`SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549


                                  FORM 10-KSB/A


         ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
                              EXCHANGE ACT OF 1934
                   FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999

                 Commission File Number 0-6580 [GRAPHIC OMITTED]


                            PEASE OIL AND GAS COMPANY
            ---------------------------------------------------------
           (Name of small business issuer as specified in its charter)


                 Nevada                                        87-0285520
      ------------------------------                     ---------------------
     (State or other jurisdiction of                        (I.R.S. Employer
      incorporation or organization)                     Identification Number)

                          751 Horizon Court, Suite 203
                         Grand Junction, Colorado 81506
                    (Address of principal executive offices)
                                 (970) 245-5917
                 ----------------------------------------------
                (Issuer's telephone number, including area code)

        Securities registered pursuant to Section 12(b) of the Act: None
           Securities registered pursuant to Section 12(g) of the Act:
                     Common Stock (Par Value $.10 Per Share)

     Indicate  by check  mark  whether  the  issuer  (1) has filed  all  reports
required to be filed by Section 13 or 15(d) of the  Exchange Act during the past
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  [ ]

     The issuer's revenues for its most recent fiscal year were $2,146,959.


     As of March 30, 2000 the issuer had 1,731,398 shares of its $0.10 par value
Common Stock issued and outstanding. Based upon the closing sale price of
$0.4375 per share on March 30, 2000, the aggregate market value of the common
stock, the Registrant's only class of voting stock, held by non-affiliates was
$726,000.

       Transitional Small Business Issuer Disclosure Format Yes [ ] No [X]



                                TABLE OF CONTENTS


PART I                                                                      PAGE
------                                                                      ----
ITEM 1.     BUSINESS                                                          1
               History and Overview                                           1
               Recent Developments                                            1
               Business Strategy                                              2
               Operations                                                     3
               Competition                                                    3
               Markets                                                        3
               Regulations                                                    4
               Operational Hazards and Insurance                              5
               Business Risks                                                 5
               Administration                                                11
ITEM 2.     PROPERTIES                                                       12
               Principal Oil and Gas Interests                               12
               Gulf Coast Properties and Prospects                           12
               Rocky Mountain Properties                                     13
               Title to Properties                                           13
               Estimated Proved Reserves                                     13
               Net Quantities of Oil and Gas Produced                        14
               Drilling Activity                                             15
ITEM 3.     LEGAL PROCEEDINGS                                                15
ITEM 4.     SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS              15
PART II
ITEM 5.     MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
             STOCKHOLDER MATTERS                                             16
               Market Information                                            16
               Stockholders                                                  16
               Dividends                                                     16
               Recent Sales of Unregistered Securities                       17
ITEM 6.     MANAGEMENT'S DISCUSSION AND ANALYSIS                             18
               Liquidity and Capital Resources                               18
               Results of Operations                                         19
               Other Matters                                                 24
ITEM 7.     FINANCIAL STATEMENTS                                             25
ITEM 8.     CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
             AND FINANCIAL DISCLOSURE                                        43
PART III
ITEM 9.     DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
             COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT               43
ITEM 10.   EXECUTIVE COMPENSATION                                            45
ITEM 11.   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT    46
ITEM 12.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS                    48
PART IV
ITEM 13.   EXHIBITS AND REPORTS ON FORM 8-K                                  49





                                     PART I

ITEM 1 - BUSINESS

HISTORY AND OVERVIEW

Pease was incorporated in the state of Nevada on September 11, 1968 to engage in
the oil and gas acquisition, development and production business. Prior to 1993,
Pease conducted business primarily in Western Colorado and Eastern Utah. In
August 1993, Pease commenced operating in the Denver-Julesburg Basin ("DJ
Basin") of northeastern Colorado through an acquisition which substantially
expanded Pease's operations. In the years following the acquisition, Pease
invested several million dollars in an effort to exploit the assets acquired and
experienced marginal success. Pease initiated efforts in 1996 and 1997 to expand
its resource base through the acquisition and exploration of properties located
in the Gulf Coast region of southern Louisiana and Texas. During 1998, Pease
sold substantially all of its Rocky Mountain oil and gas assets for
approximately $3.2 million. Accordingly, Pease now maintains only non-operated
interests in three core areas in southern Louisiana and Texas. These assets are
discussed more thoroughly below under the caption "Properties and Prospects."

RECENT DEVELOPMENTS:

Carpatsky Merger - In response to historically poor financial results stemming
from a series of dry holes and other factors, Pease began in August 1998 to
vigorously pursue a merger candidate in order to, among other things, increase
Pease's asset base and improve the chances of financing future opportunities. On
September 1, 1999, we signed an Agreement and Plan of Merger ("Merger
Agreement") with Carpatsky Petroleum, Inc. ("Carpatsky"), a publicly held
company traded on the Alberta Stock Exchange under the symbol "KPY". Carpatsky
is engaged in production and development of oil, gas and condensate in the
Republic of Ukraine. The transaction is still conditioned upon, among other
things, regulatory and shareholder approvals. Pursuant to the terms of the
proposed merger transaction, Pease will issue approximately 44.96 million shares
of common stock and 102.41 million shares of a newly designated preferred stock
to acquire all the outstanding stock of Carpatsky. In addition, all of Pease's
currently outstanding Series B Preferred Stock will be exchanged for
approximately 8.9 million shares of common stock at the close of the
transaction. All holders of the Series B Preferred stock have agreed that no
more dividends shall be paid on their holdings if the contemplated transaction
with Carpatsky is ultimately consummated. They have also agreed not to sell or
convert any outstanding shares of the Series B Preferred until the contemplated
transaction with Carpatsky is either completed or abandoned.

The Carpatsky assets consist of interests held in two separate fields: 1.) the
Rudovsko-Chervonozavodskoye natural gas and condensate field (the "RC" field)
located in the Poltava District of Eastern Ukraine; and 2.) the
Bitkov-Babchensky oil field (the "Bitkov field") located in the Ivano-Frankns'k
District of southwest Ukraine. Common to the oil and gas industry in many
foreign countries, Carpatsky does not own an interest in any real property. But
rather Carpatsky's rights and obligations are governed by and structured through
joint ownership or joint venture arrangements.

Bellwether Investment in Carpatsky - In December 1999, Bellwether Exploration
Company ("Bellwether") purchased 95.45 million shares of a newly issued class of
Carpatsky preferred shares and warrants to purchase 12.5 million Carpatsky
common shares for one year at an exercise price of US$0.125 per share. The
purchase price for the preferred shares and warrants was US$4.0 million. The
preferred shares are convertible into 50 million common shares of Carpatsky.
Bellwether is an independent oil and gas company based in Houston, Texas.
Bellwether's common stock is traded in the NASDAQ stock market under the symbol
"BELW."

The preferred shares vote as a class with the common shares of Carpatsky on all
matters submitted to shareholders, including the election of directors. The
preferred shares issued to Bellwether constitute a majority of the total number
of votes which may be cast by shareholders. Therefore, Bellwether will control
all matters voted on by Carpatsky stockholders which require a majority vote,
and will be able to veto any other matters voted on by Carpatsky's shareholders.
Mr. J.P. Bryan and Dr. Jack Birks, both of whom are members of Bellwether's
board of directors, were appointed to Carpatsky's board of directors in
connection with the purchase of preferred stock by Bellwether. Additionally,
three Canadian residents were appointed by Bellwether to Carpatsky's board of
directors on a temporary basis. Mr. Bryan also became Carpatsky's Chief
Executive Officer.






In the re-domestication and merger, the Bellwether preferred shares will be
converted into 102.41 million shares of preferred stock of the newly combined
company. This preferred stock will vote as a class with our common stock, and
will entitle Bellwether to cast a majority of the votes submitted to the
stockholders of the newly combined entity, including the election of directors.
Bellwether will therefore control all matters voted on by our stockholders after
the merger.

In addition, Messrs. Bryan, Davis and Sledge and Dr. Birks will become members
of our board of directors and Mr. Bryan will be our chief executive officer.

Details of the Merger - The description of the Merger Agreement set forth in
this section is a summary of the material provisions of the Merger Agreement and
is qualified in its entirety by reference to the Merger Agreement, as amended.
Essentially, the Merger Agreement that Pease and Carpatsky have entered into
provides that:

     1.   Carpatsky will continue and redomesticate in the State of Delaware and
          thereby become a Delaware corporation;

     2.   concurrently with redomestication, a wholly-owned subsidiary of Pease
          that will be created specifically for this transaction, will be merged
          with and into Carpatsky;

     3.   we will change our name to "Radiant Energy, Inc.";

     4.   we will amend our Articles of Incorporation to increase the number of
          shares of common stock and preferred stock we are allowed to issue;

     5.   All of the outstanding Pease Series B Convertible Preferred Stock will
          be exchanged for 8,865,665 shares of Pease common stock;

     6.   Carpatsky common stockholders will receive 44,959,557 shares of
          Radiant Energy common stock and 102,410,000 shares of Radiant Energy
          preferred stock in exchange for all outstanding Carpatsky shares. This
          number will be reduced to reflect the number of shares, if any, for
          which stockholders seek appraisal rights;

     7.   warrants and options entitling holders to purchase Carpatsky shares
          shall be adjusted to permit holders to acquire 17,448,263 shares of
          Radiant Energy common stock, exercisable at $0.35 per share.

The merger is subject to the satisfaction of a number of conditions, including
regulatory approval and the approval by stockholders of both Pease and
Carpatsky.

BUSINESS STRATEGY

Since 1997, we have generally participated as a minority, non-operating interest
holder in oil and natural gas drilling projects with industry partners. Although
we have not operated our properties or originated any exploration prospects, we
have actively participated in evaluating opportunities presented by our industry
partners. In addition to pursuing and completing the merger with Carpatsky, our
current and future business strategy will focus on expanding our reserve base
and future cash flows by continuing to develop the reserves within our proven
properties, exploiting select exploration opportunities in the Gulf Coast Region
and pursuing growth through acquisitions of companies or properties that have
proved reserves with developmental potential. For the foreseeable future, our
developmental activities, exploration efforts and resources will be focused on
our three core areas in the Gulf Coast, which are:

     1.   The East Bayou Sorrel Field in Iberville Parish, Louisiana, operated
          by National Energy Group, Inc.;

     2.   The Maurice Field in Vermillion Parish, Louisiana, operated by Amerada
          Hess; and


                                        2





     3.   The Formosa, Texana and Ganado 3-D seismic exploration prospects,
          encompassing 130,000 acres in and around Jackson County, Texas,
          operated by Parallel Petroleum.

OPERATIONS

As of December 31, 1999, we had varying ownership interests in 10 gross (.8 net)
non-operated wells located in Southern Louisiana and Texas.

The following table presents oil and gas reserve information within our major
operating areas (onshore Louisiana and Texas) as of December 31, 1999:


                                    Net Proved Reserves
                      ---------------------------------------------
                      Bbls                Mcf              BOE (6:1)
                      ----                ---              --------
                    334,000            1,359,000            561,000

We are a non-operator in the oil and natural gas prospects we pursue in the Gulf
Coast region.

COMPETITION

The oil and gas industry is highly competitive in many respects, including
identification of attractive oil and gas properties for acquisition, drilling
and development, securing financing for such activities and obtaining the
necessary equipment and personnel to conduct such operations and activities. We
compete with a number of other companies, including large oil and gas companies
and other independent operators with greater financial resources and with more
experience. Many other oil and gas companies in the industry have financial
resources, personnel, and facilities substantially greater than ours. There can
be no assurance that Pease will be able to compete effectively with these other
entities.

MARKETS

Overview - The three principal products which we currently produce and market
(through our operating partners) are crude oil, natural gas and natural gas
liquids. We do not currently use commodity futures contracts and price swaps in
sales or marketing of natural gas and crude oil.

Crude Oil - Oil produced from our properties is generally transported by truck,
barge or pipeline to unaffiliated third-party purchasers at the prevailing field
price. Currently, the primary purchaser of our proportionate share of crude oil
is Plains Marketing, L.P. which buys over 80% of our current crude oil
production. The contracts are month-to-month and subject to change. The market
for our crude oil is competitive and therefore we do not believe that the loss
of one of our primary purchasers would have a material adverse effect on our
business because other arrangements could be made to market our crude oil
products. We do not anticipate problems in selling future oil production because
purchases are made based on current market conditions and pricing. Oil prices
are subject to volatility due to several factors beyond our control including:
political turmoil; domestic and foreign production levels; OPEC's ability to
adhere to production quotas; and possible governmental control or regulation.

Natural Gas - We sell, through our operating partners, the natural gas
production at the wellhead. We generally sell to various pipeline purchasers or
natural gas marketing companies. The property operators sell the natural gas and
pass the revenue on to us when it is received. Currently, National Energy Group,
Inc. and Amerada Hess Corporation sell and distribute substantially all of our
natural gas and corresponding revenues. The wellhead contracts have various
terms and conditions, including contract duration. Under each wellhead contract
the purchaser is generally responsible for gathering, transporting, processing
and selling the natural gas and natural gas liquids and we receive a net price
at the wellhead.

REGULATIONS

General - All aspects of the oil and gas industry are extensively regulated by
federal, state, and local governments in all areas in which we have operations.
The following discussion of regulation of the oil and gas industry is
necessarily brief and is not intended to constitute a complete discussion of the

                                        3




various statutes, rules, regulations or governmental orders to which our
operations may be subject.

Price Controls on Liquid Hydrocarbons - There are currently no federal price
controls on liquid hydrocarbons (including oil, natural gas and natural gas
liquids). As a result, we sell oil produced from our properties at unregulated
market prices which historically have been volatile.

Federal Regulation of Sales and Transportation of Natural Gas - The
transportation and sale of natural gas in interstate commerce was regulated
until 1993 pursuant to the Natural Gas Act ("NGA"), the Natural Gas Policy Act
of 1978 ("NGPA") and regulations promulgated thereunder. The Natural Gas
Wellhead Decontrol Act of 1989 eliminated all regulation of wellhead gas sales
effective January 1, 1993. As a result, gas sales are no longer regulated.

The transportation and resale in interstate commerce of natural gas we produce
continues to be subject to regulation by the Federal Energy Regulatory
Commission ("FERC") under the NGA. The transportation and resale of natural gas
transported and resold within the state of its production is usually regulated
by the state involved. Although federal and state regulation of the
transportation and resale of natural gas we produce currently does not have any
material direct impact on us, such regulation does have a material impact on the
market for our natural gas production and the price we receive for our natural
gas production. Adverse changes in the regulation affecting our gas markets
could have a material impact on us.

Commencing in the mid-1980s and continuing until the present, the FERC
promulgated several orders designed to correct market distortions and to make
gas markets more flexible and competitive. These orders have had a profound
influence on natural gas markets in the United States and have, among other
things, increased the importance of interstate gas transportation and encouraged
development of a large spot market for gas.

In addition to FERC regulation of interstate pipelines under the NGA, various
state commissions also regulate the rates and services of pipelines whose
operations are purely intrastate in nature. To the extent intrastate pipelines
elect to transport gas in interstate commerce under certain provisions of the
NGPA, those transactions are subject to limited FERC regulation under the NGPA
and may ultimately effect the price of natural gas which we produce and sell.

There are many legislative proposals pending in Congress and in the legislatures
of various states that, if enacted, might significantly affect the oil and gas
industry. We are not able to predict what will be enacted and thus what effect,
if any, such proposals would ultimately have on us.

