natural gas customer for 1997.

Seasonality
-----------

                  The East Ohio Contract (i) provides that certain wells can be
shut-in for a period of time and (ii) limits the obligation of East Ohio to
purchase natural gas during the May to October production period. These
production restrictions, and the nature of the Company's business, result in
seasonal fluctuations in the Company's revenue, with the Company receiving more
income in the first and fourth quarters of its fiscal year.

Title to Properties
-------------------

                  As is customary in the oil and gas industry, the Company
performs a limited investigation as to ownership of leasehold acreage at the
time of acquisition and conducts a title examination and necessary curative work
prior to the commencement of drilling operations on a tract. Title examinations
have been performed for substantially all of the producing oil and gas
properties owned by the Company with regard to (i) substantial tracts of land
forming a portion of such oil and gas properties and (ii) the wellhead location
of such properties. The Company believes that title to its properties is
acceptable although such properties may be subject to royalty, overriding
royalty, carried and other similar interests in contractual arrangements
customary in the oil and gas industry. Also, such properties may be subject to
liens incident to operating agreements and liens for current taxes not yet due,
as well as other comparatively minor encumbrances.

Competition
-----------

                  The oil and gas industry is highly competitive in all its
phases. The Company will encounter strong competition from major and independent
oil companies in acquiring economically desirable prospects as well as in
marketing production therefrom and obtaining external financing. Major oil and
gas companies, independent concerns, drilling and production purchase programs
and individual producers and operators are active bidders for desirable oil and
gas properties, as well as the equipment and labor required to operate those
properties. Many of the Company's competitors have financial resources,
personnel and facilities substantially greater than those of the Company.

                  The availability of a ready market for the oil and gas
production of the Company depends in part on the cost and availability of
alternative fuels, the level of consumer demand, the extent of other domestic
production of oil and gas, the extent of importation of foreign oil and gas, the
cost of and proximity to pipelines and other transportation facilities,
regulations by state and federal authorities and the cost of complying with
applicable environmental regulations. The


                                      -6-
<PAGE>   8


continued period of reduced prices for oil and gas and the continued oversupply
of domestic natural gas has resulted in a curtailment in exploration for and
development of oil and gas properties.

                  There is also extensive competition in the market for gas
produced by the Company. Increases in worldwide energy production capability and
decreases in energy consumption as a result of conservation efforts have brought
about substantial surpluses in energy supplies in recent years. This, in turn,
has resulted in substantial competition for markets historically served by
domestic natural gas resources both with alternate sources of energy, such as
residual fuel oil, and among domestic gas suppliers. As a result, there have
been reductions in oil and gas prices, widespread curtailment of gas production
and delays in producing and marketing gas after it is discovered. Changes in
government regulations relating to the production, transportation and marketing
of natural gas have also resulted in significant changes in the historical
marketing patterns of the industry. Generally, these changes have resulted in
the abandonment by many pipelines of long-term contracts for the purchase of
natural gas, the development by gas producers of their own marketing programs to
take advantage of new regulations requiring pipelines to transport gas for
regulated fees, and an increasing tendency to rely on short-term sales contracts
priced at spot market prices. See "Marketing" above.

                  In light of these developments, many producers have accepted
prices that are lower than those previously prevailing to sell their production.
As a consequence, gas prices, which were once effectively determined by
government regulations, are now influenced largely by the effects of
competition. Competitors in this market include other producers, gas pipelines
and their affiliated marketing companies, independent marketers, and providers
of alternate energy supplies such as residual fuel oil.

Regulation of Oil and Gas Industry
----------------------------------

                  The exploration, production and sale of oil and natural gas
are subject to numerous state and federal laws and regulations. Such laws and
regulations govern a wide variety of matters, including the drilling and spacing
of wells, allowable rates of production, marketing, pricing and protection of
the environment. Such regulations may restrict the rate at which the Company's
wells produce oil and natural gas below the rate at which such wells could
produce in the absence of such regulations. In addition, legislation and
regulations concerning the oil and gas industry are constantly being reviewed
and proposed. The States of Ohio and Pennsylvania, the states in which the
Company owns properties and operates, have statutes and regulations governing a
number of the matters enumerated above. Compliance with the laws and regulations
affecting the oil and gas industry generally increases the Company's costs of
doing business and consequently affects its profitability. Inasmuch as such laws
and regulations are frequently amended or reinterpreted, the Company is unable
to predict the future cost or impact of complying with such regulations.

                  The interstate transportation and sale for resale of natural
gas is regulated by the Federal Energy Regulatory Commission (the "FERC") under
the Natural Gas Act of 1938 ("NGA"). The wellhead price of natural gas is also
regulated by FERC under the authority of the Natural Gas Policy Act of 1978
("NGPA"). Subsequently, the Natural Gas Wellhead Decontrol Act of 1989 (the
"Decontrol Act") was enacted on July 26, 1989. The Decontrol Act provided for
the phasing out of price regulation under the NGPA commencing on the date of
enactment and completely eliminated all such gas price regulation on January 1,
1993. In addition, FERC recently has proposed several rules or orders concerning
transportation and marketing of natural gas. The impact of these rules and other
regulatory developments on the Company cannot be predicted. It is expected that
the Company will sell natural gas produced by its oil and gas properties to a
number of purchasers, including various industrial customers, pipeline companies


                                      -7-
<PAGE>   9


and local public utilities, although the majority will be sold to The East Ohio
Gas Company as discussed earlier.

                  As a result of the NGPA and the Decontrol Act, the Company's
gas production is no longer subject to price regulation. Gas which has been
removed from price regulation is subject only to that price contractually agreed
upon between the producer and purchaser. Under current market conditions,
deregulated gas prices under new contracts tend to be substantially lower than
most regulated price ceilings originally prescribed by the NGPA. FERC recently
has proposed and enacted several rules or orders concerning transportation and
marketing of natural gas. In 1992, the FERC finalized Order 636, a rule
pertaining to the restructuring of interstate pipeline services. This rule
requires interstate pipelines to unbundle transportation and sales services by
separately pricing the various components of their services, such as supply,
gathering, transportation and sales. These pipeline companies are required to
provide customers only the specific service desired without regard to the source
for the purchase of the gas. Although the Partnership is not an interstate
pipeline, it is likely that this regulation may indirectly impact the
Partnership by increasing competition in the marketing of natural gas, possibly
resulting in an erosion of the premium price historically available for
Appalachian natural gas. The impact of these rules and other regulatory
developments on the Company cannot be predicted.

                  Regulation of the production, transportation and sale of oil
and gas by federal and state agencies has a significant effect on the Company
and its operating results. Certain states have established rules and regulations
requiring permits for drilling operations, drilling bonds and reports concerning
the spacing of wells.

Environmental Regulation
------------------------

                  The activities of the Company are subject to various federal,
state and local laws and regulations designed to protect the environment. The
Company does not conduct activities offshore. Operations of the Company on
onshore oil properties may generally be liable for clean-up costs to the federal
government under the Federal Clean Water Act for up to $50,000,000 for each
incident of oil or hazardous pollution substance and for up to $50,000,000 plus
response costs under the Comprehensive Environmental Response, Compensation, and
Liability Act of 1980 (Superfund) for hazardous substance contamination.
Liability is unlimited in cases of willful negligence or misconduct, and there
is no limit on liability for environmental clean-up costs or damages with
respect to claims by the state or private persons or entities. In addition, the
Company is required by the Environmental Protection Agency to prepare and
implement spill prevention control and countermeasure plans relating to the
possible discharge of oil into navigable waters; and the Environmental
Protection Agency will further require permits to authorize the discharge of
pollutants into navigable waters. State and local permits or approvals may also
be needed with respect to waste-water discharges and air pollutant emissions.
Violations of environment-related lease conditions or environmental permits can
result in substantial civil and criminal penalties as well as potential court
injunctions curtailing operations. Such enforcement liabilities can result from
prosecution by public or private entities.

                  Various state and governmental agencies are considering, and
some have adopted, other laws and regulations regarding environmental protection
which could adversely affect the proposed business activities of the Company.
The Company cannot predict what effect, if any, current and future regulations
may have on the operations of the Company.

                  In addition, from time to time, prices for either oil or
natural gas have been regulated by the federal government, and such price
regulation could be reimposed at any time in the future.




                                      -8-
<PAGE>   10


Operating Hazards and Uninsured Risks
-------------------------------------

                  The Company's oil and gas operations are subject to all
operating hazards and risks normally incident to drilling for and producing oil
and gas, such as encountering unusual formations and pressures, blow-outs,
environmental pollution and personal injury. The Company maintains such
insurance coverage as it believes to be appropriate taking into account the size
of the Company and its operations. Losses can occur from an uninsurable risk or
in amounts in excess of existing insurance coverage. The occurrence of an event
which is not insured or not fully insured could have an adverse impact on the
Company's revenues and earnings.

                  In certain instances, the Company may continue to engage in
exploration and development operations through drilling programs formed with
non-industry investors. In addition, the Company also will conduct a significant
portion of its operations with other parties in connection with the drilling
operations conducted on properties in which it has an interest. In these
arrangements, all joint interest parties, including the Company, may be fully
liable for their proportionate share of all costs of such operations. Further,
if any joint interest party defaults on its obligations to pay its share of
costs, the other joint interest parties may be required to fund the deficiency
until, if ever, it can be collected from the defaulting party. As a result of
the foregoing or similar oilfield circumstances, the Company could become liable
for amounts significantly in excess of amounts originally anticipated to be
expended in connection with such operations. In addition, financial difficulty
for an operator of oil and gas properties could result in the Company's and
other joint interest owners' interests in properties and the wells and equipment
located thereon becoming subject to liens and claims of creditors,
notwithstanding the fact that non-defaulting joint interest owners and the
Company may have previously paid to the operator the amounts necessary to pay
their share of such costs and expenses.

Conflicts of Interest
---------------------

                  The Partnership Agreement grants Everflow Management Company
broad discretionary authority to make decisions on matters such as the Company's
acquisition of or participation in a drilling prospect or a producing property.
To limit Everflow Management Company's management discretion might prevent
Everflow Management Company from managing the Company properly. However, because
the business activities of the affiliates of Everflow Management Company on the
one hand and the Company on the other hand are the same, potential conflicts of
interest are likely to exist, and it is not possible to completely mitigate such
conflicts.

                  The Partnership Agreement contains certain restrictions
designed to mitigate, to the extent practicable, these conflicts of interest.
The agreement restricts, among other things, (i) the cost at which the general
partner or its affiliates may acquire properties from or sell properties to the
Company; (ii) loans between the general partner, its affiliates and the Company,
and interest and other charges incurred in connection therewith; and (iii) the
use and handling of the Company's funds by the general partner.

Employees
---------
 
                 As of March 20, 1997, the Company (either directly or
indirectly through EEI) had 27 full-time employees. These employees primarily
are engaged in the following areas of business operations: six in land and lease
acquisition, seven in field operations, seven in accounting, and seven in
administration.




                                      -9-
<PAGE>   11


ITEM 2.         PROPERTIES.
---------------------------
                  Set forth below is certain information regarding the oil and
gas properties of the Company.

                  In the following discussion, "gross" refers to the total acres
or wells in which the Company has a working interest and "net" refers to gross
acres or wells multiplied by the Company's percentage of working interests
therein. Because royalty interests held by the Company will not affect the
Company's working interests in its properties, neither gross nor net acres or
wells reflects such royalty interests.

                  PROVED RESERVES.(1) The following table reflects the estimates
of the Company's Proved Reserves which are based on the Company's report as of
December 31, 1996.

<TABLE>
<CAPTION>
                                                              Oil (BBLS)                Gas (MCF)
                                                              ----------                ---------
<S>                                                             <C>                    <C>       
                  Proved Developed                              912,000                41,015,000
                  Proved Undeveloped                                 -                         -
                                                                -------                ----------
                  Total                                         912,000                41,015,000
                                                                =======                ==========

<FN>
                  ----------
                  (1)    The Company has not determined proved reserves
                         associated with its proved undeveloped acreage. A
                         reconciliation of the Company's proved reserves is
                         included in the Notes to the Financial Statements (page
                         F-21.)
</TABLE>


                  STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS.(1)
The following table summarizes as of December 31, 1996, the oil and gas reserves
attributable to the oil and gas properties owned by the Company. The
determination of the standardized measure of discounted future net cash flows as
set forth herein is based on criteria promulgated by the SEC, using calculations
based solely on Proved Reserves, current unescalated cost and price factors, and
discounted to present value at 10%.

<TABLE>
<CAPTION>
                                                                                     (Thousands)
                                                                                    -------------
<S>                                                                                 <C>          
                  Future cash inflows from sales of oil and gas                     $     132,308
                  Future production and development costs                                  49,255
                  Future income tax expense                                                 2,171
                                                                                    -------------

                  Future net cash flows                                                    80,882
                  Effect of discounting future net cash flows
                      at 10% per annum                                                     30,375
                  Standardized measure of discounted future                         -------------
                      net cash flows                                                $      50,507
                                                                                    =============

<FN>
                  ----------
                  (1)      See the Notes to the Financial Statements for
                           additional information (pages F-19 to F-23).
</TABLE>





                                      -10-
<PAGE>   12


                  PRODUCTION. The following table summarizes the net oil and gas
production, average sales prices and average production (lifting) costs per
equivalent unit of production for the periods indicated.

<TABLE>
<CAPTION>
                                                               Average
                            Production                       Sales Price              
                    ---------------------------         ----------------------         Average Lifting Cost
                    Oil (BBLS)        Gas (MCF)         per BBL        per MCF         per Equivalent MCF(1)
                    ----------        ---------         -------        -------         ------------------
<S>                   <C>               <C>             <C>            <C>                    <C>  
     1996             112,000         4,264,000         $ 19.88        $ 2.78                 $ .44
     1995             107,000         4,259,000           16.68          2.86                   .41
     1994             107,000         4,342,000           15.79          3.04                   .37

<FN>
----------
(1)      Oil production is converted to MCF equivalents at the rate of 6 MCF per
         BBL (barrel).
</TABLE>


                  PRODUCTIVE WELLS. The following table sets forth the gross and
net oil and gas wells of the Company as of December 31, 1996.