State and Local Regulation of Drilling and Production - State regulatory
authorities have established rules and regulations requiring permits for
drilling, bonds for drilling, reclamation and plugging operations, limitations
on spacing and pooling of wells, and reports concerning operations, among other
matters. The states in which we have oil and gas interests also have statutes
and regulations governing a number of environmental and conservation matters,
including the unitization and pooling of oil and gas properties . In addition, a
few states also prorate production to the market demand for oil and gas or
establish maximum rates of production from certain oil and gas wells. Although
none of our wells currently exceed any mandated production limits, these
statutes and regulations could limit the rate at which oil and gas could
otherwise be produced or the prices obtained from our properties.

Also in recent years, pressure has increased in states where we have been active
to mandate compensation to surface owners for the effects of oil and gas
operations and to increase regulation of the oil and gas industry at the local
government level. Such local regulation in general is aimed at increasing the
involvement of local governments in the permitting of oil and gas operations,
requiring additional restrictions or conditions on the conduct of operations to

                                        4





reduce the impact on the surrounding community and increasing financial
assurance requirements. Accordingly, such regulation has the potential to delay
and increase the cost, or even in some cases to prohibit entirely, the conduct
of drilling activities on our properties.

Environmental Regulations - The production, handling, transportation and
disposal of oil and gas and by- products are subject to regulation under
federal, state and local environmental laws. In most instances, the
applicable regulatory requirements relate to water and air pollution control and
solid waste management measures or to restrictions of operations in
environmentally sensitive areas. However, environmental assessments have not
been performed on all of our properties. To date, expenditures for environmental
control facilities and for remediation have not been significant in relation to
our results of operations. However, it is reasonably likely that the trend in
environmental legislation and regulations will continue towards stricter
standards and may result in significant future costs to oil and gas producers.
For instance, efforts have been made in Congress to amend the Resource
Conservation and Recovery Act to reclassify oil and gas production wastes as
"Hazardous Waste," the effect of which would be to further regulate the
handling, transportation and disposal of such waste. If such legislation were to
pass, it could have a significant adverse impact on our operating costs, as well
as the oil and gas industry in general.

We believe that our operations comply with all applicable legislation and
regulations in all material respects, and that the existence of such regulations
has had no more restrictive effect on our method of operations than other
similar companies in the industry. Although we do not believe our business
operations presently impair environmental quality, compliance with federal,
state and local regulations which have been enacted or adopted regulating the
discharge of materials into the environment could have an adverse effect upon
our capital expenditures, earnings and competitive position, the extent of which
we are presently unable to assess. We are not aware of any environmental
degradation which exists, or the obligation for remediation of which would arise
under applicable state or federal environmental laws. We do not maintain a fund
for environmental or other similar costs. We would pay any such costs or
expenses out of operating capital.

OPERATIONAL HAZARDS AND INSURANCE

Our operations are subject to the usual hazards incident to the drilling and
production of oil and gas, such as blowouts, cratering, explosions,
uncontrollable flows of oil, gas or well fluids, fires, pollution, releases of
toxic gas and other environmental hazards and risks. These hazards can cause
personal injury and loss of life, severe damage to and destruction of property
and equipment, pollution or environmental damage and suspension of operations.

We maintain insurance of various types to cover its operations. Our insurance
does not cover every potential risk associated with the drilling and production
of oil and gas. In particular, coverage is not available for certain types of
environmental hazards. The occurrence of a significant uninsured adverse event
could have a material adverse effect on our financial condition and results of
operations. Moreover, no assurance can be given that we will be able to maintain
adequate insurance in the future at reasonable rates.

BUSINESS RISKS

Our business is subject to a number of risks which should be considered by our
stockholders and others who may read this report, including the following risk
factors, as well as the other information we have included or referenced.

Pease has generated operating losses for each of the last three years and has an
accumulated deficit of $33.5 million. The auditors have issued a qualified audit
report as of the most recent year end.

We incurred the following losses from operations:

     1.       $15.4 million for the year ended December 31, 1997;
     2.       $10.4 million for the year ended December 31, 1998; and
     3.       $0.2 million for the year ended December 31, 1999.




                                        5





At December 31, 1999 we had positive working capital of $922,105. However, our
auditors' report for the financial statements as of December 31, 1999 is
qualified as to whether our company has sufficient operating capital to enable
us to continue as a going concern.

We Are Not Currently Replacing All of Our Existing Reserves.

Oil and gas reserves which are being produced are depleting assets. Our future
cash flow and income are highly dependent on our ability to find or acquire
additional reserves to replace those being currently produced. We are not adding
reserves at present at the same pace at which they are being produced. Without
adding additional reserves in the future, our oil and gas reserves and
production will continue to decline.

Our Revenue Is Dependent Upon a Limited Number of Producing Wells.

Approximately 85% of our oil and gas production is currently accounted for by
three wells at East Bayou Sorrel operated by National Energy Group, Inc. A
significant curtailment or loss of production from any one of these wells would
have a material adverse effect on our future operating results and financial
condition.

We are likely to require additional financing. Failure to receive financing
could jeopardize our changes for future growth.

We anticipate that approximately $200,000 to as much as $1.2 million will be
required to develop our interests in our Gulf Coast properties through the end
of the first quarter of 2001. In addition, our outstanding $2.8 million in
convertible debentures will become payable at maturity in April 2001, and we may
become obligated to pay quarterly dividends on our outstanding Series B
Convertible Preferred Stock if the proposed merger with Carpatsky is abandoned.
These anticipated expenditures and obligations together are likely to exceed our
available cash resources during 2000 and early 2001.

Our planned merger with Carpatsky Petroleum, Inc. may not be completed.

We previously have announced our intention to merge with Carpatsky Petroleum,
Inc., whose principal assets consist of rights to oil and natural gas to be
produced in two oil and natural gas fields in Ukraine where Carpatsky has
agreements with entities affiliated with the Ukrainian government. Due to delays
in completing the merger and to difficulties which Carpatsky has experienced in
establishing the nature of its rights to the oil and natural gas which is
expected to be produced from the two properties, Pease may terminate the merger
agreement, or the merger might not be completed for other reasons. If we are
unable to complete the merger with Carpatsky, the expected diversification of
our natural resource properties will not be achieved. Also, we will receive no
benefit from the efforts of our management and expenses we have incurred in
pursuing this merger.

The holders of our outstanding non-voting Series B Convertible Preferred Stock,
who have agreed to convert the outstanding preferred stock into common stock in
connection with the proposed merger with Carpatsky would have the right to
convert the outstanding Series B Preferred Stock into common stock which will
equal over 90% of our common stock, thus severely diluting our existing common
stockholders. We previously announced in September 1998 that we would seek a
partner with which to combine our oil and natural gas business to benefit our
stockholders and debenture holders. If we are unable to complete the combination
with Carpatsky, we will consider seeking another merger partner.

Whether or not we complete our merger with Carpatsky, we will need to seek
additional financing. Additional financing may be difficult to raise.

     We expect the following sources for operating capital through the first
quarter of 2001:

     A.   Our cash assets, which shall be approximately $1.0 million at the end
          of March 2000; and
     B.   Future operating cash flow from our existing oil and natural gas
          production, which we estimate will be in excess of $350,000 per
          quarter during the remainder of 2000.


                                        6




To the extent that these sources are insufficient to meet our anticipated cash
requirements, we would be required to seek equity or debt financing, and we
presently have no anticipated source of financing. If we are unable to secure
additional financing, we may have to:

     1.   Forfeit our interest in development or exploratory wells which may be
          drilled by various operators in the oil and gas properties in which we
          have an interest in the Gulf Coast;
     2.   Assign our interest in drilling prospects to other participants on
          such terms as we can negotiate, if any;
     3.   Sell our interest in one or more of our existing properties;
     4.   Attempt to restructure the terms of our Series B Preferred Stock and
          outstanding convertible debt; and/or
     5.   Default on the provisions of Series B Preferred Stock and convertible
          debentures if a restructuring is necessary yet unsuccessful.

It is important to remember:

     a.)  Developing proved undeveloped oil and natural gas properties requires
          substantial capital;
     b.)  Any capital resources which are available may not be available on
          terms that are advantageous to us;
     c.)  If we issue additional equity or other securities to raise capital,
          the ownership interests for existing stockholders will be diluted; and
     d.)  Any additional securities issued to raise capital may have better
          rights, preferences or privileges than common stock held by our
          existing stockholders.

If we complete our merger with Carpatsky, we will be subject to a number of
risks relating to Carpatsky's ownership interest in oil and natural gas
properties in Ukraine.

We expect that most of the future oil and gas production following a merger with
Carpatsky would be from operations in Ukraine. The success of operations in
Ukraine would depend on the ability of the merged company to maintain the
relationships with local development partners in Ukraine, the political and
economic stability of Ukraine, export and transportation tariffs, local and
national tax requirements and exercise of foreign government sovereignty over
the exploration area. No assurance can be given that operations in Ukraine would
be profitable. Generally, the risks of operations in Ukraine will include the
following:

     1.  Risk of political and economic instability of Ukraine

     The form of government and economic institutions in the Ukraine have been
created relatively recently and may be subject to a greater risk of political
and economic instability or change than in countries where such institutions
have been in existence for longer periods of time. The government of Ukraine,
through wholly or majority owned regional oil and gas companies, is an essential
participant in the establishment of the arrangements defining each exploration
and development project, including Carpatsky's two projects. These arrangements,
therefore, may be subject to changes in the event of changes in government
institutions, government personnel or political power and the development of new
administrative policies and practices.

     2.  New market economy of Ukraine

     The infrastructures, labor pools, sources of supply and legal and social
institutions in Ukraine are not equivalent to those found in connection with
projects in North America. Moreover, the regulatory regime governing oil and gas
operations (including environmental regulations) has been recently promulgated,
and there is no enforcement history or established practice available to aid the
combined company in evaluating how the regulatory regime will affect operations.
The procedures for obtaining permits and approvals are cumbersome, and officials
have wide discretion in acting on applications and requests. Each of these
factors may result in a lower level of predictability and a higher risk of
frustration of expectations.


                                        7




     3.  Currency risk in Ukraine

     The merged company would be exposed to the risk of foreign currency
exchange losses in connection with operations in Ukraine by holding cash and
receivables denominated in foreign currencies during periods in which
a strengthening United States dollar may be experienced or by having or
incurring liabilities denominated in foreign currencies during periods in which
a weakening United States dollar may be experienced.

     4.  There are risks in producing and monetizing oil and gas produced in
Ukraine.

     All of Carpatsky's interests in oil and natural gas reserves are in the
Republic of Ukraine. To date, Carpatsky's gas production has been sold to state
enterprises and private companies within Ukraine. Only partial payment for sales
to state enterprises has been received. To address this situation the merged
company would attempt to transport natural gas produced from Carpatsky's
properties for sale in Western Europe which would help assure that full payment
for gas is timely received. In addition, the merged company would face other
risks in commercializing production of Carpatsky's natural gas reserves,
including the following:

     a.)  Regulations applicable to foreign companies in the oil and gas
          business in Ukraine;
     b.)  Competition in Ukraine;
     c.)  Limited access to transportation facilities for natural gas within
          Ukraine and for export;
     d.)  Differences of oil and natural gas prices in Ukraine from prevailing
          world prices for these commodities;
     e.)  Use of local resources to develop oil and natural gas reserves in
          Ukraine;
     f.)  The possibility that Ukraine may require produced oil and natural gas
          to be sold domestically;
     g.)  Currency exchange fluctuations;
     h.)  Restriction on repatriation of capital and profits;
     i.)  Confiscatory changes in Ukraine's tax regime; and
     j.)  Non-payment for gas sold and lack of reasonable rights to seek
          redress.

     Carpatsky does not speculate in foreign currencies, does not presently
maintain significant foreign currency cash balances, and has not engaged in any
currency hedging transactions. Dividends or distributions from Ukrainian
ventures may be received in hryvna, and there is no assurance that the merged
company would be able to convert such currency into United States dollars. Even
where convertibility is available, applicable exchange rates may not reflect a
parity in purchasing power. Fluctuations of exchange rates could result in a
devaluation of hryvna held by the merger company.

     5.  Business disputes must be resolved in a foreign jurisdiction

     ln the event of a future dispute in connection with Ukraine operations, the
merged company would be subject to the exclusive jurisdiction of foreign courts
or may not be successful in subjecting foreign persons to the jurisdiction of
the courts of the United States or enforcing U.S. judgments in such other
jurisdictions. We may also be hindered or prevented from enforcing rights with
respect to a governmental instrumentality.

      6. Carpatsky must complete the licensing process to its largest field and
receive a development license to produce reserves once exploration activities
are complete

     Carpatsky currently conducts operation in its RC field property under a
joint activity agreement between Carpatsky and Ukrnafta, the holder of the
license. Carpatsky is not named as a licensee on the exploration license granted
by the Ukranian government to explore the RC field, nor is the joint activity
agreement referenced in the exploration license. Under current Ukranian law,
being named on the license or having the joint activity agreement referenced in
the license may be important to Carpatsky's rights under the joint activity
agreement. It may be difficult to enforce rights in the Ukraine under the
contract which governs the joint activities agreement. For this reason, many
western banks and government agencies will not make loans to develop resources
where the borrower is not a party to the license or the agreement with the
borrower is not referenced in the license.


                                        8





     The present exploration license must be converted into a development
license once all exploration is completed when full scale commercial production
commences. We can give no assurance that a development license can be obtained,
although Carpatsky expects that the license will be converted as a matter of
course. Ukranian law regarding natural resources is not fully developed, and
there is little precedent regarding the conversion from an exploration to a
development license, or the conditions which might be imposed on such
conversion. Failure to receive a development license, or the imposition of
material adverse conditions to the receipt of a development license, would have
a material adverse effect on the merged company.

Most of the Carpatsky proved reserves are undeveloped and there is a risk that
some of them may not be recovered.

Approximately 86% of Carpatsky's estimated proved oil reserves, 89% of estimated
proved natural gas reserves and 87% of estimated discounted future net revenue
at December 31, 1999 were proved undeveloped reserves. Exploitation of such
reserves will require drilling and completing new wells and related development
activity. We can give no assurance that future development operations by the
merged company would be successful. A substantial portion of the reserves could
be economically unrecoverable for various reasons, notwithstanding the expected
presence of hydrocarbons. In such event the inherent value of the reserves would
be substantially reduced.

Bellwether will control the merged company.

Following the merger as presently proposed, Bellwether would own approximately
102.41 million shares of convertible preferred stock of the merged company.
These shares would be entitled to vote as a class with common stock. In
addition, if additional shares of voting stock are issued, the merged company
would be required to also make a dividend to Bellwether of a like number of
additional shares of preferred stock. As a result, Bellwether would have the
right to vote approximately 53.4% of the votes entitled to be voted by
stockholders of the merged company.

We will continue to be subject to the risk of volatile oil and natural gas
prices.

Prices available for future production of oil and natural gas will determine
many aspects of our, and the merged company's, future financial viability,
including:

     1.   Revenue;
     2.   Results of operations, profitability and growth; and
     3.   The carrying value of oil and natural gas reserves acquired or
          developed.

Historically, markets for oil and natural gas have been volatile and the
volatility may continue or recur in the future. Various factors beyond our
control will effect the prices of oil and natural gas, including:

     a.   the worldwide and domestic supplies of oil and natural gas;
     b.   the ability of members of the Organization of Petroleum Exporting
          Countries to agree to and maintain oil price and production controls;
     c.   political instability or armed conflict in oil or natural gas
          producing regions;
     d.   the price and level of foreign imports;
     e.   the level of consumer demand;
     f.   the price, availability and acceptance of alternative fuels;
     g.   the availability of pipeline capacity;
     h.   weather conditions;
     i.   domestic and foreign government regulations and taxes; and
     j.   the overall local and world economic environment.