<TABLE>
<CAPTION>
                               Gross Wells                                  Net Wells
                    ----------------------------------------------------------------------------
                      Oil(1)     Gas (1)      Total             Oil (1)      Gas (1)      Total
                    ----------------------------------------------------------------------------
<S>                    <C>         <C>        <C>                 <C>          <C>         <C>
                       108         996        1,104               62           590         652
<FN>
                    ----------
                    (1)    Oil wells are those wells which generate the majority
                           of their revenues from oil production; gas wells are
                           those wells which generate the majority of their
                           revenues from gas production.
</TABLE>


                  ACREAGE. The Company had 52,357 gross developed acres and
30,692 net developed acres as of December 31, 1996. Developed acreage is that
acreage assignable to productive wells. The Company had approximately 2,800
gross and net undeveloped acres as of December 31, 1996.

                  DRILLING ACTIVITY. The following table sets forth the results
of drilling activities on properties owned by the Company. Such information and
the results of prior drilling activities should not be considered as necessarily
indicative of future performance.

<TABLE>
<CAPTION>
                                                              Development Wells(1)
                                         --------------------------------------------------------------
                                                 Productive                             Dry
                                         ---------------------------        ---------------------------
                                           Gross              Net              Gross             Net
                                         ---------         ---------        ----------         --------
                    <S>                     <C>            <C>                  <C>             <C>
                    1996                     40             23.39                1               .23
                    1995                     49             30.19                -                -
                    1994                     32             22.30                -                -

                   <FN>
                    ----------
                    (1)    All wells are located in the United States.  All wells are development wells; no
                           exploratory wells were drilled.
</TABLE>




                                      -11-
<PAGE>   13


                  PRESENT ACTIVITIES. The Company has drilled 7 gross and 4.22
net development wells since December 31, 1996. As of March 20, 1997, the Company
had no gross or net wells in the process of being drilled.

                  DELIVERY COMMITMENTS. The Company entered into various East
Ohio contracts with East Ohio which, subject to certain restrictions and
adjustments, obligates East Ohio to purchase and the Company to sell all natural
gas production from certain contract wells. The contract wells comprise more
than 75% of the Company's net gas production.

ITEM 3.         LEGAL PROCEEDINGS
---------------------------------

                  There are no material pending legal proceedings to which the
Company is a party or to which any of its property is subject.

ITEM 4.         SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
-------------------------------------------------------------------

                  During the fourth quarter of the fiscal year ended December
31, 1996, there were no matters submitted to a vote of security holders through
the solicitation of proxies or otherwise.





                                      -12-
<PAGE>   14


                                    PART II
                                    -------

ITEM 5.         MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED 
---------------------------------------------------------------------    
STOCKHOLDER MATTERS
-------------------
                  
Market
------
                  There is currently no established public trading market for
the Company's Units of Limited Partnership. At the present time, the Company
does not intend to list any of the Units for trading on any exchange or
otherwise take any action to establish any market for the Units. As of March 20,
1997, there were 6,379,941 Units of limited partnership interest held by 1,721
holders of record.

Distribution History.
---------------------

                  The Company commenced operations with the consummation of the
Exchange Offer in February 1991. Management's stated intention was to make
quarterly cash distributions equal to $0.125 per Unit (or $0.50 per Unit on an
annualized basis) for the first eight quarters following the closing date of the
Exchange Offer. The Company has paid a quarterly distribution every quarter
since July 1991. Based upon the current number of Units outstanding, each
quarterly distribution is expected to be approximately $806,000. The Company
currently intends to make quarterly distributions in April, July and October
1997.

Repurchase Right.
-----------------

                  The Partnership Agreement provides, that beginning in 1992 and
annually thereafter, the Company will repurchase for cash up to 10% of the then
outstanding Units, to the extent Unitholders offer Units to the Company for
repurchase. The Repurchase Right entitles any Unitholder, between May 1 and June
30 of each year, to notify the Company that he elects to exercise the Repurchase
Right and have the Company acquire certain or all of his Units. The price to be
paid for any such Units is calculated based on the method provided for in the
Partnership Agreement. The Company accepted an aggregate of 26,958, 81,522 and
53,103 of its Units of limited partnership interest at a price of $4.55, $4.625
and $4.50 per Unit pursuant to the terms of the Company's Offers to Purchase
dated April 30, 1994, 1995 and 1996, respectively. See Note 3 in the Company's
financial statement for additional information on the Repurchase Right.

ITEM 6.         SELECTED FINANCIAL DATA
---------------------------------------
<TABLE>
<CAPTION>
                                                                Year Ended December 31,
                                      ---------------------------------------------------------------------------
                                          1996             1995          1994             1993           1992
                                      ---------------------------------------------------------------------------
<S>                                     <C>            <C>             <C>            <C>            <C>        
Revenue . . . . . . . . . . . . . . .   $14,557,405    $14,478,954     $15,363,555    $14,220,201    $14,694,927
Net Income . . . . . . . . . . . . .      4,227,854      5,247,086       5,915,578      4,966,312      4,407,618
Net Income Per Unit . . . . . . .               .65            .80             .90            .75            .66
Total Assets  . . . . . . . . . . . .    53,188,337     52,756,474      50,454,294     48,652,536     46,637,841
Long-term Debt(1). . . . . . . . .        4,405,834      4,718,207       3,800,000      4,500,000      4,200,000
Cash Distributions Per Unit . .                 .50            .50             .50            .50            .50

----------
(1)      Long-term debt includes that portion of indebtedness classified as current.
</TABLE>





                                      -13-
<PAGE>   15


ITEM 7.           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION 
-----------------------------------------------------------------------------
AND RESULTS OF OPERATIONS
-------------------------

GENERAL

                  The Company was organized in September 1990 as a limited
partnership under the laws of the State of Delaware. Everflow Management
Company, an Ohio general partnership, is the general partner of the Company. The
Company was formed to engage in the business of oil and gas exploration and
development through a proposed consolidation of the business and oil and gas
properties of EEI, and the oil and gas properties owned by certain limited
partnerships and working interest programs managed or operated by the Programs.

                  Effective February 15, 1991, pursuant to the Exchange Offer to
acquire the EEI shares and the Interests in exchange for Units of the Company's
limited partnership interest, the Company acquired the Interests and the EEI
Shares and EEI become a wholly-owned subsidiary of the Company.

                  Everflow Management Company, the general partner of the
Company, is a general partnership. The general partners of Everflow Management
Company are EMC, three individuals who are currently directors and/or officers
of EEI, David T. Matak, Thomas L. Korner and William A. Siskovic, and Sykes
Associates, a limited partnership controlled by Robert F. Sykes, the Chairman of
the Board of EEI.

LIQUIDITY AND CAPITAL RESOURCES

Financial Position
------------------

                  Working capital surplus of $2.9 million as of December 31,
1996 represented a $618 thousand increase from December 31, 1995 due primarily
to increases in cash and equivalents and accounts receivable as of December 31,
1996 compared to December 31, 1995. In January 1995, the Company refinanced a
previous credit facility with Bank One, Texas, National Association, providing
for a new three-year revolving line of credit in the amount of $7,000,000. In
December 1996, the revolving line of credit was extended for one year pursuant
to the Second Amendment to the Credit Agreement. The Company paid down $4.8
million of long-term debt under the revolving credit facility during 1996, all
of which was paid during the winter and spring months when cash flows from
production were higher. The Company borrowed $4.4 million under the revolving
credit facility during 1996. These borrowings were used to pay for the funding
of the Company's investment in the continued development of oil and gas
properties and to repurchase Units pursuant to the Repurchase Right. The Company
repurchased 53,103 Units at a price of $4.50 per Unit, or $239 thousand, on June
30, 1996. The Company also used its credit facility to make quarterly Cash
Distributions during the summer and fall months. The Company expects to continue
to pursue its long-term objective of developing oil and gas properties without
jeopardizing the Company's ability to meet such commitments as a result of
production restrictions caused by the seasonal nature of the Company's gas
purchase agreements with The East Ohio Gas Company.




                                      -14-
<PAGE>   16


                  The following table summarizes the Company's financial
position at December 31, 1996 and December 31, 1995:

<TABLE>
<CAPTION>
         (Amounts in Thousands)                           December 31, 1996              December 31, 1995
                                                     ---------------------------    --------------------------
                                                           Amount         %               Amount         %
                                                     ---------------------------    --------------------------
<S>                                                     <C>             <C>         <C>                <C>
         Working capital                                $    2,922        6%        $       2,305        5%
         Property and equipment (net)                       48,295       93                48,786       95
         Other                                                 406        1                   111        -
                                                            ------      ---                ------      ---
              Total                                     $   51,623      100%        $      51,202      100%
                                                            ======      ===                ======      ===

         Long-term debt                                 $    4,386        8%        $       4,707        9%
         Deferred income taxes                                 278        1                   288        1
         Partners' equity                                   46,959       91%               46,207       90
                                                            ------      ---                ------      ---
              Total                                     $   51,623      100%        $      51,202      100%
                                                            ======      ===                ======      ===
</TABLE>

Cash Flows from Operating, Investing and Financing Activities
-------------------------------------------------------------

         The Company generated almost all of its cash sources from operating
activities. During the years ended 1996 and 1995, cash provided by operations
was used to fund the development of additional oil and gas properties and
distributions to partners.




                                      -15-
<PAGE>   17


                  The following table summarizes the Company's Statements of
Cash Flows for the years ended December 31, 1996 and 1995:


<TABLE>
<CAPTION>
(Amounts in Thousands)                                        1996                                 1995
                                               ------------------------------------------------------------------
                                                   Dollars               %             Dollars                %
                                               ------------------------------------------------------------------
<S>                                            <C>              <C>                 <C>              <C>
Operating Activities:
     Net income before adjustments             $       4,228            42%         $       5,247           48%
     Adjustments                                       5,921            58                  4,895           44
                                                  ----------    ----------             ----------     --------
     Cash flow from operations
       before working capital
       changes                                        10,149           100                 10,142           92
     Changes in working capital                   (      648)   (        6)                   478            4
                                                   ---------     ---------             ----------     --------
     Net cash provided by
       operating activities                            9,501            94                 10,620           96
Investing Activities:
     Proceeds received on receivables
       from officers and employees                       518             5                    557            5
     Advances disbursed to officers
       and employees                              (      477)   (        5)            (      609)   (       6)
     Purchase of property and
       equipment                                  (    5,509)   (       54)            (    8,304)   (      75)
     Proceeds on sale of property
       and equipment                                      68             1                     45            1
                                                  ----------    ----------             ----------     --------
     Net cash (used) by investing
       activities                                 (    5,400)   (       53)            (    8,311)   (      75)

Financing Activities:
     Distributions                                (    3,237)   (       32)            (    3,280)   (      30)
     Repurchase of Units                          (      239)   (        2)            (      377)   (       3)
     Long-term debt issuance                           4,500            44                  5,120           46
     Long-term debt repayments                    (    4,812)   (       48)            (    4,202)   (      38)
                                                   ---------     ---------              ---------     --------
     Net cash (used) by financing
       activities                                 (    3,788)   (       38)            (    2,739)   (      25)
                                                   ---------     ---------              ---------     --------
Increase (decrease) in cash
     and equivalents                                     313             3             (      430)   (       4)

<FN>
Note:    All items in the previous table are calculated as a percentage of total
         cash sources. Total cash sources include the following items, if
         positive: cash flow from operations before working capital changes,
         changes in working capital, net cash provided by investing activities
         and net cash provided by financing activities, plus any decrease in
         cash and cash equivalents.
</TABLE>

                  As the above table indicates, the Company's cash flow from
operations before working capital changes during the twelve months of 1996
represented 100% of total cash sources as compared with 92% during the twelve
months of 1995. Changes in working capital other than cash and equivalents
decreased cash by $648 thousand and increased cash by $478 thousand during 1996
and 1995, respectively. The increase in accounts receivable at December 31, 1996
compared to December 31, 1995 is the result of higher gas prices and
consequently, higher production revenues receivable as of December 31, 1996.
Total production revenues receivable as of December 31, 1996 amounted to $2.2
million compared to $1.9 million at December 31, 1995 and $2.2 million at
December 31, 1994. In addition, accounts receivable from officers and


                                      -16-
<PAGE>   18


employees and joint venture partners decreased $64 thousand from $1,533 thousand
in 1995 to $1,469 thousand in 1996.

                  The Company's cash flows used by investing activities
decreased $2.9 million, or 35%, during 1996 as compared with 1995. The Company's
cash flows used by investing activities increased $2.0 million, or 32%, during
1995 as compared with 1994. The primary reason for the decrease in cash flows
used by investing activities in 1996 was the decrease in the purchase of
property and equipment. The purchase of property and equipment decreased $2.8
million, or 34%, during 1996 as compared with 1995. The Company drilled and
developed 23 net wells during 1996, compared with 30 net wells during 1995. The
primary reason for the increase in 1995 was due to the Company's increased
activity in the purchase of property and equipment. The purchase of property and
equipment increased $2.0 million, or 32%, during 1995 as compared with 1994. The
Company drilled and developed 30 net wells during 1995, compared with 22 net
wells in 1994.

                  The Company's cash flows used by financing activities
increased $1.0 million, or 38%, during 1996 as compared with 1995. The primary
reason for this increase was that payments on long-term debt increased $611
thousand to $4.8 million during 1996, and proceeds from the issuance of
long-term debt decreased $620 thousand to $4.5 million during 1996. The Company
had a decrease in the repurchase of Units pursuant to the Repurchase Right of
$138 thousand during 1996. The Company's cash flows used by financing activities
decreased $1.4 million, or 34%, during 1995 as compared with 1994. The primary
reason for this decrease was that payments on long-term debt decreased $1.1
million to $4.2 million during 1995, and proceeds from the issuance of long-term
debt increased $520 thousand to $5.1 million during 1995. The Company did,
however, have an increase in the repurchase of Units pursuant to the Repurchase
Right of $254 thousand during 1995.

                  The Company's ending cash and equivalents balance of $739
thousand at December 31, 1996, as well as ongoing monthly operating cash flows
should be adequate to meet short-term cash requirements. The Company has
established a quarterly distribution and management believes the payment of such
distributions will continue at least through 1997. The Company has paid a
quarterly distribution every quarter since July 1991. Total cash distributions
are estimated to be $806 thousand per quarter ($.125 per Unit).