Any significant decline in the price of oil or natural gas will adversely affect
us and could require an impairment in the carrying value of any reserves which
we hold or may develop in the future.

We will not control our oil and gas properties; therefore we will continue to be
dependent upon the various operators of our domestic properties and upon our
joint venture partners in the Ukrainian properties to explore and develop those
prospects.


                                        9





We are not presently the operator of any of our oil or natural gas prospects in
the Gulf Coast area. Carpatsky is involved in making operating and marketing
decisions through its 50% participation in the management committees of each
venture, although it is not the operator. These arrangements are expected to
continue following the merger. Thus, if the merger is completed, we will be
unable to control material aspects of commercialization of our principal
domestic assets and we will be dependent upon the expertise, diligence and
financial condition of the operators of those properties. Our financial
condition and ability to contribute capital to the budgets of Carpatsky's two
Ukrainian ventures will determine our level of authority on the management
committees.

We will experience drilling and operating risks.

Oil and natural gas drilling activities are subject to many risks, including the
risk that no commercially productive reservoirs will be encountered. We can make
no assurance that wells in which we will have an interest will be productive or
that we will recover all or any portion of our drilling or other exploratory
costs. Drilling for oil or natural gas may involve unprofitable efforts, not
only from dry wells but from wells that are productive but do not produce
sufficient net revenue to return a profit after drilling, operating and other
costs. The costs of drilling, completing and operating wells is often uncertain.
Our drilling operations may be curtailed, delayed or canceled as a result of
numerous factors, many of which are beyond our control, including by way of
illustration the following:

     1.   Economic conditions;
     2.   Title problems in the U.S.;
     3.   Compliance with governmental requirements;
     4.   Weather conditions; and
     5.   Shortages and delays in labor, equipment, services or supplies.

Our future drilling activities may not be successful and, if unsuccessful, such
failure may have a material adverse affect on our future results of operations
and ability to participate in other projects.

Our operations are also subject to hazards and risks inherent in drilling for
and producing and transporting oil and natural gas, including, by way of
illustration, such hazards as:

     Fires;                     Natural disasters;
     Explosions;                Encountering formations with abnormal pressures;
     Blowouts;                  Cratering;
     Pipeline ruptures;         Spills; and
     Power shortages;           Equipment failures

Any of these types of hazards and risks can result in the loss of hydrocarbons,
environmental pollution, personal injury claims and other damages to property.
As protection against such operating hazards, we intend to maintain insurance
coverage against some, but not all of these potential risks. We also may elect
to self insure in circumstances in which we believe that the cost of insurance,
although available, is excessive relative to the risks presented. The occurrence
of an event that is not covered, or not fully covered, by third party insurance
could have a material adverse affect on our business, financial condition and
results of operations.

We must continue to comply with significant amounts of governmental regulation.

Domestic oil and natural gas operations are subject to extensive federal, state
and local laws and regulations relating to the exploration for, and development,
production and transportation of, oil and natural gas, including safety matters,
which may change from time to time in response to economic conditions. Matters
subject to regulation by domestic federal, state and local authorities include:



                                       10




     Permits for drilling operations;        Construction of processing facility
     Reports concerning operations;          Road and pipeline construction
     Unitization and pooling of properties;  The spacing of wells;
     Environmental protection                Taxation;
     Customs regulations                     Production rates; and Worker
                                              safety regulations

We can give no assurance that delays will not be encountered in the preparation
or approvals of such requirements or that the results of such regulations will
not require us to alter our drilling and development plans. Any delays in
obtaining approvals or material alterations to our drilling and development
plans could have a material adverse effect on our operations. From time to time
regulatory agencies have imposed price controls and limitations on production by
restricting the rate of flow of oil and natural gas below actual production
capacity in order to conserve supplies of oil and natural gas. We believe that
we are and will continue to be in substantial compliance with all applicable
laws and regulations. We are unable to predict the ultimate cost of compliance
with changes in these requirements or their effect on our operations.
Significant expenditures may be required to comply with governmental laws and
regulations and may have a material adverse affect on our financial condition
and future results of operations.

Carpatsky's Ukranian oil and gas operations will also be subject to Ukrainian
laws and regulations which are in various states of development.

We must comply with environmental regulations.

We must operate exploratory and other oil and natural gas wells in compliance
with complex and changing environmental laws and regulations adopted by
government authorities. The implementation of new, or the modification of
existing, laws and regulations could have a material adverse affect on
properties in which we may have an interest. Discharge of oil, natural gas or
other pollutants in the air, soil or water may give rise to significant
liabilities to governmental bodies and third parties and may require us to incur
substantial costs of remediation. We may be required to agree to indemnify
sellers of properties we purchase against certain liabilities for environmental
claims associated with those properties. We can give no assurance that existing
environmental laws or regulations, as currently interpreted, or as they may be
reinterpreted in the future, or future laws or regulations will not materially
adversely affect our results of operations and financial conditions.

There is a risk that our estimates of proved reserves and future net revenue are
inaccurate.

There are numerous uncertainties inherent in estimating quantities of proved
reserves and in projecting future rates of production and the timing of
development expenditures, including many factors beyond our control. The reserve
data included in this report represent only estimates. In addition, the
historical and projected estimates of future net revenue from proved reserves
and the present value thereof are based upon certain assumptions about future
production levels, commodity prices and operating costs that may prove to be
incorrect over time. In particular, estimates of crude oil and natural gas
reserves, future net revenue from proved reserves and the discounted present
value thereof for the Pease crude oil and natural gas properties described in
this report are based on the assumptions that such properties are developed in
accordance with their proposed development programs and that future crude oil
prices remain the same as crude oil prices at December 31, 1999, with respect to
production attributable to our interests in our properties.

Our corporate charter limits director liability.

Our Articles of Incorporation as amended provide, as permitted by Nevada law,
that a director shall not be personally liable to the corporation or its
stockholders for monetary damages for breach of fiduciary duty as a director,
with certain exceptions. These provisions may discourage stockholders from
bringing suit against a director for breach of fiduciary duty and may reduce the
likelihood of derivative litigation brought by stockholders against directors.
In addition, the Articles of Incorporation and Bylaws provide for mandatory
indemnification of directors and officers to the fullest extent permitted by
Nevada law.

The market price for our common stock is likely to be volatile and the market
for our common stock may not be liquid.

If our operating results should be below the expectations of investors or
analysts in one or more future periods, it is likely that the price of the
common stock would be materially adversely affected. In addition, the stock
market has experienced significant price and volume fluctuations that have
particularly effected market prices of equity securities of many energy
companies, particularly emerging and new companies. General market fluctuations
may also adversely affect the market price of the common stock.

                                       11





ADMINISTRATION

Office Facilities - We currently rent approximately 3,400 square feet in an
office facility in Grand Junction, Colorado. The rental rate is $2,400 per month
through May 31, 2000 when the present lease will expire.

Employees - As of December 31, 1999, we had four full time and one part time
employees. None are covered by a collective bargaining agreement. We consider
that our relations with our employees is satisfactory.

ITEM 2 - PROPERTIES

PRINCIPAL OIL AND GAS INTERESTS

Developed Acreage - Our producing properties as of December 31, 1999 are located
in the following areas shown in the table below:

                                                     OIL                      GAS
                                             -------------------------------------------          Developed Acreage
                                              Gross       Net(2)       Gross       Net(2)         -----------------
          Fields              State          Wells(1)     Wells       Wells(1)     Wells            Gross           Net(2)
-------------------------    -------         --------     -----       --------     -----            -----           -----
East Bayou Sorrel           Louisiana           3          .27           -           -                 368            33
South Lake Arthur           Louisiana           -           -            1          .20                349            73
Maurice                     Louisiana           -           -            2          .14                196            14
Austin Bayou                  Texas             1          .02           2          .04                505            11
Ganado                        Texas             -           -            1          .13                116            15
                                                --          --           --         ---             ------          ----
     Grand Total                                4           .29          6          .51              1,534           146
                                                ==          ===          =-         ===              =====           ===

----------------
Footnotes

     (1)  Wells which produce both gas and oil in commercial quantities are
          classified as "oil" wells for disclosure purposes.
     (2)  "Net" wells and "net" acres refer to our fractional working interests
          multiplied by the number of wells or number of acres.

Substantially all of our producing oil and gas properties are located on leases
held by us for as long as production is maintained.

Undeveloped Acreage - Our gross and net working interests in leased (or lease
options in areas where 3-D seismic is or has been conducted) on undeveloped
acreage in the Gulf Coast Region as of December 31, 1999 is as follows:

                                                              Undeveloped Acreage
                                             ------------------------------------------------
Prospect Description                         State                   Gross                Net
--------------------                         -----                  -------               ----
East Bayou Sorrel                            Louisiana                   90                   9(1)
Maurice Prospect                             Louisiana                  894                  80(2)
Parallel 3-D Program-Leases                  Texas                   11,575               1,446(3)
Austin Bayou                                 Texas                      694                  15(4)
                                                                     ------             -------
    Totals:                                                          13,253               1,550
                                                                     ======             =======

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

     (1)  Substantially all of these leases will expire in 2001 unless
          production has been obtained.
     (2)  A majority of these leases will expire in 2000 unless production has
          been obtained.
     (3)  601 net acres will expire in 2000, 829 net acres will expire in 2001,
          and 16 net acres will expire in 2002 unless production is obtained.

     (4)  Substantially all of these leases will expire in 2000 unless
          production has been obtained.



                                       12





GULF COAST PROPERTIES AND PROSPECTS

Overview - The U.S. Gulf Coast, although it has been actively explored, remains
a prolific area with excellent upside potential for exploration due to modern
proprietary 3-D seismic surveys. We believe that the combination of technology
and the availability of leases to drill make this an opportune time for an
aggressive exploration program. The three significant areas where Pease
currently participates as a non-operating, minority interest partner are
described below.

East Bayou Sorrel - During 1997, Pease acquired a working interest and an after
prospect payout ("APPO") leasehold interest in the 1996 discovery of a new oil
and gas field, East Bayou Sorrel Field located in Iberville Parish, Louisiana.
Subsequently, this field has been explored with other well tests and a 3-D
seismic survey was completed in February 1998. As of February 2000, the
production from the three producing wells in this field represents approximately
85% of Pease's net daily production (per BOE). The production is being drawn
from the CIBC haz 2 and CIBC haz 3 sand formations. Preliminary results of the
3-D survey appear to confirm the producing reservoirs at East Bayou Sorrel, and
a number of potential undrilled targets contained within the 3-D volume.
Additional development drilling of the East Bayou Sorrel Field, as well as
exploratory drilling based on images from the 3-D seismic is expected to be
conducted sometime in the future. The prospect "paid out" effective November 15,
1999. Accordingly, our working interest has increased from 8.9% to 15.6%
subsequent to that date as a result of owning the APPO.

Maurice Field - In 1997, Pease joined Davis Petroleum and AHC to drill a
discovery well at Maurice Field, Vermilion Parish, Louisiana. Since then two
additional wells have been drilled and completed, of which one well was lost in
late 1999 due to downhole mechanical problems. A 3-D survey is currently being
interpreted and additional wells are expected to be drilled in the future in
order to develop the field. As of February 2000, the producing wells represented
approximately 15% of our net daily production (per BOE) and are being drawn from
the Marg tex and Camerina sand formations. Our working interests in this field
range from 6.9% to 8.4%

Formosa, Texana and Ganado 3-D Exploration Prospects - During 1997, Pease
secured a 12.5% working interest in three specific on-shore upper Gulf Coast 3-D
seismic survey projects located in and around Jackson County, Texas. The 3-D
survey covers over 200 square miles (approximately 130,000 acres). The surveys
on the three projects are completed and the data is currently being interpreted
and integrated with known geology. Parallel Petroleum of Midland, Texas is the
designated operator for these prospect areas. Five wells were drilled on this
acreage in 1999 of which four were dry.

Rocky Mountain Properties

During 1998, we sold all of our Rocky Mountain oil and gas assets. Accordingly,
our only remaining reserves, revenues and future cash flows are now limited to
Gulf Coast region properties.

Title to Properties

Only a limited perfunctory title examination is conducted at the time we acquire
interests in oil and gas leases. This practice is customary in the oil and gas
industry. Prior to the commencement of drilling operations, a thorough title
examination is conducted. We believe that title to our properties is good and
defensible in accordance with standards generally accepted in the oil and gas
industry, subject to such exceptions, are not so material as to detract
substantially from the property economics. In addition, some prospects may be
burdened by customary royalty interests, liens incident to oil and gas
operations and liens for taxes and other governmental charges as well as
encumbrances, easements and restrictions. We do not believe that any of these
burdens will materially interfere with our use of the properties.



                                       13




Estimated Proved Reserves

Our oil and gas reserve and reserve value information is included in footnote 10
of the consolidated financial statements, titled "Oil and Gas Producing
Activities." This information is prepared pursuant to Statement of Financial
Accounting Standards No. 69, which includes the estimated net quantities of
Pease's "proved" oil and gas reserves and the standardized measure of discounted
future net cash flows. The estimated proved reserves information is based upon
an engineering evaluation by Netherland, Sewell & Associates, Inc. The
estimated proved reserves represent forward-looking statements and should be
read in connection with the disclosure on forward-looking statements set forth
elsewhere in this proxy statement and prospectus.

We have not filed any reports containing oil and gas reserve estimates with any
federal authority or agency other than the Securities and Exchange Commission
and the Department of Energy. There were no differences in the reserve estimates
reported to these two agencies.

All of our oil and gas reserves are located in the Continental United States.
The table below sets forth our estimated quantities of proved reserves, and the
present value of estimated future net revenues discounted by 10% per year using
prices we were receiving at the end of each of the two fiscal years ending 1997
and 1998 on a non-escalated basis.