                  Capital expenditures for the development of oil and gas
properties in the Company and the acquisition of undeveloped leasehold acreage
continue to be ongoing priorities of the Company. The Company drilled or
participated in the drilling of an additional 40 drillsites in 1996. The
Company's share of these drillsites amounts to 23 net developed wells. The
Company also made prepayments of intangible drilling costs on 1 gross and .82
net wells to be drilled by March 31, 1997. Proved reserves associated with the
prepaid well have not been determined. The Company's share of proved gas
reserves has increased by 957 thousand MCF's, or 2%, between December 31, 1995
and 1996, while proved oil reserves have increased by 80 thousand barrels, or
10%, between December 31, 1995 and 1996. The Company continues to develop
primarily natural gas fields, as represented by the discovery of 3.7 million
MCF's of natural gas versus 119 thousand barrels of crude oil during 1996. The
Standardized Measure of Discounted Future Net Cash Flows of the Company's
reserves increased by $8.7 million between December 31, 1995 and 1996. The
primary reasons for this increase was a significant increase in 1996 natural gas
and oil prices and upward revision of previous gas and oil reserve estimates.
Management of the Company believes the Company should be able to drill or
participate in the drilling of 20 to 30 net wells each year for the next few
years. Management believes it is necessary to meet this annual objective in
order to maintain its reserve base. At the point where the Company can no longer
generate adequate and sufficient drillsite locations, debt reductions and/or
additional distributions to partners may be made by the Company at the
discretion of management.



                                      -17-
<PAGE>   19


                  The Partnership Agreement provides that the Company annually
offers to repurchase for cash up to 10% of the then outstanding Units, to the
extent Unitholders offer Units to the Company for repurchase pursuant to the
Repurchase Right. The Repurchase Right entitles any Unitholder, between May 1
and June 30 of each year, to notify the Company of his or her election to
exercise the Repurchase Right and have the Company acquire such Units. The price
to be paid for any such Units will be calculated based upon the audited
financial statements of the Company as of December 31 of the year prior to the
year in which the Repurchase Right is to be effective and independently prepared
reserve reports. The price per Unit will be equal to 66% of the adjusted book
value of the Company allocable to the Units, divided by the number of Units
outstanding at the beginning of the year in which the applicable Repurchase
Right is to be effective less all Interim Cash Distributions received by a
Unitholder. The adjusted book value is calculated by adding partner's equity,
the Standardized Measure of Discounted Future Net Cash Flows and the tax effect
included in the Standardized Measure and substracting from that sum the carrying
value of oil and gas properties (net of undeveloped lease costs). If more than
10% of the then outstanding Units are tendered during any period during which
the Repurchase Right is to be effective, the Investor's Units so tendered shall
be prorated for purposes of calculating the actual number of Units to be
acquired during any such period. The Company repurchased 53,103, 81,522 and
26,958 Units during 1996, 1995 and 1994 pursuant to the Repurchase Right at a
price of $4.50, $4.625 and $4.55 per Unit, respectively. The Company borrowed
against its credit facility to meet such obligations and would expect to do so
again in 1997. The Repurchase Right to be conducted in 1997 will result in
Unitholders being offered a price of $5.21 per Unit. The Company estimates it
would need to borrow $3.3 million in the event the 1997 Offering pursuant to the
Repurchase Right is fully subscribed.

                  In the fall of 1996, there was a significant increase in the
price received for natural gas pursuant to the pricing adjustments contained in
the Company's Intermediate Term Adjustable Price Gas Purchase Agreements with
The East Ohio Gas Company. These pricing adjustments should increase the
Company's cash flows from operations during 1997, assuming similar production
levels.




                                      -18-
<PAGE>   20


RESULTS OF OPERATIONS

                  The following table and discussion is a review of the results
of operations of the Company for the twelve months ended December 31, 1996, 1995
and 1994. All items in the table are calculated as a percentage of total
revenues. This table should be read in conjunction with the discussions of each
item below:

<TABLE>
<CAPTION>
                                                                            Year Ended December 31,
                                                                 --------------------------------------------
                                                                   1996              1995              1994
                                                                 --------------------------------------------
<S>                                                                  <C>              <C>               <C>
Revenues:
     Oil and gas sales                                               97%              96%               97%
     Well management and operating                                    3                4                 3
     Other                                                            -                -                 -
                                                                    ---              ---              ----
         Total Revenues                                             100              100               100
Expenses:
     Production costs                                                15               14                12
     Well management and operating                                    1                2                 2
     Depreciation, depletion and amortization                        35               34                33
     Abandonment and write down
         of oil and gas properties                                    5                1                 1
     General and administrative                                      13               13                14
     Other                                                            2                1                 1
     Income taxes                                                     -            (   1)           (    1)
                                                                    ---             ----             -----
         Total Expenses                                              71               64                62
                                                                    ---             ----               ---
Net income                                                           29%              36%               38%
                                                                    ===              ===               ===
</TABLE>


                  Revenues for the year ended December 31, 1996 increased $78
thousand, or 1%, compared to the same period in 1995. Revenues for the year
ended December 31, 1995 decreased $885 thousand, or 6%, compared to the same
period in 1994. These changes were due primarily to changes in oil and gas sales
between the periods involved.

                  Oil and gas sales increased $109 thousand, or 1%, from 1995 to
1996. The primary reason for this increase in oil and gas sales between 1995 and
1996 was an increase in oil production and oil prices. Effective with the
November 1996 production period, the price received for natural gas under the
majority of these agreements was increased by $.47 per MCF pursuant to the terms
of the gas purchase agreements with The East Ohio Gas Company. In addition, the
Company's gas production increased by 5 thousand MCF from 1995 to 1996. Oil and
gas sales decreased $915 thousand, or 6%, from 1994 to 1995. The primary reasons
for the decrease in oil and gas sales between 1994 and 1995 were that the gas
purchase agreement with The East Ohio Gas Company brought the Company a lower
gas price for the majority of the Company's wells and natural gas production
decreased by 83 thousand MCF from 1994 to 1995. The impact of lower gas prices
and decreased gas production was reduced by the fact that oil prices were
slightly higher during 1995 compared to 1994.

                  Production costs increased $160 thousand, or 8%, between 1995
and 1996. The primary reasons for this increase include increased operating
costs relating to older wells and the Company's increasing costs due to placing
newly drilled wells into production. Depreciation, depletion and amortization
increased $257 thousand, or 5%, between 1995 and 1996. This increase was the
result of an increase in wells placed into production and the downward revision
of reserve estimates on certain properties. Production costs increased $197
thousand, or 11%, and depreciation, depletion and amortization decreased $142
thousand, or 3%, between 1994 and


                                      -19-
<PAGE>   21


1995. The increase in oil and gas production and sales and operating costs
associated with new wells drilled are the primary reasons for the increase in
production costs from 1994 to 1995.

                  Well management and operating revenues decreased $33 thousand,
or 7%, from 1995 to 1996. Well management and operating costs decreased $78
thousand, or 27%, from 1995 to 1996. The reason for these decreases was due to
the purchase of oil and gas properties by the Company which previously were only
operated by the Company. This purchase during 1996 decreased the third party
share of oil and gas properties managed and operated by the Company. Well
management and operating revenues increased $29 thousand, or 6%, from 1994 to
1995. Well management and operating costs increased $4 thousand, or 1%, from
1994 to 1995.

                  Abandonments and write downs of oil and gas properties
increased $534 thousand between 1995 and 1996. This increase was attributable to
the write down of oil and gas properties, abandonments of oil and gas properties
and leasehold impairments. During 1996, the Company wrote down oil and gas
properties by approximately $262,000 to provide for impairment on certain of its
oil and gas properties. Additionally, in 1996, the Company wrote off
approximately $210,000 of costs associated with an unsuccessful and abandoned
water flood project. Abandonments of oil and gas properties decreased $60
thousand between 1994 and 1995. Abandonments of oil and gas properties during
1994 and 1995 were attributable to leasehold impairment provisions and
abandonment of wells during such periods.

                  General and administrative expenses decreased $37 thousand, or
2%, between 1995 and 1996, while they decreased $221 thousand, or 10%, between
1994 and 1995. These decreases in general and administrative expenses are a
result of the continued reduction in administrative costs associated with the
consolidated structure of the Company since the Exchange Offer. Management
believes the Company can maintain the current level of overhead and related
expenses.

                  Net other expenses increased $81 thousand between 1995 and
1996, while increasing $17 thousand between 1994 and 1995. The increase between
1995 and 1996 was primarily attributable to increases in interest expense and
the loss on sale of oil and gas properties. Interest expense increased due to an
increase in the average outstanding debt relating to the Company's revolving
credit facility and additional interest expense as a result of the Company's
mortgage notes. The increase between 1994 and 1995 was primarily attributable to
higher interest rates during 1995 compared to 1994. The weighted average
interest rate during 1995 was 9.0% compared to 7.2% during 1994.

                  Income tax expense attributable to EEI increased $180 thousand
between 1995 and 1996 and decreased $10 thousand between 1994 and 1995. The
increase is due to the effect of timing adjustments as they relate to the
taxable income of EEI. The Company is not a tax paying entity, and the net
taxable income or loss, other than the taxable income or loss allocable to EEI,
is allocated directly to its respective partners.

                  Net income decreased $1,019 thousand, or 19%, between 1995 and
1996. The decrease resulted from increased costs, including production costs,
depreciation, depletion and amortization, abandonment and write down costs and
income tax expense. Net income decreased $668 thousand, or 11%, between 1994 and
1995. Revenues were lower due to a decrease in oil and gas sales. Net income
represented 29%, 36% and 38% of total revenues during the years ended December
31, 1996, 1995 and 1994, respectively.

NEW ACCOUNTING STANDARD

                  In March 1995, the Financial Accounting Standards Board issued
a new standard (SFAS 121), "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to


                                      -20-
<PAGE>   22


be Disposed Of." SFAS 121 requires that long-lived assets (including oil and gas
properties) and certain identifiable intangibles to be held and used by an
entity be reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. SFAS 121
is effective for financial statements for fiscal years beginning after December
15, 1995. Everflow adopted SFAS 121 in the first quarter of 1996 and utilizes a
field by field basis for assessing impairment of its oil and gas properties. The
impact of adopting SFAS 121 was not material to the Company's financial position
or results of operation.

INFLATION AND CHANGES IN PRICES

                  While the cost of operations is affected by inflation, oil and
gas prices have fluctuated in recent years and generally have not matched
inflation. The price of oil in the Appalachian Basin during the Persian Gulf
crisis ranged from a low of $18.00 per barrel on July 30, 1990 to a high of
$37.50 per barrel on October 13, 1990. The price of oil in the Appalachian Basin
more recently has ranged from a low of $13.50 per barrel in late 1993 and early
1994 to a high of $23.50 in January 1997. Although the Company's sales are
affected by this type of price instability, the impact on the Company is not as
dramatic as might be expected since only 16% of the Company's total future cash
inflows related to oil and gas reserves as of December 31, 1996 are comprised of
oil reserves.

                  The various gas purchase agreements with The East Ohio Gas
Company negotiated since 1991 had provided an increase in the average gas price
obtained from the Company's natural gas sales through 1994. The average price of
gas during 1994 and 1993 amounted to $3.04 and $2.80 per MCF, respectively, a
$0.24 and $0.12 increase over 1993 and 1992. The amount of the annual price
adjustment applicable to the first price adjustment in the Intermediate Term
Adjustable Price Gas Purchase Agreements with The East Ohio Gas Company
beginning November 1993 was an increase of $.55 per MCF. The amount of the
annual price adjustment beginning November 1994 was a decrease of $.06 per MCF.
These adjustments were based on 80% of the increase or decrease in The East Ohio
Gas Company's Gas Cost Recovery rates ("GCR") as specified in the contracts. The
average price of gas during 1995 amounted to $2.86 per MCF, an $.18 decrease
compared to 1994. The November 1995 annual price adjustment was a decrease of
$.50 per MCF. The average price of gas during 1996 amounted to $2.78 per MCF, a
$.08 decrease compared to 1995. The November 1996 annual price adjustment was an
increase of $.47 per MCF.

                  The Company's Standardized Measure of Discounted Future Net
Cash Flows increased by $8.7 million from December 31, 1995 to December 31, 1996
and decreased by $3.1 million from December 31, 1994 to December 31, 1995. A
reconciliation of the Changes in the Standardized Measures of Discounted Future
Net Cash Flows is included on page F-22 of the Company's consolidated financial
statements.


ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
---------------------------------------------------

                  See attached pages F-1 to F-23.

ITEM 9.  DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
-------------------------------------------------------------

                  Not applicable.





                                      -21-
<PAGE>   23


                                    PART III
                                    --------

ITEM 10.        DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
------------------------------------------------------------------

                  The Company, as a limited partnership, does not have any
directors or executive officers. The General Partner of the Company is Everflow
Management Company, an Ohio general partnership formed in September 1990 to act
as the Company's General Partner. The general partners of Everflow Management
Company as of March 20, 1995 are Everflow Management Corporation, an Ohio
corporation ("EMC"), Thomas L. Korner, William A. Siskovic and David T. Matak,
all of whom are directors and/or officers of EEI, and Sykes Associates, a
limited partnership controlled by Robert F. Sykes, Chairman of the Board of EEI.

                  EMC is the Managing General Partner of Everflow Management
Company. EMC was formed in September 1990 to act as the Managing General Partner
of Everflow Management Company. EMC is owned by the other general partners of
Everflow Management Company and EMC currently has no employees, but as Managing
General Partner of Everflow Management Company, makes all management and
business decisions on behalf of Everflow Management Company and thus on behalf
of the Company.

                  EEI has continued its separate existence and provides general,
administrative, management and leasehold functions for the Company. Personnel
previously employed by EEI to conduct its operation, drilling and field
supervisory functions have become employed directly by the Company and discharge
the same functions on behalf of the Company. All of EEI's outstanding shares are
owned by the Company.

                  DIRECTORS AND OFFICERS OF EEI AND EMC. The executive officers
and directors of EEI and EMC as of March 20, 1997 are as follows:

<TABLE>
<CAPTION>
                                                         Positions and                    Positions and
         Name                         Age              Offices with EEI                 Offices with EMC
------------------------              ---          --------------------------       -------------------------
<S>                                   <C>          <C>                              <C>                        
Robert F. Sykes                       73           Chairman of the Board            Chairman of the Board
                                                                                    and Director

Thomas L. Korner                      43           President and Director           President and Director

David A. Kidder                       58           Treasurer                        None

David T. Matak                        38           Vice President/Land              Vice President and
                                                                                    Director

William A. Siskovic                   41           Vice President, Secretary,       Vice President, Secretary-
                                                   Principal Financial and          Treasurer, Principal
                                                   Accounting Officer and           Financial and Accounting
                                                   Director                         Officer and Director
</TABLE>

All directors of EEI are elected to serve by the Company, which is EEI's sole
shareholder. All officers of EEI serve at the pleasure of the Board of
Directors. Directors and officers of EEI receive no compensation or fees for
their services to EEI or their services on behalf of the Company.

                  All directors and officers of EMC hold their positions with
EMC pursuant to a shareholders' agreement among EMC and such directors and
officers. The shareholders agreement controls the operation of EMC, provides for
changes in share ownership of EMC, and determines the identity of the directors
and officers of EMC as well as their replacement.


                                      -22-
<PAGE>   24


ROBERT F. SYKES has been a Director of EEI since March 1987 and Chairman of the
Board since May 1988. Mr. Sykes is the Chairman of the Board and a Director of
EMC and has served in such capacities since its formation in September 1990. He
was the Chairman of the Board of Sykes Datatronics, Inc., Rochester, New York,
from its organization in 1986 until his resignation in January 1989. Sykes
Datatronics, Inc. is a manufacturer of telephone switching equipment. Mr. Sykes
also served as President and Chief Executive Officer of Sykes Datatronics, Inc.
from 1968 until October 1983 and from January 1985 until October 1985. Mr. Sykes
also has been a Director of Voplex, Inc., Rochester, New York, a manufacturer of
plastic products, since 1980 and a Director of ACC Corp., a long distance
telephone company, since 1988.

THOMAS L. KORNER has been President of EEI and EMC since November 1995 and the
President and Treasurer of Everflow Nominee. Mr. Korner is also a Director of
EMC and has served in such capacity since its formation in September 1990. He
served as Vice President and Secretary of EEI from April 1985 to November 1995
and as Vice President and Secretary of EMC from September 1990 to November 1995.
He served as the Treasurer of EEI from June 1982 to June 1986. Mr. Korner
supervises and oversees all aspects of EEI's business, including oil and gas
property acquisition, development, operation and marketing. Prior to joining EEI
in June 1982, Mr. Korner was a practicing certified public accountant with Hill,
Barth and King, certified public accountants, and prior to that with Arthur
Andersen & Co., certified public accountants. He has a Business Administration
Degree from Mt. Union College.

DAVID A. KIDDER has been the Treasurer of EEI since June 1986 and has been
employed by EEI since April 1985. From 1983 to 1985, he was Treasurer of LGM
Corporation, Columbus, Ohio, an oil and gas service company; from 1982 to 1983,
he was Treasurer of OPEX, Inc., Columbus, Ohio, a producer of oil and gas; and
from 1980 to 1981, he was Treasurer of United Petroleum, Inc., Columbus, Ohio, a
producer of oil and gas. From 1973 to 1980, Mr. Kidder was involved in the oil
and gas industry in various financial and accounting capacities. Prior to that
time, Mr. Kidder practiced as a certified public accountant with Coopers &
Lybrand, certified public accountants. Mr. Kidder has a Bachelor of Arts Degree
in Accounting from the University of Cincinnati.

DAVID T. MATAK has been Vice President of EEI since July 1987. He is primarily
responsible for the exploration and development activities of EEI. Mr. Matak is
a Vice President and a Director of EMC and has served in such capacities since
its formation in September 1990. From September 1982 to June 1984, Mr. Matak
served as a teaching assistant in the Geology Department of the University of
Akron and worked on the Clinton Research Project at the university. From March
1984 to July 1986, Mr. Matak was a geologist with Gasearch, Inc., Girard, Ohio,
where he logged and evaluated over 200 wells and evaluated and reviewed all
locations to be drilled by Gasearch, Inc. Mr. Matak has a Bachelor of Science
Degree in Biology and Geology from Mt. Union College and a Masters Degree in
Geology from the University of Akron.

WILLIAM A. SISKOVIC has been a Vice President of EEI since January 1989. Mr.
Siskovic is a Vice President, Secretary-Treasurer, Principal Financial and
Accounting Officer and a Director of EMC. He has served as Principal Financial
Officer and Secretary of EMC since November 1995 and in all other capacities
since the formation of EMC in September 1990. He is responsible for the
financial operations of the Company and EEI. From August 1980 to July 1984, Mr.
Siskovic served in various financial and accounting capacities including
Assistant Controller of Towner Petroleum Company, a public independent oil and
gas operator, producer and drilling fund sponsor company. From August 1984 to
September 1985, Mr. Siskovic was a Senior Consultant for Arthur Young & Company,
certified public accountants, where he was primarily responsible for the firm's
oil and gas consulting practice in the Cleveland, Ohio, office. From October
1985 until joining EEI in April 1988, Mr. Siskovic served as Controller and
Principal Accounting Officer of Lomak Petroleum, Inc., a public independent oil
and gas operator and producer. He has a Business Administration Degree in
Accounting from Cleveland State University.


                                      -23-
<PAGE>   25


                  SECTION 16 DISCLOSURE. Section 16(a) of the Securities
Exchange Act of 1934 requires the Company's officers and directors, and persons
who own more than 10% of the Units to file reports of ownership and changes in
ownership with the Securities and Exchange Commission. Officers, directors and
greater than 10% Unitholders are required by SEC regulation to furnish the
Company with copies of all Section 16(a) forms they file.

                  Based solely on review of the copies of such forms furnished
to the Company, the Company believes that for all of 1996, all Section 16(a)
filing requirements applicable to its officers, directors and greater than 10%
beneficial owners were complied with.

ITEM 11.        EXECUTIVE COMPENSATION
--------------------------------------

                  As a limited partnership the Company has no executive officers
or directors, but is managed by Everflow Management Company, the General Partner
of the Company. The executive officers of EMC and EEI are compensated either
directly by the Company or indirectly through EEI. The compensation described
below represents all compensation from either the Company or EEI.




                                      -24-
<PAGE>   26


                  The following table sets forth information concerning the
annual and long-term compensation for services in all capacities to the Company
for the fiscal years ended December 31, 1996, 1995 and 1994, of those persons
who were, at December 31, 1996: (i) the chief executive officer; and (ii) the
other two most highly compensated executive officers of the Company. The Chief
Executive Officer and such other executive officers are hereinafter referred to
collectively as the "Named Executive Officers."


<TABLE>
<CAPTION>
                                                   SUMMARY COMPENSATION TABLE

                                                       Annual Compensation
                                   -------------------------------------------------------
                                                                                   Other
                                                                                   Annual            All Other
          Name and                                                                 Compen-            Compen-
     Principal Position            Year           Salary             Bonus        sation  (1)          sation  (2)
     ------------------            ----           ------             -----      ----------          -----------   
<S>                                <C>               <C>             <C>             <C>              <C>      
Thomas L. Korner                   1996              71,250          75,500          2,190            26,846(3)
President                          1995              45,000          33,000          3,236            30,653(3)
                                   1994              45,000          50,000          4,823            26,982(3)

David T. Matak                     1996              73,000          95,500          1,241            28,530(4)
Vice President                     1995              52,000          75,000          3,636            32,798(4)
                                   1994              50,250          88,000          5,418            29,606(4)

William A. Siskovic                1996              75,625          65,500          2,073            17,996(5)
Vice President and                 1995              62,500          28,500          2,136            20,007(5)
Principal Financial and            1994              62,500          40,000          2,596            16,320(5)
Accounting Officer


<FN>
----------
No Named Executive Officer received personal benefits or perquisites during
1996, 1995 and 1994 in excess of the lesser of $50,000 or 10% of his aggregate
salary and bonus.

(1)      Includes payments to cover certain executive's taxes.
(2)      Includes amounts received from participation in certain overriding
         royalty interest arrangements organized by EEI. Also includes amounts
         contributed under the Company's 401(K) Retirement Savings Plan. The
         Company matched an employee's contribution to the 401(K) Retirement
         Savings Plan to the extent of 50% of the first 6% of a participant's
         salary reduction. The amounts attributable to the Company's matching
         contribution vest immediately.
(3)      Includes amounts received by Thomas L. Korner from  participation in
         certain  overriding  royalty interest  arrangements  organized by EEI
         of $22,602, $28,280 and $24,387 in 1996, 1995 and 1994, respectively.
(4)      Includes  amounts received by David T. Matak from  participation in
         certain  overriding  royalty  interest  arrangements  organized by EEI
         of $24,365, $30,518 and $27,247 in 1996, 1995 and 1994, respectively.
(5)      Includes amounts received by William A. Siskovic from participation in
         certain overriding royalty interest  arrangements  organized by EEI of
         $13,762, $17,247 and $13,214 in 1996, 1995 and 1994, respectively.
</TABLE>





                                      -25-
<PAGE>   27


Everflow Management Company, EMC and the general partners do not receive any
separate compensation or reimbursement for their management efforts on behalf of
the Company. All direct and indirect costs incurred by the Company are borne by
Everflow Management Company as General Partner of the Company and the
Unitholders as Limited Partners of the Company in proportion to their respective
interest in the Company. The general partners are not entitled to any fees or
other compensation as a result of the acquisition or operation of oil and gas
properties by the Company. The general partners, in their individual capacities,
are not entitled to share in distributions from or income of the Company on an
ongoing basis, upon liquidation or otherwise. The general partners only share in
the revenues, income and distributions of the Company indirectly through their
ownership of Everflow Management Company, as the General Partner of the Company.
Everflow Management Company is entitled to share in the income and expense of
the Company on the basis of its interests as the General Partner of the Company.
Everflow Management Company contributed Interests (as defined and described in
"Item 1. Business" above) with an Exchange value of $670,980 for its interest as
a general partner in the Company.

                  None of the officers of EEI or EMC has an employment agreement
with either EEI or EMC.

ITEM 12.        SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
------------------------------------------------------------------------------
                  Everflow Management Company is a general partnership of which
EMC, an Ohio corporation is the Managing General Partner. The general partners
of Everflow Management Company are Thomas L. Korner, William A. Siskovic and
David T. Matak, all of whom are directors or officers of EEI, and Sykes
Associates, a limited partnership controlled by Robert F. Sykes, Chairman of the
Board of EEI and EMC. The general partners and their affiliates currently hold
(in addition to Everflow Management Company's interest as a general partner of
the Company) 1,318,365 Units, representing approximately 21% of the outstanding
Units.

                  Everflow Management Company, as General Partner of the
Company, owns a 1.03% general partner's interest in the Company.

                  The following table sets forth certain information with
respect to the number of Units beneficially owned as of March 20, 1997 by each
person known to the management of the Company to own beneficially more than 5%
of the outstanding Units; by each director and officer of the Company; and by
all directors and officers as a group. The table also sets forth (i) the
ownership interests of Everflow Management Company, and (ii) the ownership of
EMC.




                                      -26-
<PAGE>   28


                  BENEFICIAL OWNERSHIP OF UNITS IN THE COMPANY,
                       EVERFLOW MANAGEMENT COMPANY AND EMC

<TABLE>
<CAPTION>
                                                                                   Percentage
                                                                                   Interest in
                                                                Percentage          Everflow         Percentage
              Name                             Units             of Units          Management        Interest in
             of Holder                      in Company         in Company(1)       Company(2)           EMC
---------------------------------           ----------         -------------       ----------         -----
<S>                                          <C>                 <C>                  <C>              <C>    
Robert F. Sykes(3)                           1,062,854           16.66                57.1429          57.1429
Estate of Joseph W. Baschnagel                 546,716            8.57                     -                -
Thomas L. Korner                               135,504            2.12                14.2857          14.2857
David T. Matak                                  74,029            1.16                14.2857          14.2857
William A. Siskovic                             45,978             .72                14.2857          14.2857
All officers and directors as
   a group (4 persons in
   Everflow Management
   Company)                                  1,318,365           20.66               100.0000         100.0000

<FN>
----------
(1)  Does not include the interest in the Company owned indirectly by such
     individuals as a result of their ownership in (i) Everflow Management
     Company (based on Everflow Management Company's 1.04% general partner's
     interest in the Company) or (ii) EMC (based on EMC's 1% managing general
     partner's interest in Everflow Management Company).
(2)  Includes the interest in Everflow Management Company owned indirectly by
     such individuals as a result of their share ownership in EMC resulting from
     EMC's 1% managing general partner's interest in Everflow Management
     Company.
(3)  Includes 739,245 Units held by Sykes Associates, a New York limited
     partnership comprised of Mr. Sykes and his wife as general partners and
     four adult children as limited partners. On January 1, 1994, Mr. Sykes
     transferred 323,609 Units of the Company held in his name to Robert F.
     Sykes Annuity Trust (162,462 Units) and Catherine Sykes Annuity Trust
     (161,147 Units). Mr. Sykes has pledged all Units held by Sykes Associates
     to Central Trust Company of Rochester, New York.
</TABLE>


ITEM 13.        CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
--------------------------------------------------------------

                  In the past, certain officers, directors and more than 10%
Unitholders of the Company have invested, and may in the future invest, in oil
and gas programs sponsored by EEI on the same terms as unrelated investors. In
the past, certain officers, directors and/or more than 10% Unitholders of the
Company have frequently participated and will likely participate in the future
as working interest owners in wells in which the Company has an interest. The
Company anticipates that any such participation by individual members of the
Company's management would enable such individuals to participate in the
drilling and development of undeveloped drillsites on an equal basis with the
Company or the particular drilling program acquiring such drillsites, which
participation would be on a uniform basis with respect to all drilling conducted
during a specified time frame, as opposed to selective participation.
Frequently, such participation has been on more favorable terms than the terms
which were available to unrelated investors. Frequently, EEI loaned its officers
the funds necessary to participate in the drilling and development of such
wells. The loans are secured by the interests in the oil and gas properties.
Such loans currently accrue interest at the rate of 1% over the prime rate per
annum. As of December 31, 1996, the aggregate outstanding balance of such
indebtedness was approximately $543,000, with Thomas L. Korner, David T. Matak
and William A. Siskovic owing $181,000, $187,000 and $175,000, respectively.