                                                         Year Ended December 31,
                                                         ----------------------
                                                            1999         1998
                                                            ----         ----

    Estimated Proved Oil Reserves (Bbls)                   334,000      275,000
    Estimated Proved Gas Reserves (Mcf)                  1,359,000    1,368,000
    Estimated Future Net Revenues                      $ 8,156,000  $ 4,054,000
    Present Value of Estimated Future Net Revenues     $ 6,269,000  $ 2,951,000
    Prices used to determine reserves:

        Oil (per Bbl)                                  $     24.91  $     10.15
        Gas (per Mcf)                                  $      2.77  $      2.43

NET QUANTITIES OF OIL AND GAS PRODUCED

Our net oil and gas production for each of the last two years (all of which was
from properties located in the United States) was as follows:

                                       Year Ended December 31,
                                       ----------------------
                                       1999              1998
                                       ----              ----
     Oil (Bbls)
          Gulf Coast                   74,000            58,000
          Rocky Mtns.                    --              51,000
                                    ---------          --------
               Total                   74,000           109,000
                                    =========          ========
     Gas (Mcf)
          Gulf Coast                  337,000           337,000
          Rocky Mtns.                    --             230,000
                                     --------          --------
               Total                  337,000           550,000
                                     ========          ========




                                       14





The average sales price per barrel of oil and Mcf of gas, and average production
costs per barrel of oil equivalent ("BOE") excluding depreciation, depletion and
amortization were as follows:


                                          Average Sales Prices                      Average
        Year Ended              -----------------------------------------         Production
        December 31             Oil (Bbls)       Gas (Mcf)        Per BOE         Cost Per BOE
        -----------             ----------       ---------        -------         ------------
   1999:
     Gulf Coast                 $   17.80        $  2.46          $  16.48         $   3.11
     Rocky Mtns.                      N/A            N/A              N/A               N/A
   1998:
     Gulf Coast                 $   12.19        $  2.22          $  12.73         $   2.17
     Rocky Mtns.                $   12.11        $  1.39          $  10.50         $   9.04
          Combined Avg.         $   12.18        $  1.87          $  11.74         $   5.22


DRILLING ACTIVITY

The following table summarizes our oil and gas drilling activities that were
completed during the last two fiscal years, all of which were located in the
continental United States:


                                   1999                     1998
                              --------------            -------------
      Wells Drilled           Gross      Net            Gross     Net
      -------------           -----      ---            -----     ---
  Exploratory
       Oil                       -         -              1        .09
       Gas                       3        .27             4        .14
       Non-Productive            4        .50             3        .32
                                ---       ---            ---       ---
            Total                7        .77             8        .55
                                ===       ===            ===       ===
  Development
       Oil                       -         -              -         -
       Gas                       -         -              -         -
       Non-Productive            -         -              -         -
                                ---       ---            ---       ---
            Total                -         -              -         -
                                ===       ===            ===       ===

ITEM 3 - LEGAL PROCEEDINGS

We may from time to time be involved in various claims, lawsuits, disputes with
third parties, actions involving allegations of discrimination, or breach of
contract incidental to the operation of its business. At December 31, 1999 and
as of the date of this report, we were not involved in any litigation which we
believe could have a materially adverse effect on our financial condition or
results of operations.

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

We did not submit any matters to a vote of our Security holders during the
fourth quarter ended December 31, 1999.



                                       15




                                     Part II

ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Pease common stock is traded on the OTC Bulletin Board market under the symbol
"WPOG." Until January 14, 1999, the Pease common stock was traded in the Nasdaq
Small Cap Market. The following table sets forth the high and low reported
closing prices per share of Pease common stock for the quarterly periods
indicated, which correspond to the fiscal quarters for financial reporting
purposes.

                                                  Pease Common Stock
                                                  ------------------
                                                   High        Low
                                                   ----        ---
          1998:
              First quarter                        19.69      8.44
              Second quarter                       13.75      6.56
              Third quarter                         7.50      1.25
              Fourth quarter                        3.13      0.81
          1999:
              First quarter                         1.00      0.41
              Second quarter                        0.70      0.41
              Third quarter                         0.63      0.44
              Fourth quarter                        0.45      0.25

Note: Adjusted to give effect to a 10 into 1 reverse stock split in the fourth
quarter of 1998.

Stockholders - As of January 1, 2000, we had at least 635 round-lot registered
holders of our common stock and 10 holders of our Series B Preferred stock.

Dividends - We have not paid cash dividends on our Common Stock in the past and
do not anticipate doing so in the foreseeable future. We are precluded from
paying dividends on our Common Stock so long as any dividends on the Preferred
Stock are in arrears.

Under our Articles of Incorporation, as amended ("Articles"), the Board of
Directors has the power, without further action by the holders of the Common
Stock, to designate the relative rights and preferences of Pease's Preferred
Stock, when and if issued. Such rights and preferences could include preferences
as to liquidation, redemption and conversion rights, voting rights, dividends or
other preferences, any of which may be dilutive of the interest of the holders
of the Common Stock. The Board previously designated Series A Cumulative
Convertible Preferred Stock, none of which is outstanding and all of which has
been retired.

We have designated 145,300 shares of Series B Preferred, of which 113,333 shares
were issued on December 31, 1997, and the balance are reserved for issuance of
payment in kind ("PIK") dividends on outstanding Series B Preferred. The Series
B Preferred is entitled to a dividend of $2.50 per year, payable calendar
quarterly, which amount may be paid, at our election, in cash or in kind. If a
dividend is paid in kind, each share of Series B Preferred issued shall be
valued at $50. The dividend is cumulative to the date of payment. The shares of
Series B Preferred have a liquidation preference equal to $50 plus any unpaid
dividends. The Series B Preferred was issued in a private placement and is not
publicly traded nor do we expect these securities to be publicly traded in the
future.

In connection with the contemplated merger with Carpatsky, the Preferred
stockholders have signed Agreements Not to Sell or Convert Securities which,
among other things, stated that Pease's obligation to accrue and pay additional
dividends on the Series B Preferred stock shall be deferred from the date that
an Agreement and Plan of Merger with Carpatsky is signed. Therefore, dividends
were accrued and paid to the Preferred stockholders through the close of
business on September 1, 1999. If the merger with Carpatsky is consummated,
there will be no further dividends accrued or paid. If the merger is not
consummated, Pease shall at that time accrue and pay dividends for the period
from September 1, 1999 through the date on which the merger is abandoned.


                                       16




Additional classes of Preferred Stock may be designated and issued from time to
time in one or more series with such designations, voting powers or other
preferences and relative other rights or qualifications as are determined by
resolution of Pease's Board of Directors. The issuance of Preferred Stock may
have the effect of delaying or preventing a change in control of Pease and may
have an adverse effect on the rights of the holders of Common Stock.

Recent Sales of Unregistered Securities - Pease issued and sold the following
securities without registration under the Securities Act of 1933, as amended
("Securities Act"), during the fiscal year ended December 31, 1999 and through
the date of this report (all amounts have been retroactively adjusted to reflect
the 1:10 reverse stock split in December 1998):

    1.       On January 28, 1999 we issued 16,209 shares of our common stock
             upon conversion of 200 shares of Series B Preferred Stock. The
             Certificates representing the shares issued upon conversion bear a
             restrictive legend prohibiting transfer without registration under
             the Securities Act or the availability of an exemption from
             registration. The shares issued upon conversion were registered by
             Pease for resale by the holders in Registration No. 333-44305. We
             relied upon Section 3(a)(9) of the Securities Act of 1933, as
             amended, in claiming exemption from the registration requirements
             of the Securities Act for issuance of the securities upon
             conversion.
    2.       On March 1, 1999 we issued 30,759 shares of its common stock upon
             conversion of 233 shares of Series B Preferred Stock. The
             Certificates representing the shares issued upon conversion bear a
             restrictive legend prohibiting transfer without registration under
             the Securities Act or the availability of an exemption from
             registration. The shares issued upon conversion were registered by
             Pease for resale by the holders in Registration No. 333-44305. We
             relied upon Section 3(a)(9) of the Securities Act of 1933, as
             amended, in claiming exemption from the registration requirements
             of the Securities Act for issuance of the securities upon
             conversion.
    3.       On March 23, 1999 we issued 40,668 shares of its common stock upon
             conversion of 250 shares of Series B Preferred Stock. The
             Certificates representing the shares issued upon conversion bear a
             restrictive legend prohibiting transfer without registration under
             the Securities Act or the availability of an exemption from
             registration. The shares issued upon conversion were registered by
             Pease for resale by the holders in Registration No. 333-44305. We
             relied upon Section 3(a)(9) of the Securities Act of 1933, as
             amended, in claiming exemption from the registration requirements
             of the Securities Act for issuance of the securities upon
             conversion.
    4.       On September 24, 1999, we issued a total of 42,700 shares to five
             of our directors for compensation of services in lieu of cash. The
             services were provided between January 1, 1997 and August 31, 1999.
             For financial statement reporting purposes, the issuance was
             recorded at $67,333 (or $1.58 per share) representing the average
             market value of Pease's stock on the various dates the services
             were rendered. The Certificates representing the shares issued upon
             conversion bear a restrictive legend prohibiting transfer without
             registration under the Securities Act or the availability of an
             exemption from registration.

In connection with the issuance of the above noted securities, we also relied
upon Section 4(2) of the Securities Act in claiming exemption for the
registration requirement of the Securities Act. All of the persons to whom the
securities were issued had full information concerning the business and affairs
of Pease and acquired the shares for investment purposes. Certificates
representing the securities issued bear a restrictive legend and stop transfer
instructions have been entered prohibiting transfer of the securities except in
compliance with applicable securities law.

On March 30, 2000 there were outstanding 105,828 shares of Series B Preferred
Stock held by 10 holders. The Series B Preferred Stock is convertible into
common stock at a ratio dependent upon the reported closing market price at the
time of conversion. Based on such price on March 30, 2000, the outstanding
Series B Preferred Stock would have been convertible into approximately 16.6
million shares. Our Articles of Incorporation authorize a total of up to
4,000,000 shares of common stock, of which 1,731,398 were issued and outstanding
on March 31, 2000. We are obligated to take appropriate action and seek
stockholder approval to increase the number of authorized common stock at the
next meeting of stockholders to provide for this contingency.


                                       17





ITEM 6 - MANAGEMENT'S DISCUSSION AND ANALYSIS

Liquidity, Capital Expenditures and Capital Resources
At December 31, 1999, our cash balance was $724,354 with a positive working
capital position of $922,105, compared to a cash balance of $1,049,582 and a
positive working capital position of $1,101,888 of December 31, 1998. The change
in our cash balance is summarized as follows:


Cash balance at December 31, 1998                              $   1,049,582
Sources of Cash:
     Cash provided by operating activities                           739,290
     Proceeds from the sale of property and equipment                101,005
     Proceeds from the redemption of certificate of deposit           70,000
                                                               -------------
          Total sources of cash                                    1,959,877
Uses of Cash:
     Capital expenditures for oil and gas activities               (931,689)
     Series B Preferred Stock dividends                            (244,653)
     Purchase and retirement of Series B Preferred Stocks           (51,313)
     Repayment of long term debt                                     (5,853)
     Other capital expenditures                                      (2,015)
                                                               ------------
          Total uses of cash                                     (1,235,523)
                                                               ------------
Cash balance at December 31, 1999                              $    724,354
                                                               ============

The costs incurred in 1999 for oil and gas activities are summarized as follows
(the difference between the total incurred, as illustrated in the following
table, and the total amount cash used in 1999, relates to the changes in
accounts payable at December 31, 1998 and December 31, 1999).

                                               PROGRAM OPERATOR
                                               ----------------
Category:
                                          NEGX     Parallel       AHC       Other      Total            %
                                          ----     --------       ---       -----      ------         ----
     Exploratory Dry Holes              $    -     $ 163,960    $    -      $    -     $ 163,960       18%
     Land, G&G and Costs on
          Seismic Programs               2,310       130,097         -           -       132,407       15%
     Successful efforts                      -        58,603      250,897       1,515    311,015       34%
     Capitalized Interest                    -          -            -        278,250    278,250       30%
     Other Exploration Costs             -              -            -         23,803     23,803        3%
                                      --------     ---------    ---------   ---------  ---------     ----
          Total Exploration Costs       $2,310     $ 352,660    $ 250,897   $ 303,568  $ 909,435     100%
                                        ======     =========    =========   =========  =========     ====
          % of Exploration Costs          Nil             39%          28%         33%       100%

Our current oil and gas assets consist of the following:

          1.   The East Bayou Sorrel Area in Iberville Parish, Louisiana,
               operated by National Energy Group, Inc. ("NEGX");

          2.   The Maurice Prospect in Fayetteville Parish, Louisiana, operated
               by Amerada Hess Corporation ("AHC"); and

          3.   The Formosa, Texas and Ganado 3-D prospects encompassing 130,000
               acres in and around Jackson County, Texas, operated by Parallel
               Petroleum ("Parallel").

In December 1998, NEG filed an Involuntary Petition for an Order and Relief
under Chapter 11 of Title 11 of the United States Bankruptcy Code in United
States Bankruptcy Court for the Northern District of Texas, Dallas Division. As
operator of the East Bayou Sorrel field, which represents a majority of Pease's
current production, the bankruptcy petition might adversely effect future
development or operation of the field; however, Pease does not expect that its
interest in the field or production from currently existing wells will be
affected.


                                       18





Pease does have an unsecured claim in the bankruptcy proceeding for various
amounts which Pease believes were overpaid to NEG as operator in connection with
the drilling and operating of certain wells. Collection of these amounts may be
delayed or may not occur, pending disposition of NEG's reorganization
proceeding. The total claim is approximately $60,000. However, no amount has
been recorded (as an account receivable) in the financial statements as of
December 31, 1999.

We incurred a bad debt expense in 1999 of $23,710 when TransTexas Gas
Corporation ("TransTexas") filed for chapter 11 bankruptcy. The Company owns
less than a 1.71% working interest in three wells in Brazoria County, Texas,
where TransTexas is the operator. Prior to filing for bankruptcy, TransTexas
owed the Company $36,195 for sales of past production from those three wells.
Based on the proposed Plan of Reorganization, working interest owners were to
receive 40% of the allowed claim. Accordingly, we wrote off 60% of the
receivable, or $23,710, that was due prior to TransTexas filing for bankruptcy.
The Company has been receiving payments on production sales subsequent to the
filing as well as payments on the balance in accordance with TransTexas' Plan of
Reorganization.

Although we are non-operator in all of these areas, and therefore do not control
the timing of any development or exploration activities, we currently expect the
expenditures that will be proposed for these areas by the respective operators
through the first quarter of 2001 to be within the following ranges:

                                                                Estimated Investment
                                                               ---------------------
          Area                          Operator               Minimum       Maximum
          ----                 ---------------------------     -------       -------
   East Bayou Sorrel           National Energy Group, Inc.
                               ("NEG")                     $      -       $  400,000
   Formosa, Texana and Ganado  Parallel Petroleum, Inc.
                               ("Parallel")                    150,000       300,000
   Maurice Prospect            Amerada Hess Corporation
                               ("AHC")                          50,000       500,000
                                                           -----------    ---------
          Total                                            $   200,000    $1,200,000
                                                           ===========    ==========

Given the range of potential capital requirements through the first quarter of
2001, our current and anticipated cash position may not be sufficient to cover
the future working capital and exploration obligations. We have vigorously
explored various alternatives for additional sources of capital. However, with
the hyper-dilutive potential of the outstanding Series B Preferred Stock (should
the holders elect to convert into common stock), we have been unable to attract
additional equity capital. For example, using our recent common stock price of
$0.43, and applying the applicable discount of 25%, should all the holders of
the Series B Preferred Stock elect to convert into common stock, we would be
required to issue approximately 16.6 million shares in the conversion. This
would represent approximately 90% of the then outstanding common shares.
Presently, we have only 4.0 million shares of common stock authorized and are
obligated under the terms of the Preferred Stock Agreement to seek approval of
additional authorized shares at our next meeting of stockholders to allow for
conversion should the Preferred stockholders choose to do so. However, it cannot
be determined at this time whether or not additional common shares will be
authorized by the common shareholders and if not, what the consequences may be.

In September 1998, Pease engaged San Jacinto Securities, Inc. ("SJS"), an
investment banking firm located in Dallas, Texas, to assist us in pursuing
various strategic alternatives. Their efforts have focused primarily on seeking
a potential merger candidate for us. As previously stated, on September 1, 1999
the Merger Agreement was executed by Pease and Carpatsky. In exchange for their
services, SJS has been paid a $150,000 non- refundable cash fee and will receive
an additional 3% of the merger value in excess of $5.0 million should it
consummate.