                  Certain officers and directors of EMC own oil and gas
properties and, as such, contract with the Company to provide field operations
on such properties. These ownership


                                      -27-
<PAGE>   29


interests are charged per well fees for such services on the same basis as all
other working interest owners.


                                     PART IV
                                     -------

ITEM 14.        EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
-------------------------------------------------------------------------------

(a)    (1)        Financial Statements
                  --------------------

                  The following Consolidated Financial Statements of the
Registrant and its subsidiaries are included in Part II, Item 8:

<TABLE>
<CAPTION>
                                                                            Page(s)
                                                                            -------
<S>                                                                       <C>  
Auditors' Report on Audited Financial Statements                              F-3
       Balance Sheets                                                      F-4 - F-5
       Statements of Income                                                   F-6
       Statements of Partners' Equity                                         F-7
       Statements of Cash Flows                                            F-8 - F-9
       Notes to Financial Statements                                      F-10 - F-23
</TABLE>

(a)    (2)        Financial Statements Schedules
                  ------------------------------

                  All schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission are not required
under the related instructions or are inapplicable, and therefore have been
omitted.

(a)    (3)        Exhibits
                  --------

                  See the Exhibit Index at page E-1 of this Annual Report on
Form 10-K.

(b) On October 22, 1996, the Registrant filed a current report on Form 8-K
relating to pricing adjustments under the Company's Agreements with The East
Ohio Gas Company.



                                      -28-
<PAGE>   30





                                   SIGNATURES
                                   ----------

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

EVERFLOW EASTERN PARTNERS, L.P.

By:      EVERFLOW MANAGEMENT COMPANY,
         General Partner
By:      EVERFLOW MANAGEMENT CORPORATION,
         Managing General Partner


<TABLE>
<S>      <C>                                            <C>                                        <C>

By:      /s/Robert F. Sykes                             Director                                   March  24 , 1997
         --------------------------------------------                                                    ----
         Robert F. Sykes



By:      /s/Thomas L. Korner                            President and Director                     March  24 , 1997
         --------------------------------------------                                                    ----
         Thomas L. Korner



By:      /s/William A. Siskovic                         Vice President,                            March  24 , 1997
         --------------------------------------------   Secretary-Treasurer                              ----
         William A. Siskovic                            and Director (principal
                                                        financial and accounting
                                                        officer)



By:      /s/David T. Matak                              Vice President and                         March  24 , 1997
         --------------------------------------------   Director                                         ----
                                                 
         David T. Matak                                 
</TABLE>



<PAGE>   31


                                  Exhibit Index
                                  -------------

<TABLE>
<CAPTION>
    Exhibit No.                                 Description                                               Page
    -----------                                 -----------                                               ----
        <S>              <C>                                                                               <C>
        4.1              Certificate of Limited Partnership of the Registrant                              (1)
                         dated September 13, 1990, as filed with the Delaware
                         Secretary of State on September 14, 1990

        4.2              Form of Agreement of Limited Partnership of the                                   (1)
                         Registrant

        4.3              General Partnership Agreement of Everflow                                         (1)
                         Management Company

        4.4              Articles of Incorporation of Everflow Management                                  (1)
                         Corporation

        4.5              Code of Regulations of Everflow Management                                        (1)
                         Corporation

        4.6              Shareholders Agreement for Everflow Management                                    (1)
                         Corporation

        4.7              Third Amended and Restated Loan Agreement,                                        (2)
                         dated as of May 1, 1991 between Everflow
                         Eastern, Inc., the Registrant and the banks listed
                         therein, with National Bank of Detroit as Agent

        4.8              First Amendment to Third Amended and Restated                                     (5)
                         Loan and Security Agreements dated July 1, 1993,
                         between Everflow Eastern, Inc. and Everflow Eastern
                         Partners, L.P. and the banks listed therein, with
                         National Bank of Detroit as Agent

        4.9              Revolving Credit Note to First Amendment to Third                                 (5)
                         Amended and Restated Loan and Security Agreement
                         dated as of July 1, 1993

        4.10             Credit Agreement dated January 19, 1995 between                                   (8)
                         Everflow Eastern, Inc. and Everflow Eastern Partners, L.P.
                         and Bank One, Texas, National Association

        4.11             Amendment to Credit Agreement dated February 23, 1996                              57
                         between Everflow Eastern, Inc. and Everflow Eastern
                         Partners, L.P. and Bank One, Texas, National Association

        4.12             Second Amendment to Credit Agreement dated December 30,                            59
                         1996 between Everflow Eastern, Inc. and Everflow Partners,
                         L.P. and Bank One, Texas, National Association
</TABLE>

                                      E-1
<PAGE>   32


<TABLE>
<CAPTION>
    Exhibit No.                                 Description                                               Page
    -----------                                 -----------                                               ----
       <S>               <C>                                                                               <C>
       10.1              Lease Agreement dated June 30, 1984 by and                                        (1)
                         between Village Green Associates, Inc. and
                         Everflow Eastern, Inc.

       10.2              Gas Purchase Agreement dated September 3, 1991                                    (3)
                         by and between the Registrant and The East Ohio
                         Gas Company

       10.3              Intermediate Term Adjustable Price Gas Purchase                                   (4)
                         Agreement, contract #10342, dated October 9, 1992,
                         between The East Ohio Gas Company and Everflow
                         Eastern Partners, L.P.

       10.4              Quaker State Full Load Crude Oil Purchase Agreement                               (4)
                         Dated January 13, 1993, between Quaker State Oil
                         Refining corporation and Everflow Eastern Partners, L.P.

       10.5              Intermediate Term Adjustable Gas Purchase Agreement,                              (6)
                         Contract #10461, dated March 10, 1994, between The
                         East Ohio Gas Company and Everflow Eastern Partners, L.P.

       10.6              Intermediate Term Adjustable Gas Purchase Agreement,                              (7)
                         Contract #10515, dated August 10, 1994, between The
                         East Ohio Gas Company and Everflow Eastern Partners, L.P.

       10.7              Operating facility lease dated October 3, 1995 between                            (9)
                         Everflow Eastern Partners, L.P. and A-1 Storage of
                         Canfield, Ltd.

       10.8              Intermediate Term Adjustable Gas Purchase Agreement,                             (11)
                         Contract #11245, dated May 29, 1996, between The
                         East Ohio Gas Company and Everflow Eastern Partners, L.P.

       10.9              Intermediate Term Adjustable Gas Purchase Agreement,                             (11)
                         Contract #11285, dated May 29, 1996, between The
                         East Ohio Gas Company and Everflow Eastern Partners, L.P.

       10.10             One Year Term Gas Purchase Agreement dated August 1,                             (12)
                         1996, between Everflow Eastern Partners, L.P. and
                         JDS Energy Corporation

       10.11             One Year Term Gas Purchase Agreement dated January 20,                             60
                         1997, between Everflow Eastern Partners, L.P. and
                         JDS Energy Corporation

       22.1              Subsidiaries of the Registrant                                                   (10)
</TABLE>


                                      E-2
<PAGE>   33





----------

(1)      Incorporated herein by reference to the appropriate exhibit to
         Registrant's Registration Statement on Form S-1 (Reg. No. 33-36919).

(2)      Incorporated herein by reference to the appropriate exhibit to the
         Registrant's Quarterly Report on Form 10-Q for the second quarter ended
         June 30, 1991.

(3)      Incorporated herein by reference to the appropriate exhibit to
         Registrant's Annual Report on Form 10-K for the year ended December 31,
         1991 (File No. 0-19279).

(4)      Incorporated herein by reference to the appropriate exhibit to the
         Registrant's Annual Report on Form 10-K for the year ended December 31,
         1992 (File No. 0-19279).

(5)      Incorporated herein by reference to the appropriate exhibit to the
         Registrant's Quarterly Report on Form 10-Q for the second quarter ended
         June 30, 1993.

(6)      Incorporated herein by reference to the appropriate exhibit to the
         Registrant's Quarterly Report on Form 10-Q for the second quarter ended
         June 30, 1994.

(7)      Incorporated herein by reference to the appropriate exhibit to the
         Registrant's Quarterly Report on Form 10-Q for the third quarter ended
         September 30, 1994.

(8)      Incorporated herein by reference to the appropriate exhibit to the
         Registrant's Annual Report on Form 10-K for the year ended December 31,
         1994 (File No. 0-19279).

(9)      Incorporated herein by reference to the appropriate exhibit to the
         Registrant's Quarterly Report on Form 10-Q for the third quarter ended
         September 30, 1995.

(10)     Incorporated herein by reference to the appropriate exhibit to the
         Registrant's Annual Report on Form 10-K for the year ended December 31,
         1995 (File No. 0-19279).

(11)     Incorporated herein by reference to the appropriate exhibit to the
         Registrant's Quarterly Report on Form 10-Q for the third quarter ended
         June 30, 1996.

(12)     Incorporated herein by reference to the appropriate exhibit to the
         Registrant's Quarterly Report on Form 10-Q for the third quarter ended
         September 30, 1996.



                                     E-3

<PAGE>   34
                        EVERFLOW EASTERN PARTNERS, L. P.

                       1996 CONSOLIDATED FINANCIAL REPORT


<PAGE>   35



                        EVERFLOW EASTERN PARTNERS, L. P.

                                    CONTENTS



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

<TABLE>
<CAPTION>
                                                                    Page
                                                                    ----
<S>                                                              <C>
AUDITORS' REPORT ON THE FINANCIAL STATEMENTS                        F-3

FINANCIAL STATEMENTS
    Consolidated balance sheets                                  F-4 - F-5 
    Consolidated statements of income                               F-6
    Consolidated statements of partners' equity                     F-7 
    Consolidated statements of cash flows                        F-8 - F-9 
    Notes to consolidated financial statements                   F-10 - F-23
</TABLE>



                                      F-2
<PAGE>   36

                          Independent Auditors' Report
                          ----------------------------


To the Partners
Everflow Eastern Partners, L. P.
Canfield, Ohio


         We have audited the accompanying consolidated balance sheets of
Everflow Eastern Partners, L. P. and subsidiaries as of December 31, 1996 and
1995, and the related consolidated statements of income, partners' equity, and
cash flows for each of the three years in the period ended December 31, 1996.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.

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

         In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Everflow Eastern Partners, L. P. and subsidiaries as of December 31, 1996 and
1995, and the consolidated results of their operations and their cash flows for
each of the three years in the period ended December 31, 1996, in conformity
with generally accepted accounting principles.



                                  HAUSSER + TAYLOR



Cleveland, Ohio
March 13, 1997


                                      F-3
<PAGE>   37

                        EVERFLOW EASTERN PARTNERS, L. P.

                           CONSOLIDATED BALANCE SHEETS

                           December 31, 1996 and 1995
                           --------------------------

<TABLE>
<CAPTION>
                                                                  1996          1995
                                                                  ----          ----
<S>                                                          <C>           <C>        
        ASSETS
        ------
CURRENT ASSETS
  Cash and equivalents                                       $   739,370   $   426,743
  Accounts receivable:
    Production                                                 2,195,525     1,823,044
    Officers and employees                                       929,457       969,609
    Joint venture partners                                       539,852       564,034
  Other                                                           82,824        75,899
                                                             -----------   -----------
       Total current assets                                    4,487,028     3,859,329

PROPERTY AND EQUIPMENT
  Proved properties (successful efforts accounting method)    98,321,815    95,362,378
  Pipeline and support equipment                                 451,971       426,500
  Corporate and other                                          1,025,175       806,370
                                                             -----------   -----------
                                                              99,798,961    96,595,248
  Less accumulated depreciation, depletion, amortization
    and write down                                            51,503,495    47,809,014
                                                             -----------   -----------
                                                              48,295,466    48,786,234

OTHER ASSETS                                                     405,843       110,911
                                                             -----------   -----------

                                                             $53,188,337   $52,756,474
                                                             ===========   ===========
</TABLE>

The accompanying notes are an integral part of these financial statements.

                                      F-4
<PAGE>   38


                        EVERFLOW EASTERN PARTNERS, L. P.

                           CONSOLIDATED BALANCE SHEETS

                           December 31, 1996 and 1995
                           --------------------------

<TABLE>
<CAPTION>
                                                                  1996          1995
                                                                  ----          ----
<S>                                                           <C>           <C>        
        LIABILITIES AND PARTNERS' EQUITY
        --------------------------------
CURRENT LIABILITIES
  Current portion of long-term debt                           $    19,600   $    11,700
  Accounts payable                                              1,246,050     1,243,830
  Accrued expenses                                                298,980       299,059
                                                              -----------   -----------
        Total current liabilities                               1,564,630     1,554,589

LONG-TERM DEBT                                                  4,386,234     4,706,507

DEFERRED INCOME TAXES                                             278,000       288,000

COMMITMENTS AND CONTINGENCIES

LIMITED PARTNERS' EQUITY, SUBJECT TO REPURCHASE
  RIGHT
    Authorized - 8,000,000 units
    Issued and outstanding - 6,379,941 and 6,433,044 units,
      respectively                                             46,471,094    45,731,442

GENERAL PARTNER'S EQUITY                                          488,379       475,936
                                                              -----------   -----------
        Total partners' equity                                 46,959,473    46,207,378
                                                              -----------   -----------

                                                              $53,188,337   $52,756,474
                                                              ===========   ===========
</TABLE>

   The accompanying notes are an integral part of these financial statements.




                                      F-5
<PAGE>   39

                        EVERFLOW EASTERN PARTNERS, L. P.

                        CONSOLIDATED STATEMENTS OF INCOME

                  Years Ended December 31, 1996, 1995 and 1994
                  --------------------------------------------

<TABLE>
<CAPTION>
                                                      1996            1995            1994
                                                      ----            ----            ----
<S>                                               <C>             <C>             <C>         
REVENUES
  Oil and gas sales                               $ 14,078,491    $ 13,969,378    $ 14,884,027
  Well management and operating                        474,851         507,873         478,609
  Other                                                  4,063           1,703             919
                                                  ------------    ------------    ------------
                                                    14,557,405      14,478,954      15,363,555

DIRECT COST OF REVENUES
  Production costs                                   2,192,349       2,032,706       1,835,432
  Well management and operating                        207,951         286,206         282,615
  Depreciation, depletion and amortization           5,155,681       4,898,667       5,040,940
  Abandonment and write down of oil and gas
    properties                                         671,992         137,587         197,691
                                                  ------------    ------------    ------------
        Total direct cost of revenues                8,227,973       7,355,166       7,356,678

GENERAL AND ADMINISTRATIVE EXPENSE                   1,870,646       1,907,188       2,128,504
                                                  ------------    ------------    ------------
        Total cost of revenues                      10,098,619       9,262,354       9,485,182
                                                  ------------    ------------    ------------

INCOME FROM OPERATIONS                               4,458,786       5,216,600       5,878,373

OTHER INCOME (EXPENSE)
  Interest income                                       78,668          71,516          49,308
  Interest expense                                    (262,659)       (218,496)       (193,279)
  (Loss) gain on sale of property and equipment        (56,941)        (12,534)          1,176
                                                  ------------    ------------    ------------
                                                      (240,932)       (159,514)       (142,795)
                                                  ------------    ------------    ------------

INCOME BEFORE INCOME TAXES                           4,217,854       5,057,086       5,735,578

PROVISION (CREDIT) FOR INCOME TAXES
  Current                                                   --              --         (43,000)
  Deferred                                             (10,000)       (190,000)       (137,000)
                                                  ------------    ------------    ------------
                                                       (10,000)       (190,000)       (180,000)
                                                  ------------    ------------    ------------

NET INCOME                                        $  4,227,854    $  5,247,086    $  5,915,578
                                                  ============    ============    ============


Allocation of Partnership Net Income
  Limited Partners                                $  4,184,053    $  5,193,251    $  5,855,417
  General Partner                                       43,801          53,835          60,161
                                                  ------------    ------------    ------------
                                                  $  4,227,854    $  5,247,086    $  5,915,578
                                                  ============    ============    ============


Earnings per unit                                 $        .65    $        .80    $        .90
                                                  ============    ============    ============
</TABLE>

   The accompanying notes are an integral part of these financial statements.

                                      F-6
<PAGE>   40

                        EVERFLOW EASTERN PARTNERS, L. P.

                   CONSOLIDATED STATEMENTS OF PARTNERS' EQUITY

                  Years Ended December 31, 1996, 1995 and 1994
                  --------------------------------------------


<TABLE>
<CAPTION>
                                                      1996            1995            1994
                                                      ----            ----            ----
<S>                                              <C>             <C>             <C>         
PARTNERS' EQUITY - JANUARY 1                     $ 46,207,378    $ 44,617,973    $ 42,122,626


  Net income                                        4,227,854       5,247,086       5,915,578


  Cash distributions ($.50 per unit each year)     (3,236,795)     (3,280,642)     (3,297,572)


  Purchase and retirement of Units                   (238,964)       (377,039)       (122,659)
                                                 ------------    ------------    ------------

PARTNERS' EQUITY - DECEMBER 31                   $ 46,959,473    $ 46,207,378    $ 44,617,973
                                                 ============    ============    ============
</TABLE>

   The accompanying notes are an integral part of these financial statements.

                                      F-7
<PAGE>   41

                        EVERFLOW EASTERN PARTNERS, L. P.

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

                 Years Ended December 31, 1996, 1995 and 1994
                 --------------------------------------------
<TABLE>
<CAPTION>
                                                             1996            1995            1994
                                                             ----            ----            ----
<S>                                                     <C>             <C>             <C>         
CASH FLOWS FROM OPERATING ACTIVITIES
  Net income                                            $  4,227,854    $  5,247,086    $  5,915,578
  Adjustments to reconcile net income to net cash
    provided by operating activities:
      Depreciation, depletion and amortization             5,202,435       4,935,223       5,073,804
      Abandonment and write down of oil and gas
        properties                                           671,992         137,587         197,691
      Loss (gain) on sale of property and equipment           56,941          12,534          (1,176)
      Deferred income taxes                                  (10,000)       (190,000)       (137,000)
      Changes in assets and liabilities:
        Accounts receivable                                 (348,299)        567,230        (444,354)
        Other current assets                                  (6,925)          6,961          36,433
        Other assets                                        (294,932)        (81,007)          4,319
        Accounts payable                                       2,220         (17,952)        138,256
        Accrued expenses                                         (79)          2,520           5,155
                                                        ------------    ------------    ------------
          Total adjustments                                5,273,353       5,373,096       4,873,128
                                                        ------------    ------------    ------------
            Net cash provided by operating activities      9,501,207      10,620,182      10,788,706

CASH FLOWS FROM INVESTING ACTIVITIES
  Proceeds received on receivables from officers and
    employees                                                517,652         557,206         592,401
  Advances disbursed to officers and employees              (477,500)       (608,675)       (623,410)
  Purchase of property and equipment                      (5,508,792)     (8,303,950)     (6,269,058)
  Proceeds on sale of property and equipment                  68,192          44,486           8,475
                                                        ------------    ------------    ------------
            Net cash used by investing activities         (5,400,448)     (8,310,933)     (6,291,592)

CASH FLOWS FROM FINANCING ACTIVITIES
  Distributions                                           (3,236,795)     (3,280,642)     (3,297,572)
  Repurchase of Units                                       (238,964)       (377,039)       (122,659)
  Proceeds from issuance of long-term debt                 4,500,000       5,120,000       4,600,000
  Payments on long-term debt                              (4,812,373)     (4,201,793)     (5,300,000)
                                                        ------------    ------------    ------------
            Net cash used by financing activities         (3,788,132)     (2,739,474)     (4,120,231)
                                                        ------------    ------------    ------------

NET INCREASE (DECREASE) IN CASH AND
  EQUIVALENTS                                                312,627        (430,225)        376,883

CASH AND EQUIVALENTS - JANUARY 1                             426,743         856,968         480,085
                                                        ------------    ------------    ------------

CASH AND EQUIVALENTS - DECEMBER 31                      $    739,370    $    426,743    $    856,968
                                                        ============    ============    ============
</TABLE>


   The accompanying notes are an integral part of these financial statements.



                                      F-8
<PAGE>   42

                        EVERFLOW EASTERN PARTNERS, L. P.

                CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

                  Years Ended December 31, 1996, 1995 and 1994
                  --------------------------------------------

<TABLE>
<CAPTION>
                                                       1996                1995                  1994
                                                       ----                ----                  ----
<S>                                                  <C>                 <C>                   <C>     
Supplemental disclosures of cash flow information:
  Cash paid during the year for:
    Interest                                         $223,286            $169,739              $192,848
    Income taxes                                           --                  --                    --

Supplemental disclosure of noncash investing and financing activities:

    See notes to financial statements for noncash investing and financing
    information on the Company's equity transactions and bank borrowings.
</TABLE>

   The accompanying notes are an integral part of these financial statements.


                                      F-9
<PAGE>   43

                        EVERFLOW EASTERN PARTNERS, L. P.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1.  ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

         A.       Organization - Everflow Eastern Partners, L. P. ("Everflow")
                  is a Delaware limited partnership which was organized in
                  September 1990 to engage in the business of oil and gas
                  exploration and development. Everflow was formed to
                  consolidate the business and oil and gas properties of
                  Everflow Eastern, Inc. ("EEI") and subsidiaries and the oil
                  and gas properties owned by certain limited partnership and
                  working interest programs managed or sponsored by EEI ("EEI
                  Programs" or "the Programs").

                  Everflow offered to exchange (the "Exchange Offer") its Units
                  of limited partnership interest for the common shares of EEI
                  and the interests of the Investors in the Programs
                  (collectively the "Interests"). The Exchange Offer was made
                  pursuant to a Registration Statement on Form S-1 declared
                  effective by the Securities and Exchange Commission on
                  December 19, 1990 and the Prospectus dated December 19, 1990
                  as filed with the Commission pursuant to Rule 424(b).

                  The Exchange Offer terminated on February 15, 1991 and holders
                  of Interests with an aggregate Exchange Value of $66,996,249
                  accepted the offer and tendered their Interests. Effective on
                  such date, Everflow acquired these Interests, which include
                  partnership interests and working interests in the Programs,
                  and all of the outstanding EEI shares. Of these Interests
                  tendered in the Exchange Offer, $28,565,244 was represented by
                  the EEI shares and $38,431,005 by the remaining Interests.
                  Approximately 6,632,000 of Everflow's Units were issued
                  pursuant to the Exchange Offer.

                  The tax-free combination of the Programs and EEI with Everflow
                  was accounted for as a reorganization of affiliated entities
                  under common control. Accordingly, the accompanying financial
                  statements reflect the historical costs of the Programs and
                  EEI.

                  Everflow Management Company, an Ohio general partnership, is
                  the general partner of Everflow. Everflow Management Company
                  is authorized, in general, to perform all acts necessary or
                  desirable to carry out the purposes and conduct of the
                  business of Everflow.

                  The partners of Everflow Management Company are Everflow
                  Management Corporation ("EMC"), three individuals who are
                  Officers and Directors of EEI and Sykes Associates, a limited
                  partnership controlled by Robert F. Sykes, the Chairman of the
                  Board of EEI. EMC is an Ohio corporation formed in September
                  1990 and is the managing general partner of Everflow
                  Management Company.

         B.       Principles of Consolidation - The consolidated financial
                  statements include the accounts of Everflow, its wholly-owned
                  subsidiaries, including EEI and EEI's wholly-owned
                  subsidiaries, and investments in oil and gas drilling and
                  income partnerships (collectively, "the Company") which are
                  accounted for under the proportional consolidation method. All
                  significant accounts and transactions between the consolidated
                  entities have been eliminated.


                                      F-10
<PAGE>   44

                        EVERFLOW EASTERN PARTNERS, L. P.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 1.  ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

         C.       Use of Estimates - The preparation of financial statements in
                  conformity with generally accepted accounting principles
                  requires management to make estimates and assumptions that
                  affect the reported amounts of assets and liabilities and
                  disclosure of contingent assets and liabilities at the date of
                  the financial statements and the reported amounts of revenues
                  and expenses during the reporting period. Actual results could
                  differ from those estimates.

         D.       Fair Value of Financial Instruments - The fair values of cash,
                  accounts receivable, accounts payable and other short-term
                  obligations approximate their carrying values because of the
                  short maturity of these financial instruments. The carrying
                  values of the Company's long-term obligations approximate
                  their fair value. In accordance with Statement of Financial
                  Accounting Standards No. 107, "Disclosure About Fair Value of
                  Financial Instruments," rates available at balance sheet dates
                  to the Company are used to estimate the fair value of existing
                  debt.

         E.       Cash Equivalents - For purposes of the statement of cash
                  flows, the Company considers all highly liquid debt
                  instruments purchased with a maturity of three months or less
                  to be cash equivalents. The Company maintains at various
                  financial institutions cash and cash equivalents which may
                  exceed federally insured amounts at times and which may, at
                  times, significantly exceed balance sheet amounts due to
                  float.

         F.       Property and Equipment - The Company uses the successful
                  efforts method of accounting for oil and gas exploration and
                  production activities. Under successful efforts, costs to
                  acquire mineral interests in oil and gas properties and to
                  drill and equip development wells are initially capitalized.
                  Costs of development wells (on properties the Company has no
                  further interest in) that do not find proved reserves and
                  geological and geophysical costs are expensed. The Company has
                  not participated in exploratory drilling and owns no interest
                  in unproved properties.

                  Capitalized costs of proved properties, after considering
                  estimated dismantlement and abandonment costs and estimated
                  salvage values, are amortized by the unit-of-production method
                  based upon estimated proved developed reserves. Depletion,
                  depreciation and amortization on proved properties amounted to
                  $5,127,388, $4,874,691 and $5,014,758 for the years ended
                  December 31, 1996, 1995 and 1994, respectively.

                  On sale or retirement of a unit of a proved property (which
                  generally constitutes the amortization base), the cost and
                  related accumulated depreciation, depletion, amortization and
                  write down are eliminated from the property accounts, and the
                  resultant gain or loss is recognized.

                  Pipeline and support equipment and other corporate property
                  and equipment are depreciated principally on the straight-line
                  method over their estimated useful lives (pipeline and support
                  equipment - 10 years, other corporate equipment - 3 to 7
                  years, other corporate property - building and improvements
                  with a cost of $659,000 - 39 years). Depreciation on pipeline
                  and support equipment and other corporate property and
                  equipment amounted to $75,047, $60,532 and $59,046 for the
                  years ended December 31, 1996, 1995 and 1994, respectively.


                                      F-11
<PAGE>   45

                        EVERFLOW EASTERN PARTNERS, L. P.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 1.  ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

         F.       Property and Equipment (Continued)

                  Maintenance and repairs of property and equipment are expensed
                  as incurred. Major renewals and improvements are capitalized,
                  and the assets replaced are retired.

         G.       Revenue Recognition - The Company recognizes revenue from oil
                  and gas production as it is extracted and sold from the
                  properties. Other revenue is recognized at the time it is
                  earned and the Company has a contractual right to such
                  revenue.

                  The Company participates (and may act as drilling contractor)
                  with unaffiliated joint venture partners in the drilling,
                  development and operation of jointly owned oil and gas
                  properties. Each owner, including the Company, has an
                  undivided interest in the jointly owned property(ies).
                  Generally, the joint venture partners participate on the same
                  drilling/development cost basis as the Company and, therefore,
                  no revenue, expense or income is recognized on the drilling
                  and development of the properties. Accounts receivable from
                  joint venture partners consist principally of drilling and
                  development costs the Company has advanced or incurred on
                  behalf of joint venture partners. The Company will earn and
                  receive monthly management and operating fees from certain
                  joint venture partners after the properties are completed and
                  placed into production.

         H.       Income Taxes - Everflow is not a tax-paying entity and the net
                  taxable income or loss, other than the taxable income or loss
                  allocable to EEI, which is a C corporation owned by Everflow,
                  will be allocated directly to its respective partners. The
                  Company is not able to determine the net difference between
                  the tax bases and the reported amounts of Everflow's assets
                  and liabilities due to separate tax elections that were made
                  by owners of the working interests and limited partnership
                  interests that comprised Programs.