                                       19




If the contemplated merger with Carpatsky cannot be consummated within a
reasonable period of time, and under reasonable terms, then we may have to seek
additional financing. However, our common stock was delisted from the Nasdaq
SmallCap electronic market system on January 14, 1999 for failure to maintain an
average bid price of at least $1.00 per share. The stock is now listed on the
over-the-counter market on the NASD Bulletin Board (OTC BB). It is believed that
this delisting will have a material negative impact on our ability to raise
additional equity capital. Therefore, it is unclear at this time what
alternatives for future working capital will be available, or to what extent the
potential dilution to the existing shareholders may be. If additional sources of
financing are not ultimately available, we may have to consider other
alternatives, including the sale of existing assets, cancellation of existing
exploration agreements, farmouts, joint ventures, restructuring under the
protection of the Federal Bankruptcy Laws and/or liquidation.


RESULTS OF OPERATIONS

Overview
Our largest source of operating revenue is from the sale of produced oil,
natural gas, and natural gas liquids. Therefore, the level of our revenues and
earnings are affected by prices at which natural gas, oil and natural gas
liquids are sold. Therefore, our operating results for any prior period are not
necessarily indicative of future operating results because of the fluctuations
in natural gas, oil and natural gas liquid prices and the lack of predictability
of those fluctuations as well as changes in production levels.

Total Revenue
Total Revenue from all operations was as follows:

                                                   For the Year Ended December 31,
                                               --------------------------------------
                                                    1999                    1998
                                               ----------------       ---------------
                                               Amount        %        Amount       %
                                               ------       ---       ------     ----
     Oil and gas sales                     $ 2,144,057     100%   $ 2,359,905      81%
     Gas plant, services and supply               -         -         528,106      18%
     Well administration and other income        2,902     Nil         28,971       1%
                                           -----------    ----    -----------    ----
          Total revenue                    $ 2,146,959     100%   $ 2,916,982     100%
                                           ===========    ====    ===========    ====

The decrease in total revenue, along with any known trends or changes that
effect revenue on a line-by-line basis, are discussed in the following
paragraphs under their respective captions.

Oil and Gas
Operating statistics for oil and gas production for the periods presented are as
follows:


                                       20



                                          For the Year Ended December 31,
                                          ------------------------------
                                            1999                  1998
                                            ----                  ----
   Production:
     Oil (Bbls)
          Rocky Mtns.                         -                    51,000
          Gulf Coast                        74,000                 58,000
     Gas (Mcf)
          Rocky Mtns.                         -                   230,000
          Gulf Coast                       337,000                320,000
     BOE (6:1)
          Rocky Mtns.                         -                    89,000
          Gulf Coast                       130,000                112,000
   Average Collected Price:
     Oil (per bbl)
          Rocky Mtns.                   $     -               $     12.11
          Gulf Coast                    $    17.80            $     12.19
     Gas (per mcf)
          Rocky Mtns.                   $     -               $      1.39
          Gulf Coast                    $     2.46            $      2.22
     Per BOE (6:1)
          Rocky Mtns.                   $     -               $     10.50
          Gulf Coast                    $    16.48            $     12.73

Operating Margins:
     Rocky Mtns:
          Revenue
               Oil                      $     -               $   612,370
               Gas                            -                   321,703
                                        ----------            -----------
                                              -                   933,703
          Costs                               -                  (806,224)
                                        ----------            -----------
               Operating Margin         $     -               $   127,479
                                        ==========            ===========
               Operating Margin Percent       -                        14%
     Gulf Coast:
         Revenue
               Oil                      $ 1,316,142           $   715,699
               Gas                          827,915               710,503
                                        -----------           -----------
                                          2,144,057             1,426,202
          Costs                            (404,897)             (243,339)
                                        -----------           -----------
               Operating Margin         $ 1,739,160           $ 1,182,863
                                        ===========           ===========
               Operating Margin Percent          81%                   83%
Production Costs per BOE before DD&A:
     Rocky Mtn Region                   $     -               $      9.04
     Gulf Coast Region                         3.11                  2.17
Change in Revenue Attributable to:
     Production                         $  (832,081)
     Price                                  613,787
                                        -----------
          Total Decrease in Revenue     $  (218,294)
                                        ===========
Change in Revenue Attributable to:
     Production                         $   223,485
     Price                                  494,370
                                        -----------
          Total Increase in Gulf
          Coast Revenue                 $   717,855
                                        ===========

                                       21




Substantially, all of our current oil and gas production is now generated from
four of the ten wells in which we hold a working interest. Of the four main
producing wells, three are operated by NEG, and the other one is operated by
AHC. All these wells are deep, high pressure, water driven reservoirs that are
inherently laden with geologic, geophysical, and mechanical risks and
uncertainties. The unexpected loss of any one of these wells would have a
material negative impact on our estimated reserves, future production and future
cash flows.

Gas Plant, Service and Supply
As previously discussed, we sold these assets in 1998. However, the historical
operating results excluding depreciation and amortization for 1998 are as
follows:

                                                Amount
                                                ------

     Revenue                                $   271,932
     Costs                                     (295,789)
                                            -----------
          Net Operating Income (Loss)       $   (23,857)
                                            ===========

Consulting Arrangement - Related Party
In March 1996 Pease entered into a three-year consulting agreement with Beta
Capital Group, Inc. ("Beta") located in Newport Beach, California. Beta's
chairman, Steve Antry, has been a director of Pease since August 1996. The
consulting agreement, which ended in February 1999, provided for minimum monthly
cash payments of $17,500 plus reimbursement for out-of-pocket expenses.

During 1997, Pease granted Beta warrants for an additional 100,000 shares of
common stock which after the reverse stock split translates to 10,000 shares of
common stock. These warrants are exercisable for a period of four years at an
exercise price of $37.50 per share. Pease has determined the value of these
options using the Black Scholes model and has recognized the fair value of
approximately $60,000 as consulting expense in the accompanying statements of
operations for the year ended December 31, 1997. Stephen Fischer, an independent
contractor for Beta, is also a member of our Board of Directors.

General and Administrative
General and Administrative ("G&A") expenses decreased $741,000 in 1999 when
compared to 1998 which is summarized as follows:

      $  397,000  Reduction of payroll as a result of eliminating executive and
                  administrative positions
         150,000  Fee paid in 1998 to San Jacinto Securities
         144,000  Legal and accounting
         110,000  Consulting
          44,000  Travel
          31,000  All other, net
        (135,000) Costs associated with pursuing the merger with Carpatsky
      ----------
     $   741,000  Net decrease between the periods presented


We have taken steps to significantly reduce future G&A costs, and we expect
"core" G&A costs in 2000 to be between $40,000 to $60,000 per month. However, we
expect additional amounts (aggregating $50,000 to $75,000) will be incurred in
connection with the efforts to consummate the merger transaction with Carpatsky.




                                       22


Depreciation, Depletion and Amortization
Depreciation, Depletion and Amortization ("DD&A") for the periods presented by
cost center consisted of the following:

                                                   For the Year Ended
                                                       December 31,
                                                   ------------------
                                                    1999        1998
                                                    ----        ----

     Oil and Gas Properties                     $   985,113  $1,914,262
     Gas Plant, Service and Supply
     Operations                                       -         273,345
     Furniture and Fixtures                         22,402       53,485
                                                ----------   ----------
          Total                                 $1,007,515   $2,241,092
                                                ==========   ==========
     DD&A per BOE for oil and gas properties    $     7.57   $     9.52

DD&A for the oil and gas properties is computed using the units-of-production
method utilizing only the estimated proved reserves at the end of each period
presented and prior to applying the ceiling test discussed below under
"Impairment Expense". Total DD&A for the oil and gas properties decreased in
1999 when compared to 1998 principally as a result of the impairment charges
recognized in 1998 significantly reduced the net value of full cost pool being
amortized in 1999.

Interest Expense
Total interest incurred, and its allocation, for the periods presented is as
follows:

                                                         For the Year Ended
                                                            December 31,
                                                       ----------------------
                                                       1999              1998
                                                       ----              ----
     Interest paid or accrued                     $   280,425       $   369,919
     Amortization of debt discount                    138,236           187,863
     Amortization of debt issuance costs              219,337           297,672
                                                 ------------      ------------
          Total interest incurred                     637,998           855,454
     Interest capitalized                            (278,250)         (852,978)
                                                 -----------       -----------
          Interest expense                        $   359,748       $     2,476
                                                  ===========       ===========

The lower interest incurred in 1999 is substantially attributed to the reduction
of outstanding debt during the third quarter of 1998. In connection with the
sale of the Rocky Mountain assets, we paid down $1.2 million (or 30%) of the
outstanding convertible debentures in September 1998, thereby reducing the
outstanding principal from $4.0 million to $2.8 million.

Impairment - Oil and Gas Properties
We use the full cost method of accounting for our oil and gas activities. The
full cost method regards all costs of acquisition, exploration, and development
activities as being necessary for the ultimate production of reserves. All of
those costs are incurred with the knowledge that many of them relate to
activities that do not result directly in finding and developing reserves.
However, the benefits obtained from the prospects that do prove successful,
together with benefits from past discoveries, may ultimately recover the costs
of all activities, both successful and unsuccessful. Thus, all costs incurred in
those activities are regarded as integral to the acquisition, discovery, and
development of reserves that ultimately result from the efforts as a whole and
are thereby associated with Pease's proved reserves. Establishing a direct
cause-and-effect relationship between costs incurred and specific reserves
discovered, which is the premise under the successful efforts accounting method,
is not relevant to the full cost concept. However, the costs accumulated in our
full cost pool are subject to a "ceiling," as defined by Regulation SX Rule
4-10(e)(4).


                                       23




As prescribed by the corresponding accounting standards for full cost, all the
accumulated costs in excess of the ceiling, are to be expensed periodically by a
charge to impairment. Accordingly, we incurred an impairment charge of
$7,278,818 in 1998 as a result of our net accumulated costs subject to
amortization exceeded our ceiling. No impairment charge was incurred in 1999
since our ceiling was greater than our net accumulated costs.

Extraordinary Item - In connection with the sale of the Rocky Mountain assets,
the Company paid down $1.2 million (or 30%) of the outstanding convertible
debentures in September 1998, thereby reducing the outstanding principal from
$4.0 million to $2.8 million. At the same time, the Company wrote off $396,742,
representing 30% of the unamortized debt discount and debt issuance costs
associated with that debt. For financial statement reporting purposes, this
charge has been reported in the 1998 Statement of Operations as an extraordinary
item in connection with an early extinguishment of debt. There were no tax
consequences associated with the extraordinary item because of the Company's
substantial net operating loss carry-forwards.

Dividends and Net Loss Per Common Share
Net loss per common share is computed by dividing the net loss applicable to
common stockholders by the weighted average number of common shares outstanding
during the year. All potential common shares have been excluded from the
computations because their effect would be antidilutive.

The net loss applicable to common stockholders is determined by adding any
dividends accruing to the benefit of the preferred stockholders to the net loss.
The dividends included for this calculation include: 1) paid dividends; 2)
accrued but unpaid dividends; 3) any dividends in arrears; and 4) any imputed
dividends attributable to the beneficial conversion feature. Accordingly, the
net loss applicable to common stockholders includes the following charges
associated with the Series B preferred stock that was issued on December 31,
1997:

                                       For the Year Ended December 31,
                                       ------------------------------
                                             1999          1998
                                             ----          ----
     Dividends declared                $   177,817     $   278,026
     Dividends in arrears                   87,707            -
     Non-cash imputed dividend charge         -          1,789,468
                                       -----------     -----------
         Total                         $   265,524     $ 2,067,494
                                       ===========     ===========

The Series B preferred stock is convertible into common stock at a conversion
price equal to a 25% discount to the average trading price of the common stock
prior to conversion. This discount started at 12% in April 1998 and increased
periodically until it topped out at 25%. This discount is considered a
"beneficial conversion feature." The additional non-cash imputed dividend charge
represents the intrinsic value of the discount applicable through the period
presented. No additional non-cash dividend charges have been or will be incurred
subsequent to December 31, 1998.

In connection with an agreement signed by the Preferred Stockholders and
associated with the contemplated merger with Carpatsky, we have not accrued or
paid any dividends to the Series B Preferred Stockholders subsequent to
September 1, 1999. However, the amount that we would be obligated to pay should
the merger be abandoned has been included in the calculation of net loss per
share as "Dividends in arrears".

OTHER MATTERS

Disclosure Regarding Forward-Looking Statements
This report on Form 10-QSB includes "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933, as amended (the
"Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"). All statements other than statements of historical
facts included in this report, including, without limitation, statements under
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" regarding Pease's contemplated merger, financial position, reserve
quantities, plans and objectives of Pease's management for future operations and
capital expenditures, and statements regarding the planned Carpatsky
transactions and the Carpatsky assets are forward-looking statements and the
assumptions upon which such forward-looking statements are based are believed to
be reasonable. We can give no assurance that such expectations and assumptions
will prove to be correct. Reserve estimates of oil and gas properties are
generally different from the quantities of oil and natural gas that are
ultimately recovered or found. This is particularly true for estimates applied
to exploratory prospects. Additionally, any statements contained in this report


                                       24



regarding forward-looking statements are subject to various known and unknown
risks, uncertainties and contingencies, many of which are beyond our control.
Such risks and uncertainties may cause actual results, performance, achievements
or expectations to differ materially from the anticipated results, performance,
achievements or expectations. Factors that may affect such forward-looking
statements include, but are not limited to: the contemplated merger not be
consummated, our ability to generate additional capital to complete our planned
drilling and exploration activities; risks inherent in oil and gas acquisitions,
exploration, drilling, development and production; price volatility of oil and
gas; competition; shortages of equipment, services and supplies; U.S. and
foreign government regulation; environmental matters; implications to Carpatsky
from conducting its operations in Ukraine and related political and geographical
risks; financial condition of the other companies participating in the
exploration, development and production of oil and gas programs; and other
matters beyond our control. In addition, since all of the prospects in the Gulf
Coast are currently operated by another party, we may not be in a position to
control costs, safety and timeliness of work as well as other critical factors
affecting a producing well or exploration and development activities. All
written and oral forward-looking statements attributable to Pease or persons
acting on our behalf subsequent to the date of this report are expressly
qualified in their entirety by this disclosure.

                                       25





ITEM 7.   FINANCIAL STATEMENTS


                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS


                                                                            Page
                                                                            ----
     Independent Auditor's Report                                             27
     Consolidated Balance Sheet - December 31, 1999                           28
     Consolidated Statements of Operations - For the Years Ended December 31,
          1999 and 1998                                                       29
     Consolidated Statements of Stockholders' Equity - For the Years Ended
          December 31, and 1998                                               30
     Consolidated Statements of Cash Flows - For the Years Ended December 31,
          1999 and 1998                                                    31-32
     Notes to Consolidated Financial Statements                            33-49




                                       26





                          INDEPENDENT AUDITOR'S REPORT



Board of Directors
Pease Oil and Gas Company
Grand Junction, Colorado

We have audited the accompanying consolidated balance sheet of Pease Oil and Gas
Company and subsidiaries as of December 31, 1999, and the related consolidated
statements of operations, stockholders' equity and cash flows for the years
ended December 31, 1999 and 1998. 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Pease Oil and Gas
Company and subsidiaries as of December 31, 1999, and the results of their
operations and their cash flows for the years ended December 31, 1999 and 1998
in conformity with generally accepted accounting principles.

The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern, which contemplates the
realization of assets and liquidation of liabilities in the normal course of
business. As discussed in Note 1 to the Financial Statements, the Company has
historically incurred net operating losses resulting in an accumulated deficit
of $33.5 million as of December 31, 1999. These conditions and other matters
discussed in Note 1 raise substantial doubt about the Company's ability to
continue as a going concern. Management's plans in regard to these matters are
also discussed in Note 1. The Financial Statements do not include any
adjustments that might result from the outcome of this uncertainty.




/s/ HEIN + ASSOCIATES LLP

Denver, Colorado
February 18, 2000


                                       27





                   PEASE OIL AND GAS COMPANY AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEET
                                December 31, 1999


                                     ASSETS
CURRENT ASSETS:
     Cash and equivalents ................................................................   $    724,354
     Trade receivables, net of allowance for bad debts of $15,621 ........................        402,847
     Prepaid expenses and other ..........................................................         76,349
                                                                                             ------------
          Total current assets ...........................................................      1,203,550

OIL AND GAS PROPERTIES, at cost (full cost method):
     Unevaluated properties ..............................................................      2,281,732
     Costs being amortized ...............................................................     18,278,461
                                                                                             ------------
          Total oil and gas properties ...................................................     20,560,193
     Less accumulated amortization .......................................................    (14,868,287)
                                                                                             ------------
          Net oil and gas properties .....................................................      5,691,906
                                                                                             ------------
OTHER ASSETS:
     Office equipment and vehicle ........................................................        230,211
     Less accumulated depreciation .......................................................       (176,013)
                                                                                             ------------
          Net office equipment and vehicle ...............................................         54,198
     Debt issuance costs, net of accumulated amortization of $464,846 ....................        184,315
     Deposits and other ..................................................................          7,493
                                                                                             ------------
         Total other assets ..............................................................        246,006
                                                                                             ------------
TOTAL ASSETS .............................................................................   $  7,141,462
                                                                                             ============
           LIABILITIES, REDEEMABLE PREFERRED AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
     Current maturities of long-term debt ................................................   $      6,352
     Accounts payable, trade .............................................................        140,554
     Accrued expenses ....................................................................        134,539
                                                                                             ------------
         Total current liabilities .......................................................        281,445

LONG-TERM DEBT, less current maturities: .................................................      2,506,218
COMMITMENTS AND CONTINGENCIES (Notes 3 and 5)
STOCKHOLDERS' EQUITY:
     Preferred Stock, par value $.01 per share, 2,000,000 shares authorized
     105,828 shares of Series B 5% PIK Cumulative Convertible Preferred
     Stock issued and outstanding (Liquidation preference of $5,379,107) .................          1,058
          Common Stock, par value $0.10 per share, 4,000,000 shares authorized,
          1,731,398 shares issued and outstanding ........................................        173,140
          Additional paid-in capital .....................................................     37,636,191
          Accumulated deficit ............................................................    (33,456,590)
                                                                                             ------------
         Total Stockholders' equity ......................................................      4,353,799
                                                                                             ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ...............................................   $  7,141,462
                                                                                             ============




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

                                       28




                   PEASE OIL AND GAS COMPANY AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                 For the Years Ended December 31, 1999 and 1998



                                                                  1999            1998
                                                                  ----            ----
REVENUE:
     Oil and gas sales ..................................   $  2,144,057    $  2,359,905
     Gas plant, service and supply ......................           --           528,106
     Well administration and other ......................          2,902          28,971
                                                            ------------    ------------
          Total revenue .................................      2,146,959       2,916,982
                                                            ------------    ------------
EXPENSES:
     Oil and gas production costs .......................        404,897       1,049,563
     Gas plant, service and supply ......................           --           571,013
     Consulting expense-related party ...................         37,750         247,123
     General and administrative .........................        845,526       1,587,013
           Depreciation, depletion and amortization .....      1,007,515       2,241,092
     Impairment expense:
          Oil and gas properties ........................           --         7,278,818
          Assets held for sale ..........................           --           313,953
                                                            ------------    ------------
               Total expenses ...........................      2,295,688      13,288,575
                                                            ------------    ------------
LOSS FROM OPERATIONS ....................................       (148,729)    (10,371,593)
OTHER INCOME (EXPENSES):
     Interest expense ...................................       (359,748)         (2,476)
     Interest income ....................................         42,235         139,785
     Gain (Loss) on sale of assets ......................            968           3,555
                                                            ------------    ------------
LOSS BEFORE EXTRAORDINARY ITEM ..........................       (465,274)    (10,230,729)
     Extraordinary item - loss on early extinguishment of
        debt, net of tax ................................           --          (396,742)
                                                            ------------    ------------
NET LOSS ................................................       (465,274)    (10,627,471)
     Preferred Stock dividend charges ...................       (265,524)     (2,067,494)
                                                            ------------    ------------
NET LOSS APPLICABLE TO COMMON STOCKHOLDERS ..............   $   (730,798)   $(12,694,965)
                                                            ============    ============
NET LOSS PER COMMON SHARE, BASIC AND DILUTED:
     Before extraordinary item ..........................   $      (0.43)   $      (7.74)
     Extraordinary item .................................           --             (0.25)
                                                            ------------    ------------
          Net Loss per common share .....................   $      (0.43)   $      (7.99)
                                                            ============    ============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
     OUTSTANDING ........................................      1,684,000       1,588,000
                                                            ============    ============



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

                                       29




                             PEASE OIL AND GAS COMPANY AND SUBSIDIARIES
                           CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                           For the Years Ended December 31, 1999 and 1998


                                                                Preferred Stock                 Common Stock
                                                                ---------------                 ------------
                                                            Shares          Amount         Shares          Amount
                                                            ------          ------         ------          ------

BALANCES, December 31, 1997 .......................        113,333    $      1,133       1,579,353   $    157,936
Purchase and retirement of Series B Preferred Stock         (4,500)            (45)           --             --
Issuance of common stock for:
     Exercise of warrants .........................           --              --               125             12
     Conversion of Series B Preferred stock .......         (1,497)            (15)         21,584          2,158
Series B preferred stock dividends ................           --              --              --             --
Net Loss ..........................................           --              --              --             --
                                                      ------------   ------------    -------------   ------------
BALANCES, December 31, 1998 .......................        107,336           1,073       1,601,062        160,106

Purchase and retirement of Series B Preferred Stock           (825)             (8)           --             --
Issuance of common stock for:
     Services of Directors in lieu of cash ........           --              --            42,700          4,270
     Conversion of Series B Preferred stock .......           (683)             (7)         87,636          8,764
Series B Preferred Stock dividends ................           --              --              --             --
Net Loss ..........................................           --              --              --             --
                                                      ------------    ------------    ------------   ------------
BALANCES, December 31, 1999 .......................        105,828    $      1,058       1,731,398   $    173,140
                                                      ============    ============    ============   ============

                                                       Additional                          Total
                                                         Paid-In       Accumulated      Stockholders'
                                                         Capital         Deficit           Equity
                                                       ----------      -----------      ------------

BALANCES, December 31, 1997 .......................   $ 38,296,454    $(22,363,845)   $ 16,091,678
Purchase and retirement of Series B Preferred Stock       (206,205)           --          (206,250)
Issuance of common stock for:
     Exercise of warrants .........................            926            --               938
     Conversion of Series B Preferred stock .......         (2,143)           --              --
Series B preferred stock dividends ................       (278,026)           --          (278,026)
Net Loss ..........................................           --       (10,627,471)    (10,627,471)
                                                      ------------    ------------    ------------
BALANCES, December 31, 1998 .......................     37,811,006     (32,991,316)      4,980,869
Purchase and retirement of Series B Preferred Stock        (51,305)           --           (51,313)
Issuance of common stock for:
     Services of Directors in lieu of cash ........         63,063            --            67,333
     Conversion of Series B Preferred stock .......         (8,757)           --              --
Series B Preferred Stock dividends ................       (177,816)           --          (177,816)
Net Loss ..........................................           --          (465,274)       (465,274)
                                                      ------------    ------------    ------------
BALANCES, December 31, 1999 .......................   $ 37,636,191    $(33,456,590)   $  4,353,799
                                                      ============    ============    ============



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

                                       30





                   PEASE OIL AND GAS COMPANY AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                 For the Years Ended December 31, 1999 and 1998

                                                                                    1999           1998
                                                                                    ----           ----
CASH FLOWS FROM OPERATING ACTIVITIES:
     Net Loss ..............................................................   $   (465,274)   $(10,627,471)
     Adjustments to reconcile net loss to net cash provided by (used in)
          operating activities:
               Depreciation, depletion and amortization ....................      1,007,515       2,241,092
               Amortization of debt discount and issuance costs ............        357,573         396,742
               Bad debt expense ............................................         23,710            --
               Impairment expense:
                    Assets held for sale ...................................           --           313,953
                    Oil and gas properties .................................           --         7,278,818
               Loss (Gain) on sale of assets ...............................           (968)         (3,555)
               Issuance of common stock for services .......................         29,747            --
               (Increase) decrease in:
                    Trade receivables ......................................         (6,097)        336,974
                     Inventory .............................................           --           385,091
                    Prepaid expenses and other .............................         24,338           8,292
               Increase (decrease) in:
                    Accounts payable .......................................       (147,647)        (40,673)
                    Accrued expenses .......................................        (83,607)       (512,971)
                                                                               ------------    ------------
               Net cash provided by (used in) operating activities .........        739,290        (223,708)
                                                                               ------------    ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
     Capital expenditures for property, plant and equipment ................       (933,704)     (7,351,977)
     Redemption of certificate of deposit ..................................         70,000          25,000
     Proceeds from sale of property, plant and equipment ...................        101,005       3,823,286
                                                                               ------------    ------------
               Net cash provided by (used in) investing activities .........       (762,699)     (3,503,691)
                                                                               ------------    ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
     Proceeds from exercise of stock options and warrants ..................           --               938
     Series B preferred stock dividends ....................................       (244,653)       (210,941)
     Repayment of long-term debt ...........................................         (5,853)     (1,207,805)
     Offering costs ........................................................           --          (146,765)
     Purchase and retirement of Series B preferred stock ...................        (51,313)       (206,250)
                                                                               ------------    ------------
               Net cash provided by (used in) financing activities .........       (301,819)     (1,770,823)
                                                                               ------------    ------------
NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS ............................       (325,228)     (5,498,222)
CASH AND EQUIVALENTS, beginning of year ....................................      1,049,582       6,547,804
                                                                               ------------    ------------
CASH AND EQUIVALENTS, end of year ..........................................   $    724,354    $  1,049,582
                                                                               ============    ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
     Cash paid for interest ................................................   $    280,425    $    400,309
                                                                               ============    ============
     Cash paid for income taxes ............................................   $       --      $       --
                                                                               ============    ============
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND
     FINANCING ACTIVITIES:
          Debt incurred for purchase of vehicles ...........................   $       --      $     32,610
          Increase (decrease) in payables for:
               Oil and gas properties ......................................        (22,246)     (1,002,353)
               Offering costs ..............................................           --          (146,765)
               Series B Preferred Stock dividends ..........................        (67,085)         67,085
          Capitalized portion of amortized debt issuance/discount costs -
                485,534 The accompanying notes are an integral part of these
                consolidated financial statements ..........................

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

                                       31




                   PEASE OIL AND GAS COMPANY AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



1.  NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
    -------------------------------------------------------------------

Nature of Operations - At December 31, 1999 the principal business of Pease Oil
and Gas Company ("Pease") is to participate as a non-operating, minority
interest owner in exploration, development, production and sale of oil, natural
gas and natural gas liquids. Pease was previously engaged in the processing and
marketing of natural gas at a gas processing plant, the sale of oil and gas
production equipment and oilfield supplies, and oil and gas well completion and
operational services. However, as discussed in Note 2, during 1998, Pease's gas
processing plant and the oilfield service and supply businesses were sold. Pease
conducted its operations through the following wholly-owned subsidiaries:
Loveland Gas Processing Company, Ltd.; Pease Oil Field Services, Inc.; Pease Oil
Field Supply, Inc.; and Pease Operating Company, Inc. All the subsidiaries are
currently inactive.

Continuing Operations - Pease has historically incurred net operating losses
resulting in an accumulated deficit of $33.5 million as of December 31, 1999. As
a result of the continuing losses, Pease's stockholders' equity has been reduced
to approximately $4.3 million. At December 31, 1999, the liquidation preference
of the Series B Preferred stock is in excess of total stockholders' equity and
the hyper-dilutive potential of the conversion feature has resulted in Pease's
inability to raise additional equity capital which is critical to carry out
development and exploration activities that are planned for the next several
years. Pease may be required to redeem the Series B Preferred stock on December
31, 2002 at a price equal to the liquidation preference. Alternatively, Pease
can force the holders to convert to common stock which would result in ownership
by the Preferred holders in excess of 90% (based on the current trading price of
the common stock). However, Pease does not currently have a sufficient number of
common shares authorized to convert all of the Preferred stock. Under the terms
of the Preferred Stock Agreement, Pease is obligated to take the appropriate
steps to increase the number of authorized shares in the future. However, no
assurance can be given at this time whether or not additional shares can or will
be authorized.

In April 2001, Pease will also be required to pay off convertible debentures
with a current outstanding balance of $2,782,500. During 1998 and into 1999,
Pease has taken several steps to reduce general and administrative costs and
management believes Pease will be able to generate positive operating cash flows
in 2000. Management believes capital requirements for 2000 will be between
$200,000 and $1,200,000. Accordingly, management believes that existing working
capital, plus cash expected to be generated from operating activities will be
sufficient to meet commitments for capital expenditures and other obligations of
Pease through at least the first quarter of 2001. However, should the existing
working capital not be sufficient to meet future obligations, Pease may have to
consider other alternatives, including the sale of existing assets, cancellation
of existing exploration agreements, farmouts, joint ventures, restructuring
under the protection of the Federal Bankruptcy Laws and/or liquidation.

During 1998, in response to a series of dry holes and other factors that
contributed to the historically poor financial results, Pease restructured its
management and began to vigorously pursue a merger candidate. Pease's Board of
Directors believed that a merger would, among other things, increase Pease's
asset base and improve the chances of financing future opportunities. As a
result of these efforts, Pease signed an Agreement and Plan of Merger ("Merger
Agreement") on September 1, 1999 (and amended in December 1999) with Carpatsky
Petroleum, Inc. ("Carpatsky"), a publicly held company traded on the Alberta
Stock Exchange under the symbol "KPY." Carpatsky is engaged in production and
development of oil, gas and condensate in the Republic of Ukraine with proven
reserves much greater than Pease's. The transaction is still conditioned upon,
among other things, regulatory and shareholder approvals. Pursuant to the terms
of the proposed merger transaction, Pease will issue approximately 44.96 million
shares of common stock plus 102.41 million shares of a newly designated
preferred stock to acquire all the outstanding stock of Carpatsky. In addition,
all of Pease's currently outstanding Series B Preferred Stock will be exchanged
for approximately 8.9 million shares of common stock at the close of the
transaction. All holders of the Series B Preferred Stock have agreed that
dividends subsequent to September 2000 shall not be paid on their holdings if
the contemplated transaction with Carpatsky is ultimately consummated. They have
also agreed not to sell or convert any outstanding shares of the Series B
Preferred until the contemplated transaction with Carpatsky is either completed
or abandoned. The Merger Agreement contemplates an "opt-out" break-up fee of
$250,000 payable by the defaulting party to the merger. If this merger occurs,

                                       32




                   PEASE OIL AND GAS COMPANY AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




Carpatsky will have control of Pease as Pease will have only one of the expected
seven board of director positions. It is expected current management will also
be replaced.