                  EEI and its subsidiaries account for income taxes under
                  Statement of Financial Accounting Standards No. 109 (SFAS
                  109), "Accounting for Income Taxes." Income taxes are provided
                  for all items (as they relate to EEI and its subsidiaries) in
                  the Consolidated Statement of Income regardless of the period
                  when such items are reported for income tax purposes. SFAS 109
                  provides that deferred tax assets and liabilities be
                  recognized for temporary differences between the financial
                  reporting basis and tax basis of certain of EEI's and its
                  subsidiaries' assets and liabilities. In addition, SFAS 109
                  requires that deferred tax assets and liabilities be measured
                  using enacted tax rates expected to apply to taxable income in
                  the years in which the temporary differences are expected to
                  be recovered or settled. The impact on deferred taxes of
                  changes in tax rates and laws, if any, is reflected in the
                  financial statements in the period of enactment. In some
                  situations, SFAS 109 permits the recognition of expected
                  benefits of utilizing net operating loss and tax credit
                  carryforwards.


                                      F-12
<PAGE>   46

                        EVERFLOW EASTERN PARTNERS, L. P.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 1.  ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

         I.       Allocation of Income and Per Unit Data - Under the terms of
                  the limited partnership agreement, initially, 99% of revenues
                  and costs are allocated to the Unitholders (the limited
                  partners) and 1% of revenues and costs are allocated to the
                  General Partner. Such allocation changes as Unitholders elect
                  to exercise the Repurchase Right (see Note 3).

                  Earnings and distributions per limited partner Unit have been
                  computed based on the weighted average number of Units
                  outstanding during the year for each year presented. Average
                  outstanding Units for earnings and distributions per Unit
                  calculations amount to 6,406,492, 6,476,150 and 6,528,045 in
                  1996, 1995 and 1994, respectively.

         J.       New Accounting Standard - In March 1995, the Financial
                  Accounting Standards Board issued a new standard (SFAS 121),
                  "Accounting for the Impairment of Long-Lived Assets and for
                  Long-Lived Assets to be Disposed Of." SFAS 121 requires that
                  long-lived assets (including oil and gas properties) and
                  certain identifiable intangibles to be held and used by an
                  entity be reviewed for impairment whenever events or changes
                  in circumstances indicate that the carrying amount of an asset
                  may not be recoverable. SFAS 121 is effective for financial
                  statements for fiscal years beginning after December 15, 1995.
                  Everflow adopted SFAS 121 in the first quarter of 1996 and
                  utilizes a field by field basis for assessing impairment of
                  its oil and gas properties. The effect of adopting SFAS 121
                  was not material to the Company's financial position or
                  results of operations. During 1996, the Company wrote down oil
                  and gas properties by approximately $262,000 to provide for
                  impairment on certain of its oil and gas properties.
                  Additionally, in 1996, the Company wrote off approximately
                  $210,000 of costs associated with an unsuccessful and
                  abandoned water flood project.

         K.       Reclassifications - Certain reclassifications were made to
                  prior period financial statement presentations to conform with
                  current period presentations.

NOTE 2.  LONG-TERM DEBT

         In January 1995, the Company entered into an agreement that replaced
         all prior credit agreements. The agreement provides for a revolving
         line of credit in the amount of $7,000,000, all of which is available.
         The new revolving line of credit provides for interest payable
         quarterly at prime plus 1/8% and the principal due at maturity,
         November 1, 1997. In December 1996, the agreement was amended extending
         the maturity date by one year to November 1, 1998. Borrowings under the
         facility are unsecured. However, the Company has agreed, if requested
         by the bank, to execute any supplements to the agreement including
         security and mortgage agreements on the Company's assets. The agreement
         requires the borrower to pay engineering fees of $10,000 per year and
         commitment fees of 3/8% per annum on the daily average of the
         difference between the current available amount and the aggregate of
         loans outstanding. The agreement contains restrictive covenants
         requiring Everflow to maintain the following: (i) loan balance not to
         exceed the borrowing base of $7,000,000; (ii) tangible net worth of at
         least $30,000,000; and (iii) a total debt to tangible net worth ratio
         of not more than 0.7 to 1.0. In addition, there are restrictions on
         mergers, sales and acquisitions, the incurrence of additonal debt and
         the pledge or mortgage of the Company's assets.


                                      F-13
<PAGE>   47

                        EVERFLOW EASTERN PARTNERS, L. P.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 2.  LONG-TERM DEBT (CONTINUED)

         Borrowings on long-term revolving credit facilities amounted to
         $4,000,000 and $4,400,000 at December 31, 1996 and 1995, respectively.
         The following schedule reflects activity under the Company's long-term
         revolving credit facilities for the years ended December 31, 1996, 1995
         and 1994. The average amount outstanding under the facility was
         calculated using daily balances and a 365 day period. The weighted
         average interest rates were calculated by dividing the interest expense
         for the year for such borrowings by the average amounts outstanding
         during the period.

<TABLE>
<CAPTION>
                                                                                    Weighted
                                                  Maximum            Average         Average
                                                   Amount            Amount         Interest
                                                Outstanding        Outstanding        Rate
                                                -----------        -----------        ----
               <S>                               <C>               <C>                <C>  
               Year Ended December 31:
                   1996                          $4,800,000        $2,645,479         8.4% 
                                                                                           
                   1995                          $4,400,000        $2,235,000         9.0% 
                                                                                           
                   1994                          $5,000,000        $2,531,000         7.2% 
                                                                                     
</TABLE>

         For purposes of the Company's borrowings the prime rate was 8.25%,
         8.50% and 8.50% at December 31, 1996, 1995 and 1994, respectively.

         The Company purchased a building and funded its cost, including
         improvements, in part, through mortgage notes. The notes, which have an
         aggregate balance of $405,834 and $318,207 at December 31, 1996 and
         1995, respectively, bear interest at 8.22% per annum until October 6,
         1998 and then a variable rate of .5% above prime until maturity. The
         notes require aggregate payments of principal and interest of $4,353
         per month. Maturities on the notes are expected to be as follows: 1997
         - $19,600; 1998 - $21,300, 1999 - $23,000; 2000 - $25,000; 2001 -
         $27,200; thereafter - $289,734.

NOTE 3.  PARTNERS' EQUITY

         Units represent limited partnership interests in Everflow. The Units
         are transferable subject only to the approval of any transfer by
         Everflow Management Company and to the laws governing the transfer of
         securities. The Units are not listed for trading on any securities
         exchange nor are they quoted in the automated quotation system of a
         registered securities association. However, Unitholders have an
         opportunity to require Everflow to repurchase their Units pursuant to
         the Repurchase Right.

         Under the terms of the limited partnership agreement, initially, 99% of
         revenues and costs are allocated to the Unitholders (the limited
         partners) and 1% of revenues and costs are allocated to the General
         Partner. Such allocation has changed and will change in the future due
         to Unitholders electing to exercise the Repurchase Right.


                                      F-14
<PAGE>   48

                        EVERFLOW EASTERN PARTNERS, L. P.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 3.  PARTNERS' EQUITY (CONTINUED)

         The partnership agreement provides that Everflow will repurchase for
         cash up to 10% of the then outstanding Units, to the extent Unitholders
         offer Units to Everflow for repurchase pursuant to the Repurchase
         Right. The Repurchase Right entitles any Unitholder, between May 1 and
         June 30 of each year, to notify Everflow that he elects to exercise the
         Repurchase Right and have Everflow acquire certain or all of his Units.
         The price to be paid for any such Units will be calculated based upon
         the audited financial statements of the Company as of December 31 of
         the year prior to the year in which the Repurchase Right is to be
         effective and independently prepared reserve reports. The price per
         Unit will be equal to 66% of the adjusted book value of the Company
         allocable to the Units, divided by the number of Units outstanding at
         the beginning of the year in which the applicable Repurchase Right is
         to be effective less all Interim Cash Distributions received by a
         Unitholder. The adjusted book value is calculated by adding partners'
         equity, the Standardized Measure of Discounted Future Net Cash Flows
         and the tax effect included in the Standardized Measure and subtracting
         from that sum the carrying value of oil and gas properties (net of
         undeveloped lease costs). If more than 10% of the then outstanding
         Units are tendered during any period during which the Repurchase Right
         is to be effective, the Investors' Units so tendered shall be prorated
         for purposes of calculating the actual number of Units to be acquired
         during any such period. The price associated with the Repurchase Right,
         based upon the December 31, 1996 calculation, is estimated to be $5.21
         per Unit, net of the distributions ($.25 per Unit in total) expected to
         be made in January and April 1997.

         Units repurchased pursuant to the Repurchase Right, for each of the
         four years in the period ended December 31, 1996, are as follows:

<TABLE>
<CAPTION>
                                     Per Unit
                 ------------------------------------------------------
                 Calculated                                                                          Units
                 Price for                    Less                                                 Outstanding
                 Repurchase     Premium      Interim             Net           # of Units          Following
         Year     Right         Offered    Distributions      Price Paid       Repurchased         Repurchase
         ----    ----------     -------    -------------      ----------       -----------         ----------
         <S>      <C>            <C>          <C>               <C>               <C>              <C>      
         1993     $4.60          $ --         $.25              $ 4.35            40,002           6,541,524


         1994     $4.80          $ --         $.25              $ 4.55            26,958           6,514,566


         1995     $4.72          $.28         $.375             $4.625            81,522           6,433,044


         1996     $4.48          $.27         $.25              $ 4.50            53,103           6,379,941
</TABLE>



NOTE 4.  PROVISION FOR INCOME TAXES

         As referred to in Note 1, EEI and its subsidiaries account for current
         and deferred income taxes under the provisions of SFAS No. 109. The
         deferred taxes are the result of temporary differences arising from
         differences in financial reporting and tax reporting methods for EEI's
         proved properties.


                                      F-15
<PAGE>   49

                        EVERFLOW EASTERN PARTNERS, L. P.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 4.  PROVISION FOR INCOME TAXES (CONTINUED)

         A reconciliation between taxes computed at the Federal statutory rate
         and the effective tax rate in the statements of income follows:

<TABLE>
<CAPTION>
                                                                     Year Ended December 31,
                                            ---------------------------------------------------------------------------
                                                       1996                        1995                     1994
                                              ------------------         ------------------         ------------------
                                              Amount          %          Amount          %          Amount          %
                                              ------         ---         ------         ---         ------         ---
         <S>                                <C>              <C>       <C>              <C>       <C>              <C> 
         Provision based on the
           statutory rate (for taxable
           income up to $10,000,000)        $ 1,434,000      34.0      $ 1,719,000      34.0      $ 1,950,000      34.0

         Tax effect of:
           Non-taxable status of the
             Programs and Everflow           (1,368,000)    (32.4)      (1,688,000)    (33.4)      (1,927,000)    (33.6)
           Excess statutory depletion           (90,000)     (2.1)        (102,000)     (2.0)        (116,000)     (2.0)
           Graduated tax rates, state
             income tax and other - net          14,000       0.3         (119,000)     (2.4)         (87,000)     (1.5)
                                            -----------      ----      -----------      ----      -----------      ----
                 Total                      $   (10,000)     (0.2)     $  (190,000)     (3.8)     $  (180,000)     (3.1)
                                            ===========      ====      ===========      ====      ===========      ====
</TABLE>



         EEI has percentage depletion deduction carryforwards for tax purposes
         of approximately $2,000,000. These carryforwards can be carried forward
         indefinitely. For financial reporting purposes, the deferred tax
         liability at December 31, 1996 and 1995 has been reduced by
         approximately $680,000 and $750,000, respectively, for the tax effect
         of carryforwards.

NOTE 5.  RETIREMENT PLAN

         The Company has a defined contribution plan pursuant to Section 401(K)
         of the Internal Revenue Code for all employees who had reached the age
         of 21 and completed one year of service. Contributions to the plan are
         at the discretion of EMC's Board of Directors. The Company made
         contributions of $38,595, $35,815 and $37,440 for the years ended
         December 31, 1996, 1995 and 1994, respectively.

NOTE 6.  RELATED PARTY TRANSACTIONS

         Since 1989, EEI provided certain employees with an opportunity to
         receive assignments of certain Overriding Royalty Interests which were
         created at the time EEI generated an oil and gas lease for acquisition
         by oil and gas drilling programs. Not all leases generated and acquired
         by such Programs had an Overriding Royalty Interest reserved for
         assignment to employees. Certain Employees of the Company have been
         given the option of having a portion of their compensation in the form
         of an assignment in certain of such Overriding Royalty Interests. Those
         employees who elect to receive a portion of their compensation in this
         form receive an assignment of a pro rata portion of each of the
         Overriding Royalty Interests selected. During the calendar years ended
         December 31, 1996, 1995 and 1994, approximately $121,000, $199,000 and
         $157,000, respectively, was distributed to such employees from such
         Overriding Royalty Interests.


                                      F-16
<PAGE>   50

                        EVERFLOW EASTERN PARTNERS, L. P.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 6.  RELATED PARTY TRANSACTIONS (CONTINUED)

         The Company's Officers, Directors, Affiliates and certain employees
         have frequently participated and will likely participate in the future
         as working interest owners in wells in which the Company has an
         interest. Frequently, the Company has loaned the funds necessary to
         participate in the drilling and development of such wells. Such loans
         currently accrue interest at the prime rate plus 1% per annum. Such
         receivables are expected to be paid from production revenues
         attributable to such interests or through joint interest assessments.

NOTE 7. BUSINESS SEGMENTS, RISKS AND MAJOR CUSTOMERS

         The Company operates exclusively in the United States, almost entirely
         in Ohio and Pennsylvania, in the exploration, development and
         production of oil and gas.

         The Company operates in an environment with many financial risks,
         including, but not limited to, the ability to acquire additional
         economically recoverable oil and gas reserves, the inherent risks of
         the search for, development of and production of oil and gas, the
         ability to sell oil and gas at prices which will provide attractive
         rates of return, and the highly competitive nature of the industry and
         worldwide economic conditions. The Company's ability to expand its
         reserve base and diversify its operations is also dependent upon the
         Company's ability to obtain the necessary capital through operating
         cash flow, additional borrowings or additional equity funds. Various
         federal, state and governmental agencies are considering, and some have
         adopted, laws and regulations regarding environmental protection which
         could adversely affect the proposed business activities of the Company.
         The Company cannot predict what effect, if any, current and future
         regulations may have on the operations of the Company.