Principles of Consolidation - The accompanying financial statements include the
accounts of Pease and its wholly- owned subsidiaries. All material intercompany
transactions and accounts have been eliminated in consolidation.

Cash and Equivalents - Pease considers all highly liquid investments purchased
with an original maturity of three months or less to be cash equivalents.

Oil and Gas Properties - Pease's oil and gas producing  activities are accounted
for using the full cost method of  accounting.  Pease has one cost center  (full
cost pool) since all of its oil and gas  producing  activities  are conducted in
the United States.  Under the full cost method,  all costs  associated  with the
acquisition,   development  and  exploration  of  oil  and  gas  properties  are
capitalized,  including  payroll  and other  internal  costs  that are  directly
attributable  to these  activities.  Any internal costs that are capitalized are
limited to those costs that can be  directly  identified  with the  acquisition,
exploration,  and development  activities  undertaken by the Company for its own
account,  and do not include any costs related to production,  general corporate
overhead, or similar activities.  The total amount of internal costs capitalized
in unevaluated  oil and gas properties as of December 31, 1999 is  approximately
$397,000, consisting mostly of interest. The Company capitalizes interest on its
unevaluated  oil and gas properties in accordance with FASB  Interpretation  No.
33.  Accordingly,  interest is  capitalized on oil and gas assets that have been
excluded form the full cost amortization  pool. The interest that is capitalized
becomes  part of the  related  projects or  properties  and  transferred  to the
amortization  pool.  For the years ended  December  31,  1999 and 1998,  capital
expenditures include other internal costs of $23,804 and $236,931, respectively.

Proceeds from sales of oil and gas properties are credited to the full cost pool
with no gain or loss recognized unless such adjustments would significantly
alter the relationship between capitalized costs and proved oil and gas
reserves. Production costs are expensed as incurred.

Acquisition  costs of  unproved  properties  and costs  related  to  exploratory
drilling and seismic activities are initially excluded from amortization.  These
costs  are  evaluated  at least  annually  for  impairment  and  transferred  to
properties  being  amortized when either proved  reserves are established or the
costs are determined to be impaired.  When  evaluating  unproved  properties for
impairment the Company considers,  among other factors,  historical  experience,
primary lease terms, the terms of the exploration agreement(s) within an area of
mutual interest, or capital "AMI", and the quality of a particular 3-D beta set.

At December 31, 1999, Pease owned approximately 1,550 net (13,250 gross)
undeveloped acres. All of these leases were acquired with either two or three
year terms. Unless production has been obtained through exploratory drilling,
696 of the net acres will expire in 2000, 838 net acres will expire in 2001 and
16 net acres will expire in 2002. Substantially all of the undeveloped acreage
contain identified exploratory prospects or leads. Should the leases expire
prior to an exploratory well being drilled, the value of these properties may be
negatively affected. This in turn may have a negative material impact on Pease's
future results of operations and/or its financial condition. The carrying value
of the undeveloped acreage at December 31, 1999 was $155,000. At December 31,
1999, Pease owns approximately 146 net (1,534 gross) developed acres.
Substantially all of the developed acres have terms that allow Pease to hold the
lease as long as production is maintained.

The capitalized costs related to all evaluated oil and gas properties are
amortized using the units of production method based upon production and
estimates of proved reserve quantities. Future costs to develop proved reserves,
as well as site restoration, dismantlement and abandonment costs, are estimated
based on current costs and are also amortized to expense using the units of
production method.

The capitalized costs of evaluated oil and gas properties (net of accumulated
amortization and related deferred income taxes) are not permitted to exceed the
full cost ceiling. The full cost ceiling involves a quarterly calculation

                                       33




                   PEASE OIL AND GAS COMPANY AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


of the estimated future net cash flows from proved oil and gas properties, using
current prices and costs and an annual discount factor of 10%. Accordingly, the
full cost ceiling may be particularly sensitive in the near term due to changes
in oil and gas prices or production rates.

Impairment of Long-Lived Assets - Pease performs an assessment for impairment
whenever events or changes in circumstances indicate that the carrying amount of
a long-lived asset may not be recoverable. If the net carrying value exceeds
estimated undiscounted future net cash flows, then impairment is recognized to
reduce the carrying value to the estimated fair value.

Property, Plant and Equipment - Property, plant and equipment is stated at cost.
Depreciation of property, plant and equipment was calculated using the
straight-line method over the estimated useful lives of the assets, as follows:

                                                           Years
                                                           -----
     Gas plant                                                17
     Service equipment and vehicles                          4-7
     Buildings and office equipment                         7-15

Depreciation expense related to property, plant and equipment amounted to
$22,402 and $326,830 for the years ended December 31, 1999 and 1998,
respectively.

The costs of normal maintenance and repairs are charged to operating expenses as
incurred. Material expenditures which increase the life of an asset are
capitalized and depreciated over the estimated remaining




                                       34




                   PEASE OIL AND GAS COMPANY AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



useful life of the asset. The cost of properties sold, or otherwise disposed of,
and the related accumulated depreciation or amortization are removed from the
accounts, and any gains or losses are reflected in current operations.

Debt Issuance Costs - Debt issuance costs relate to the $5 million private
placement of convertible debentures discussed in Note 3. These costs are being
amortized using the interest method.

Accounting 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 revenue and expenses during
the reporting period. The actual results could differ from those estimates.

Pease's financial statements are based on a number of significant estimates
including the allowance for doubtful accounts, assumptions affecting the fair
value of stock options and warrants, and oil and gas reserve quantities which
are the basis for the calculation of amortization and impairment of oil and gas
properties. Management emphasizes that reserve estimates are inherently
imprecise and that estimates of more recent discoveries are more imprecise than
those for properties with long production histories.

Income Taxes - Deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on previously
recorded deferred tax assets and liabilities resulting from a change in tax
rates is recognized in earnings in the period in which the change is enacted.

Revenue Recognition - Pease recognizes revenues for oil and gas sales upon
delivery to the purchaser. Revenues from oil field services were recognized as
the services are performed. Oil field supply and equipment sales were recognized
when the goods were shipped to the customer.


                                       35




                   PEASE OIL AND GAS COMPANY AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



The Company accounts for gas imbalances using the "Sales" method. However, the
Company has not disclosed any specifics on past gas imbalances since they have
not been material and are not expected to be so in the future.

Net Loss Per Common Share -Net loss per common share is presented in accordance
with the provisions of Statement of Financial Accounting Standards ("SFAS") No.
128, Earnings Per Share, which requires disclosure of basic and diluted earnings
per share ("EPS"). Basic EPS excludes dilution for potential common shares and
is computed by dividing the net loss applicable to common shareholders by the
weighted average number of common shares outstanding for the period. Diluted EPS
reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common stock.
Basic and diluted EPS are the same in 1999 and 1998 as all potential common
shares were antidilutive.

The net loss applicable to common stockholders is determined by adding any
dividends accruing to the benefit of the preferred stockholders to the net loss.
The dividends included for this calculation include: 1) paid dividends: 2)
accrued but unpaid dividends; 3) any dividends in arrears; and 4) any imputed
dividends attributable to the beneficial conversion feature. Accordingly, the
net loss applicable to common stockholders includes the following charges
associated with the Series B Preferred Stock that was issued on December 31,
1997:

                                      For the Year Ended December 31,
                                      ------------------------------
                                           1999            1998
                                           ----            ----
     Dividends declared                $  177,817     $   278,026
     Dividends in arrears                  87,707           -
     Non-cash imputed dividend charge        -          1,789,468
                                       ----------     -----------
          Total                        $  265,524     $ 2,067,494
                                       ==========     ===========

The Series B Preferred Stock is convertible into common stock at a conversion
price equal to a 25% discount to the average trading price of the common stock
prior to conversion. This discount started at 12% in April 1998 and increased
periodically until it topped out at 25%. This discount is considered a
"beneficial conversion feature." The additional non-cash imputed dividend charge
represents the intrinsic value of the discount applicable through the period
presented. No additional non-cash dividend charges have been or will be incurred
subsequent to December 31, 1998.

In connection with an agreement signed by the Preferred Stockholders and
associated with the contemplated merger with Carpatsky, we have not accrued or
paid any dividends to the Series B Preferred Stockholders subsequent to
September 1, 1999. However, the amount that we would be obligated to pay should
the merger be abandoned has been included in the calculation of net loss per
share as "Dividends in arrears".

Extraordinary Item - In connection with the sale of the Rocky Mountain assets,
the Company paid down $1.2 million (or 30%) of the outstanding convertible
debentures in September 1998, thereby reducing the outstanding principal from
$4.0 million to $2.8 million. At the same time, the Company wrote off $396,742,
representing 30% of the unamortized debt discount and debt issuance costs
associated with that debt. For financial statement reporting purposes, this
charge has been reported in the 1998 Statement of Operations as an extraordinary
item in connection with an early extinguishment of debt. There were no tax
consequences associated with the extraordinary item because of the Company's
substantial net operating loss carry-forwards.

Stock Split - Effective December 1, 1998, the Board of Directors declared a 1
for 10 reverse stock split related to Pease's common stock. All share and per
share amounts in the accompanying financial statements and notes have been
retroactively restated for this stock split.

Stock-Based Compensation - For employees, Pease accounts for stock-based
compensation using the intrinsic value method prescribed in Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and
related interpretations. Accordingly, compensation cost for stock options
granted to employees is measured as the excess, if any, of the quoted market
price of Pease's common stock at the measurement date (generally, the date of
grant) over the amount an employee must pay to acquire the stock.


                                       36




                   PEASE OIL AND GAS COMPANY AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


is measured as the excess, if any, of the quoted market price of Pease's common
stock at the measurement date (generally, the date of grant) over the amount an
employee must pay to acquire the stock.


For non-employees, the Company accounts for stock-based compensation as
prescribed by SFAS No. 123 titled Accounting for Stock-Based Compensation. This
pronouncement requires that all options, warrants, and similar instruments which
are granted to non-employees for goods and services be recorded at fair value on
the measurement date and pro forma information be provided as to the fair value
effects of transactions with employees. Fair value is generally determined under
an option pricing model using the criteria set forth in SFAS No. 123. The
measurement date is generally the earlier of : a) the date in which the
performance of the goods or services is fully committed; or b) the date in which
the performance is substantially complete.



2.  ASSETS DIVESTITURE:
    -------------------

During the fourth quarter of 1997, Pease's Board of Directors determined that
Pease's long-term strategy had shifted to exploration and development activities
in the Gulf Coast region and that the Rocky Mountain assets should be divested.
Accordingly, Pease evaluated these assets in 1997 for impairment and reduced the
net carrying value to the estimated fair value. These assets were sold during
1998 for cash proceeds of $3,054,000 and an additional payment of $100,000 was
received in April 1999.

The Company recognized an impairment charge in 1998 of $313,953, to account for
the difference between the net realizable value estimated in 1997 and the actual
amount realized in 1998. The results of operations during 1998, exclusive of the
impairment charge, related to the Rocky Mountain assets are as follows:

                                              1998
                                              ----
     Revenues                           $   1,488,843
     Operating costs and expenses          (1,394,141)
     Depreciation and amortization           (549,816)
                                        -------------
     Loss from operations               $    (455,114)
                                        =============


3.  DEBT FINANCING ARRANGEMENTS:
    ----------------------------

    Long-Term Debt - Long-term debt at December 31, 1999 consists of the
following:

    Convertible debentures, interest at 10%, due April 2001, unsecured                     $ 2,782,500
    Less unamortized discount                                                                 (292,450)
                                                                                           -----------
        Net carrying value                                                                   2,490,050
    Note payable to bank, interest at 8.5%, monthly payments of $669, due March 2003,
       collateralized by a vehicle                                                              22,520
                                                                                           -----------
          Total long-term debt                                                               2,512,570
          Less current maturities                                                               (6,352)
                                                                                           -----------
          Long-term debt, less current maturities                                          $ 2,506,218
                                                                                           ===========

    Aggregate maturities of long-term debt excluding the unamortized non-cash
discount, are as follows:

      Year Ending December 31:
      -----------------------
                2000                 $      6,352
                2001                    2,789,396
                2002                        7,505
                2003                        1,767
                                     ------------
                Total                $  2,805,020
                                     ============



                                       37




                   PEASE OIL AND GAS COMPANY AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Convertible Debentures and Consulting Agreement - In March 1996, Pease entered
into a consulting agreement with a company (the "Consultant") that specializes
in developing and implementing capitalization plans, including the utilization
of debt capital in business operations. The agreement expired in February 1999,
and provided for minimum monthly cash payments of $17,500. In addition to cash
compensation, Pease agreed to grant warrants to purchase 100,000 shares of
Pease's common stock. The exercise price of the warrants is $7.50 per share and
they expire in March 2001.

In April 1996, Pease, with the assistance of the Consultant, initiated a private
placement to sell up to $5,000,000 of collateralized  convertible  debentures in
the  form  of  "Units."  Each  Unit  consists  of  one  $50,000   five-year  10%
collateralized  convertible  debenture and detachable warrants to purchase 2,500
shares of Pease's  common  stock at $12.50 per share (see Note 7 for  additional
information  with respect to the  warrants).  In November 1996, the offering was
completed and Pease was successful in selling the entire  $5,000,000  generating
net cash  proceeds of  $4,300,000.  The estimated  fair value of the  detachable
warrants of  $1,829,000  has been treated as a discount  and is being  amortized
using the interest  method.  The debentures were initially  collateralized  by a
first priority  interest in certain Rocky Mountain oil and gas properties  owned
and operated by Pease.

The debentures are convertible, at the holder's option, into Pease's common
stock for $30.00 per share and may be redeemed by Pease, in whole or in part, at
a premium to the original principal amount. During the year ended December 31,
1997, the holders of $1,025,000 of debentures elected to convert to 341,665
shares of common stock. Effective October 1, 1998, the holders of the debentures
voted to amend the debentures to release the oil and gas properties which
previously collateralized this debt. In exchange for this release, Pease agreed
to retire 30% of the outstanding principal balance which amounted to an
aggregate of $1,192,500. Interest on the debentures is payable quarterly and the
principal balance is due on April 15, 2001.

4.  INCOME TAXES:
    -------------

    Deferred tax assets (there are no deferred tax liabilities) as of December
31, 1999 are comprised of the following:

                                                       1999
                                                       ----
Long-term Assets:
     Net operating loss carryforwards             $  9,646,000
     Property, plant and equipment                     968,000
     Tax credit carryforwards                          294,000
     Percentage depletion carryforwards                160,000
     Other                                               8,000
                                                  ------------
          Total                                     11,076,000
     Less valuation allowance                      (11,076,000)
                                                  ------------
          Net long-term asset                     $     -
                                                  ============

    During the years ended December 31, 1999 and 1998, Pease increased the
valuation allowance by $1,525,000 and $3,050,000, respectively, primarily due to
an increase in the net operating loss carryforwards which are not considered to
be realizable. Pease has provided a valuation allowance for the net operating
loss and credit carryforwards based upon the various expiration dates and the
limitations which exist under IRS Sections 382 and 384.

    At December 31, 1999, Pease had net operating loss carryforwards for income
tax purposes of approximately $24 million, which expire primarily in 2008
through 2019. Some of these net operating losses are subject to limitations
under IRS Sections 382 and 384, particularly should a significant number of
Series B Preferred stock convert into common stock in the future or the merger
with Carpatsky is consummated. Additionally, Pease has

                                       38




                   PEASE OIL AND GAS COMPANY AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


tax credit carryforwards at December 31, 1998, of approximately $294,000 and
percentage depletion carryforwards of approximately $429,000.