         Approximate percentages of oil and gas sales from purchasers who
         represented greater than 10% of total oil and gas sales for the years
         ended December 31, 1996, 1995 and 1994, respectively, were as follows:

<TABLE>
<CAPTION>
                                      Customer                       1996        1995       1994
                                      --------                       ----        ----       ----
                    <S>                                               <C>         <C>        <C>
                    The East Ohio Gas Company                         72%         77%        72%
                    Quaker State Refining Corporation                 12           11        10
                                                                      --           --        --

                                                                      84%         88%        82%
                                                                      ==          ==         == 
</TABLE>


                                      F-17
<PAGE>   51

                        EVERFLOW EASTERN PARTNERS, L. P.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 7.  BUSINESS SEGMENTS, RISKS AND MAJOR CUSTOMERS (CONTINUED)

         The Company has various Intermediate Term Adjustable Price Gas Purchase
         Agreements (the "East Ohio Contracts") with The East Ohio Gas Company
         ("East Ohio"). Pursuant to the East Ohio Contracts and subject to
         certain restrictions and adjustments, East Ohio is obligated to
         purchase, and the Company is obligated to sell, all natural gas
         production from a specified list of wells (the "Contract Wells"). A
         summary of Everflow's principal East Ohio Gas Contracts at December 31,
         1996 follows:

<TABLE>
<CAPTION>
          Contract     Period      Termination    Number      Required         Shut-In           Limitation
            Date       Covered       Clause      of Wells     Purchases       Provisions         Provisions
          --------     -------     -----------   --------     --------        ----------         ----------
           <S>       <C>              <C>          <C>      <C>             <C>              <C>   
           9/3/91    11/91-10/01      11/97        449      275 days/year   Maximum of       May-Oct. - 50% of
                                                                            60 days (Nov.-   production from
                                                                            April)           prior 6 month period

          3/10/94     4/94-3/00       None          49      275 days/year   Maximum of       May-Oct. - 50% of
                                                                            60 days (Nov.-   production from
                                                                            April)           prior 6 month period

          8/10/94   11/94-10/00       None          28       Nov.-March     April-Oct.       Shut-in provisions

<CAPTION>
                                                      Net Price per MCF
          ------------------------------------------------------------------------------------------------------
                          Initially                                       Adjusted Prices
          Contract ---------------------------------------------------------------------------------------------
            Date   Nov.-April  May-Oct.  11/94-4/95  5/95-10/95  11/95-4/96   5/96-10/96  11/96-4/97  5/97-10/97
          -------- ----------  --------  ----------  ----------  ----------   ----------  ----------  ----------

           <S>       <C>        <C>        <C>         <C>          <C>         <C>         <C>         <C>   
            9/3/91   $ 2.85     $ 2.22     $ 3.34      $ 2.71       $ 2.84      $ 2.21      $ 3.31      $ 2.68

           3/10/94   $ 2.98     $ 2.28        No adjustment         $ 2.48      $ 1.78      $ 2.95      $ 2.25

           8/10/94   $ 3.08       N/A         No adjustment         $ 2.82        N/A       $ 3.55        N/A
</TABLE>


         As detailed above, the price paid for natural gas purchased under the
         East Ohio Contracts varies with the production period. Pricing under
         the East Ohio Contracts is adjusted annually (after the first
         adjustment), up or down, by an amount equal to 80% of the increase or
         decrease in East Ohio's average Gas Cost Recovery ("GCR") rates. The
         net price per MCF includes $.20 per MCF for transportation less a $.02
         per MCF metering charge. Additionally, the 8/10/94 contract provides
         for a price cap equal to the quarterly GCR, which amounted to $3.87 and
         $2.82 in November 1996 and 1995, respectively.

         In addition to the East Ohio Contracts described above, the Company has
         various short-term contracts (covering production from 45 gross wells
         at December 31, 1996) which have a primary term of 15 months or less.
         Twenty-four of the wells are covered by fixed price contracts that
         provide for the sale of the Company's gas at $2.65 to $2.95 per MCF.
         The remaining twenty-one wells are covered by a variable rate contract
         that provides for the sale of the Company's gas based on a monthly
         NYMEX settlement, with no floor price provisions, plus $.35
         (April-Oct.) or $.55 (Nov.-March) per MCF (including transportation
         allowances). There are no significant production restrictions under the
         Company's short-term contracts as they relate to the Company's existing
         wells. Future wells can be added to certain of the contracts subject to
         gross production restrictions under the contracts.


                                      F-18
<PAGE>   52

                        EVERFLOW EASTERN PARTNERS, L. P.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 7.  BUSINESS SEGMENTS, RISKS AND MAJOR CUSTOMERS (CONTINUED)

         In January 1993, the Company entered into a 3 year crude oil purchase
         agreement with Quaker State Refining Corporation ("Quaker State"). The
         agreement provides for the sale of significantly all of the Company's
         crude oil production to Quaker State at a premium price of $.40 or $.80
         per barrel over Quaker State's posted price. The Company is entitled to
         the premium provided it makes available to Quaker State its product in
         80 ($.40 premium) or 160 ($.80 premium) barrel minimum quantities. The
         provisions of this agreement are now customary for crude oil production
         purchased in the Appalachian Basin. As a result, the Company expects to
         continue to receive pricing consistent with the terms of the agreement
         without a formal agreement in place.

         The Company expects that East Ohio and Quaker State will be the only
         major customers in 1997.

NOTE 8.  COMMITMENTS AND CONTINGENCIES

         Everflow paid a dividend in January 1997 of $.125 per Unit. The
         distribution amounted to approximately $806,000.

         The Company is the General Partner in certain oil and gas partnerships.
         As General Partner, the Company shares in unlimited liability to third
         parties with respect to the operations of the Partnerships and may be
         liable to limited partners for losses attributable to breach of
         fiduciary obligations.

NOTE 9.  SUPPLEMENTAL INFORMATION RELATING TO OIL AND GAS PRODUCING ACTIVITIES
         (UNAUDITED)

         The following supplemental unaudited oil and gas information is
         required by Statement of Financial Accounting Standards (SFAS) No. 69,
         "Disclosures About Oil and Gas Producing Activities."

         The tables on the following pages set forth pertinent data with respect
         to the Company's oil and gas properties, all of which are located
         within the continental United States.

                     CAPITALIZED COSTS RELATING TO OIL AND GAS
                              PRODUCING ACTIVITIES

<TABLE>
<CAPTION>
                                                             December 31,
                                            -------------------------------------------
                                                1996            1995            1994
                                                ----            ----            ----
         <S>                                <C>             <C>             <C>        
         Proved oil and gas properties      $98,321,815     $95,362,378     $87,964,253
         Pipeline and support equipment         451,971         426,500         358,263
                                            -----------     -----------     -----------
                                             98,773,786      95,788,878      88,322,516
         Accumulated depreciation,
           depletion, amortization
           and write down                    51,286,350      47,598,650      42,837,170
                                            -----------     -----------     -----------
         Net capitalized costs              $47,487,436     $48,190,228     $45,485,346
                                            ===========     ===========     ===========
</TABLE>


                                      F-19
<PAGE>   53

                        EVERFLOW EASTERN PARTNERS, L. P.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 9.  SUPPLEMENTAL INFORMATION RELATING TO OIL AND GAS PRODUCING ACTIVITIES
         (UNAUDITED) (CONTINUED)


<TABLE>
<CAPTION>
                    COSTS INCURRED IN OIL AND GAS PRODUCING ACTIVITIES
                                                                  December 31,
                                              ------------------------------------------------
                                                     1996              1995              1994
                                                    ----              ----              ----
         <S>                                   <C>               <C>               <C>         
         Property acquisition costs            $    972,653      $  1,056,162      $  1,119,842
         Development costs                        4,109,532         6,675,443         5,113,387

<CAPTION>
                 RESULTS OF OPERATIONS FOR OIL AND GAS PRODUCING ACTIVITIES

                                                                  December 31,
                                              ------------------------------------------------
                                                     1996              1995              1994
                                                    ----              ----              ----
         <S>                                   <C>               <C>               <C>         
         Oil and gas sales                     $ 14,078,491      $ 13,969,378      $ 14,884,027
         Production costs                        (2,192,349)       (2,032,706)       (1,835,432)
         Depreciation, depletion and
           amortization                          (5,155,681)       (4,898,667)       (5,040,940)
         Abandonment and write down of
           oil and gas properties                  (671,992)         (137,587)         (197,691)
                                               ------------      ------------      ------------
                                                  6,058,469         6,900,418         7,809,964

         Income tax expense                         360,000           272,000           280,000
                                              ------------      ------------      ------------
 
        Results of operations for oil and
           gas producing activities
           (excluding corporate overhead
           and financing costs)                $  5,698,469      $  6,628,418      $  7,529,964
                                               ============      ============      ============
</TABLE>



         Income tax expense was computed using statutory tax rates and reflects
         permanent differences that are reflected in the Company's consolidated
         income tax expense for the year.


                                      F-20
<PAGE>   54

                        EVERFLOW EASTERN PARTNERS, L. P.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 9.  SUPPLEMENTAL INFORMATION RELATING TO OIL AND GAS PRODUCING ACTIVITIES
         (UNAUDITED) (CONTINUED)


               ESTIMATED QUANTITIES OF PROVED OIL AND GAS RESERVES

<TABLE>
<CAPTION>
                                                    Oil            Gas
                                                   (BBLS)          (MCF)
                                                   ------          -----
         <S>                                     <C>            <C>       
         Balance, December 31, 1993               813,000       38,106,000
           Extensions, discoveries and other
             additions                             39,000        3,650,000
           Production                            (107,000)      (4,342,000)
           Revision of previous estimates          64,000          533,000
                                                 --------       ---------- 

         Balance, December 31, 1994               809,000       37,947,000
           Extensions, discoveries and other
             additions                            120,000        5,891,000
           Production                            (107,000)      (4,259,000)
           Revision of previous estimates          10,000          479,000
                                                 --------       ---------- 

         Balance, December 31, 1995               832,000       40,058,000
           Extensions, discoveries and other
             additions                            119,000        3,665,000
           Production                            (112,000)      (4,264,000)
           Revision of previous estimates          73,000        1,556,000
                                                 --------       ---------- 

         Balance, December 31, 1996               912,000       41,015,000
                                                 ========       ========== 


         PROVED DEVELOPED RESERVES:
           December 31, 1993                      813,000       38,106,000
           December 31, 1994                      809,000       37,947,000
           December 31, 1995                      832,000       40,058,000
           December 31, 1996                      912,000       41,015,000
</TABLE>



         The Company has not determined proved reserves associated with its
         proved undeveloped acreage. At December 31, 1996 and 1995, the Company
         had 2,800 and 3,000 net proved undeveloped acres, respectively. The
         carrying cost of the proved undeveloped acreage that is included in
         proved properties amounted to $1,794,477 and $1,633,563 at December 31,
         1996 and 1995, respectively.


                                      F-21
<PAGE>   55

                        EVERFLOW EASTERN PARTNERS, L. P.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 9.  SUPPLEMENTAL INFORMATION RELATING TO OIL AND GAS PRODUCING ACTIVITIES
         (UNAUDITED) (CONTINUED)


<TABLE>
<CAPTION>
                          STANDARDIZED MEASURE OF DISCOUNTED FUTURE
                                       NET CASH FLOWS

                                                                  December 31,
                                                    ---------------------------------------
                                                      1996            1995            1994
                                                      ----            ----            ----
                                                             (Thousands of Dollars)
     <S>                                            <C>             <C>            <C>     
     Future cash inflows from sales of oil
       and gas                                      $132,308        $111,753       $119,170
     Future production and development                                             
       costs                                          49,255          42,417         43,861
     Future income tax expense                         2,171           2,090          2,538
                                                    --------        --------       --------
                                                                                   
     Future net cash flows                            80,882          67,246         72,771
     Effect of discounting future net cash                                         
       flows at 10% per annum                         30,375          25,441         27,896
                                                    --------        --------       --------
                                                                                   
     Standardized measure of discounted                                            
       future net cash flows                        $ 50,507        $ 41,805       $ 44,875
                                                    ========        ========       ========
                                                                             

<CAPTION>
                                  CHANGES IN THE STANDARDIZED MEASURE OF DISCOUNTED
                                                FUTURE NET CASH FLOWS

                                                                  December 31,
                                                    ---------------------------------------
                                                      1996            1995            1994
                                                      ----            ----            ----
                                                             (Thousands of Dollars)
<S>                                                 <C>             <C>            <C>     
     Balance, beginning of year                     $  41,805       $  44,875      $  47,070
     Extensions, discoveries and other                                             
              additions                                 6,168           8,229          5,263
     Development costs incurred                           308             351            246
     Revision of previous estimates                     2,616             634            909
     Sales of oil and gas, net of production                                       
              costs                                   (11,886)        (11,937)       (13,049)
     Net change in income taxes                           (20)            279            316
     Net changes in prices and production                                          
              costs                                     5,660          (5,241)        (2,219)
     Accretion of discount                              4,181           4,488          4,707
     Other                                              1,675             127          1,632
                                                    ---------       ---------      ---------
                                                                                   
     Balance, end of year                           $  50,507       $  41,805      $  44,875
                                                    =========       =========      =========
</TABLE>

                                      F-22
<PAGE>   56


                        EVERFLOW EASTERN PARTNERS, L. P.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 9.  SUPPLEMENTAL INFORMATION RELATING TO OIL AND GAS PRODUCING ACTIVITIES
         (UNAUDITED) (CONTINUED)

         Under the guidelines of SFAS No. 69, estimated future cash flows are
         determined based on year-end prices for crude oil, current allowable
         prices applicable to expected natural gas production, estimated
         production of proved crude oil and natural gas reserves, estimated
         future production and development costs of reserves, based on current
         economic conditions, and the estimated future income tax expense, based
         on year-end statutory tax rates (with consideration of future tax rates
         already legislated) to be incurred on pretax net cash flows less the
         tax basis of the properties involved. Such cash flows are then
         discounted using a 10% rate.

         The methodology and assumptions used in calculating the standardized
         measure are those required by SFAS No. 69. It is not intended to be
         representative of the fair market value of the Company's proved
         reserves. The valuation of revenues and costs does not necessarily
         reflect the amounts to be received or expended by the Company. In
         addition to the valuations used, numerous other factors are considered
         in evaluating known and prospective oil and gas reserves.




                                      F-23