5.  COMMITMENTS AND CONTINGENCIES:
    ------------------------------

Employment Agreements - During 1994, the Board of Directors approved an
employment agreement with Pease's current President/CFO and formally reaffirmed
that commitment in 1999. The agreement may be terminated by the officer upon 90
days notice or by Pease without cause upon 30 days notice. In the event of a
termination by Pease without cause, Pease would be required to pay the officer
one year's salary. If the termination occurs following a change in control,
which includes a merger, Pease would be required to make a lump sum payment
equivalent to two year's salary.

Profit Sharing Plan - Pease has established a 401(k) profit sharing plan that
covers all employees with six months of service who elect to participate in the
Plan. The Plan provides that the employees may elect to contribute up
to 15% of their salary to the Plan. All of Pease's contributions are
discretionary and amounted to $3,862 and $5,401 for the years ended December 31,
1999 and 1998, respectively.

Environmental - Pease is subject to extensive Federal, state and local
environmental laws and regulations. These laws, which are constantly changing,
regulate the discharge of materials into the environment and may require Pease
to remove or mitigate the environmental effects of the disposal or release of
petroleum or chemical substances at various sites. Environmental expenditures
are expensed or capitalized depending on their future economic benefit.
Expenditures that relate to an existing condition caused by past operations and
that have no future economic benefits are expensed. Liabilities for expenditures
of a noncapital nature are recorded when environmental assessment and/or
remediation is probable, and the costs can be reasonably estimated.

Bankruptcy of Third Party Operator - In December 1998, NEG filed an Involuntary
Petition for an Order and Relief under Chapter 11 of Title 11 of the United
States Bankruptcy Code in United States Bankruptcy Court for the Northern
District of Texas, Dallas Division. As operator of the East Bayou Sorrel field,
which represents a majority of Pease's current production, the bankruptcy
petition might adversely effect future development or operation of the field;
however, Pease does not expect that its interest in the field or production from
currently existing wells will be affected.

Pease does have an unsecured claim in the bankruptcy proceeding for various
amounts which Pease believes were overpaid to the operator in connection with
the drilling of existing wells. Collection of these amounts may be delayed or
may not occur, pending disposition of NEG's reorganization proceeding. The total
claim is approximately $60,000. However, no amount has been recorded (as an
account receivable) in the financial statements as of December 31, 1999.

Agreement with Carpatsky - Effective October 1, 1999, Pease entered into a
separate Agreement with Carpatsky Petroleum, Inc. whereby Pease, for a fee,
would provide certain accounting and administrative services to Carpatsky on an
as needed basis. The fees to be charged Carpatsky are based on an hourly rate
ranging from $25.00 to $75.00 per hour, depending on which of Pease's personnel
was performing the work. Pursuant to the terms of the Agreement, these fees
would only be payable to Pease in the event the merger between the two parties
was terminated or abandoned for any reason whatsoever. Accordingly, Pease has
not been paid, nor has any amount been accrued as of December 31, 1999 for
services rendered by Pease under this Agreeement.
However, should the merger ultimately be terminated or abandoned for any reason
whatsoever, the total fees and out-of-pocket expenses that would be due as of
December 31, 1999 totaled $34,454.

Other Contingencies - Pease may from time to time be involved in various claims,
lawsuits, disputes with third parties, actions involving allegations of
discrimination, or breach of contract incidental to the operations of its
business. Pease is not currently involved in any such incidental litigation
which it believes could have a materially adverse effect on its financial
conditions or results of operations.


                                       39




                   PEASE OIL AND GAS COMPANY AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


6.  PREFERRED STOCK
    ---------------

Pease has the authority to issue up to 2,000,000 shares of Preferred Stock,
which may be issued in such series and with such preferences as determined by
the Board of Directors. During 1993, Pease issued 1,170,000 shares of Series A
Cumulative Convertible Preferred Stock (the "Series A Preferred Stock"). Each
share of Series A Preferred Stock was entitled to receive dividends at 10% per
annum when, as and if declared by Pease's Board of Directors. Unpaid dividends
accrued and were cumulative. During 1997, the holders of all remaining shares of
Series A Preferred Stock elected to convert to 56,990 shares of common stock
pursuant to the original conversion terms. Upon conversion, the holders also
received warrants to purchase 56,990 shares of common stock at $60.00 per share
through August 13, 1998. On March 4, 1998, the expiration date of these warrants
was extended for one year and therefore expired on August 13, 1999.

In December 1997, the Board of Directors authorized a new series of preferred
stock which was designated as the Series B 5% PIK Cumulative Convertible
Preferred Stock (the "Series B Preferred Stock"). Pease has authority to issue
up to 145,300 shares of Series B Preferred Stock. On December 31, 1997, Pease
issued 113,333 shares of Series B Preferred Stock for $5,666,650. The Series B
Preferred Stock is convertible into common stock at a conversion price equal to
a 25% discount to the average trading price of the common stock prior to
conversion. This discount started at 12% in April 1998 and increased
periodically until it topped out at 25%. The discount was being accounted for as
an additional dividend on the Series B Preferred Stock which was recognized as a
charge to earnings applicable to common stockholders in 1998. The Series B
Preferred Stock provides for a liquidation preference of $50 per share and the
holders are entitled to dividends at $2.50 per annum, payable quarterly in cash
or additional shares of Series B Preferred Stock at the option of Pease.



                                       40




                   PEASE OIL AND GAS COMPANY AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



However, in connection with the contemplated merger with Carpatsky, the
Preferred stockholders have signed Agreements Not to Sell or Convert Securities
which, among other things, stated that Pease's obligation to accrue and pay
additional dividends on the Series B Preferred stock shall be deferred from the
date that an Agreement and Plan of Merger with Carpatsky is signed. Therefore,
dividends were accrued and paid to the Preferred stockholders through the close
of business on September 1, 1999. If the merger with Carpatsky is consummated,
there will be no further dividends paid. If the merger is not consummated, Pease
shall be obligated at that time to accrue and pay dividends for the period from
September 1, 1999 through the date on which the merger is abandoned. For
financial statement presentation purposes, however, the preferred dividends for
September 1, 1999 to December 31, 1999 have been deducted in determining net
loss applicable to common stockholders as if such amounts were required to be
paid.

Beginning in June 1999, Pease may force the holders to convert to common stock
at a conversion price that generally represents a 25% discount from the fair
value of the common stock. If not previously converted, Pease is required to
redeem the Series B Preferred Stock on December 31, 2002 at a price equal to the
Liquidation Preference.

In connection with the issuance of this preferred stock, Pease agreed to issue
warrants to the placement agent for 32,380 shares of common stock at $17.50 per
share.

7.  STOCK BASED COMPENSATION:
    -------------------------

Stock Option Plans - Pease's shareholders have approved the following stock
option plans that authorize an aggregate of 185,732 shares that may be granted
to officers, directors, employees, and consultants: 9,000 shares in June 1991;
27,732 shares in June 1993; 15,000 shares in June 1994; 34,000 shares in August
1996; and 100,000 shares in May 1997.

The plans permit the issuance of incentive and nonstatutory options and provide
for a minimum exercise price equal to 100% of the fair market value of Pease's
common stock on the date of grant. The maximum term of

                                       41




                   PEASE OIL AND GAS COMPANY AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


options granted under the plan is 10 years and options granted to employees
expire three months after the termination of employment. None of the options may
be exercised during the first six months of the option term.

No options may be granted after 10 years from the adoption date of each plan.
The following is a summary of activity under these stock option plans for the
years ended December 31, 1999 and 1998:

                                           1999                       1998
                                   ----------------------    -------------------------
                                                 Weighted                     Weighted
                                                  Average                      Average
                                    Number       Exercise       Number        Exercise
                                   Of Shares       Price      Of Shares         Price
                                   ---------     --------     ---------       --------
Outstanding, beginning of year      71,030      $  13.85       118,880      $    19.61
          Canceled                  (6,250)          -         (46,350)          21.36
          Expired                      -           13.75        (1,500)          29.40
          Repriced                     -             -         (20,000)          26.90
          Granted                      -             -          20,000           11.25
          Exercised                    -             -            -                -
                                  --------       -------      --------       ---------
Outstanding, end of year            64,780      $  13.86        71,030      $    13.85
                                  ========                    ========

In November 1998, the Company repriced 20,000 options that belonged to Mr.
Patrick J. Duncan, when he replaced Mr. Willard H. Pease, Jr. as President.
Those options were previously granted to Mr. Duncan in November 1997 with an
exercise price of $26.90 per share. In order to provide Mr. Duncan with a
meaningful incentive to accept the position as President after Mr. Pease was
terminated, the board of directors believed those options should have an
exercise price equal to the then current market price of $11.25. For financial
statement reporting purposes, this transaction was reported as a repriced
"cancellation" of the original options and a new grant underlying 20,000 shares.


For all options granted, the market price of Pease's common stock on the date of
grant was equal to the exercise price. All options are currently exercisable and
if not previously exercised, will expire as follows:



                                       42




                   PEASE OIL AND GAS COMPANY AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



                                                    Weighted
      Year Ended               Range of             Average
     December 31,          Exercise Prices          Exercise        Number Of
                            Low       High           Price            Shares
                            ---       ----          -------          -------
         2000            $ 7.00     $  8.30       $   7.77            22,265
         2001             10.00       18.10          12.80            10,015
         2002              5.00       29.70          18.35            32,500
                                                     -----          --------
                                                  $  13.86            64,780
                                                                    ========

    Warrants and Non-Qualified Stock Options - The Company has also granted
warrants and non-qualified options which are summarized as follows for the years
ended December 31, 1999 and 1998:

                                                                        1999                        1998
                                                                --------------------       ---------------------
                                                                            Weighted                    Weighted
                                                                Number       Average       Number        Average
                                                                  Of        Exercise         Of          Exercise
                                                                Shares       Price         Shares          Price
                                                                ------      --------       ------       ---------
     Outstanding, beginning of year                            570,071       $ 40.87       587,790      $  43.11
       Granted to former officer and director for severance       -              -          39,850         14.88
            Expired                                           (339,546)          -         (57,444)        45.81
            Exercised                                             -              -            (125)         7.50
                                                              --------        ------       -------        ------
     Outstanding, end of year                                  230,525       $ 16.21       570,071      $  40.87
                                                              ========                     =======

    All the warrants and non-qualified stock options

have been issued with exercise prices that were either equal to
or greater than the market price at the date of grant. For the warrants
underlying 39,850 shares issued in 1998 to a former officer and director, the
intrinsic value was used to value these equity issuances since they were granted
to Mr. Willard H. Pease, Jr., the Company's former President and CEO, in
connection with the terms of his termination and severance agreement. If not
previously exercised, warrants and non-qualified options will expire as follows:

       Year Ended                 Range of               Weighted
      December 31,             Exercise Prices            Average
      ------------             ---------------           Exercise          Number Of
                              Low           High           Price             Shares
                              ---           ----         --------          --------

          2000              $ 5.00         $71.30         $ 18.58            66,845
          2001                7.50          37.50           10.79            98,900
          2002               17.50          30.30           22.05            64,780
                                                           ------           -------
                                                          $ 16.21           230,525
                                                                            =======


    Pro Forma Stock-Based Compensation Disclosures - The Company applies APB
Opinion 25 and related interpretations in accounting for stock options and
warrants which are granted to employees. Accordingly, no compensation cost has
been recognized for grants of options and warrants to employees since the
exercise prices were not less than the fair value of the Company's common stock
on the grant dates. Had compensation cost been determined based on the fair
value at the grant dates for awards under those plans consistent with the method
of FAS 123, the Company's net loss and loss per share would have been changed to
the pro forma amounts indicated below.

                                     43


                                                        Year Ended December 31,
                                                       1999                1998
                                                       ---                 ----
     Net Loss applicable to common stockholders:
          As reported                             $  (730,798)      $ (12,694,965)
          Pro forma                                  (730,798)        (16,507,036)
     Net loss per common share:
          As reported                             $     (0.43)      $       (7.99)
          Pro forma                                     (0.43)              (8.29)

    The weighted average fair value of options and warrants granted to employees
for the year ended December 31, 1998 was $2.24. No options or warrants were
granted in 1999. The fair value of each employee option and warrant granted in
1998 was estimated on the date of grant using the Black-Scholes option-pricing
model with the following weighted average assumptions:


                                            For the Year Ended December 31,
                                            -------------------------------
                                               1999            1998
                                               ----            ----
     Expected volatility                      N/A              80.0%
     Risk-free interest rate                  N/A               5.6%
     Expected dividends                       N/A                -
     Expected terms (in years)                N/A               2.2

8.  FINANCIAL INSTRUMENTS

    Statement of Financial Accounting Standards No. 107 requires all entities to
disclose the fair value of certain financial instruments in their financial
statements. Accordingly, at December 31, 1999, management's best estimate is
that the carrying amount of cash, receivables, notes payable to unaffiliated
parties, accounts payable, and accrued expenses approximates fair value due to
the short maturity of these instruments. Management estimates that fair value is
approximately equal to carrying value of the convertible debentures since market
interest rates have not changed significantly since the offering commenced.

9.  SIGNIFICANT CONCENTRATIONS:
    ---------------------------

    Substantially all of Pease's accounts receivable at December 31, 1999,
resulted from crude oil and natural gas sales to companies in the oil and gas
industry. This concentration of customers and joint interest owners may impact
our overall credit risk, either positively or negatively, since these entities
may be similarly affected by changes in economic or other conditions. In
determining whether to require collateral from a significant customer or joint
interest owner, Pease analyzes the entity's net worth, cash flows, earnings,
and/or credit ratings. Receivables are generally not collateralized; however,
receivables from joint interest owners are subject to collection under operating
agreements which generally provide lien rights. Historical credit losses
incurred on trade receivables by Pease have been insignificant.



                                       44




                   PEASE OIL AND GAS COMPANY AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


     For the years ended December 31, 1999 and 1998, the Company had oil sales
to a single customer which accounted for 46% and 20% of total revenues,
respectively.

    At December 31, 1999, substantially all of Pease's cash and temporary cash
investments were held at a single financial institution. The Company does not
maintain insurance to cover the risk that cash and temporary investments with a
single financial institution may be in excess of amounts insured by federal
deposit insurance.

10.  OIL AND GAS PRODUCING ACTIVITIES:

    Property Acquisitions - In January 1997, Pease completed the acquisition of
a 7.8125% after prospect payout working interest in a producing oil and gas
prospect in Louisiana. The prospect is operated by National Energy Group, Inc.
(NEGX), an independent oil and gas producer. The purchase price was $1,750,000
which consisted of $875,000 in cash and the issuance of 31,500 shares of Pease's
common stock with a fair value of $875,000. In February 1997, the Company
entered into agreements with unaffiliated parties for the purchase of a 10%
working interest in this prospect for approximately $2.5 million. The assets
acquired from this acquisition account for 77% of Pease's proved reserves at
December 31, 1999.

    Capitalized Costs Incurred - The following table sets forth the capitalized
costs incurred in our oil and gas activities during the last three years:

      Description                                  1999             1998           1997
     ----------------------------------            ----             ----           ----
     Acquisition of proved properties       $        -         $      -       $ 4,266,955
     Acquisition of unproved properties            76,912          507,307      1,926,861
     Exploration                                  314,997        5,439,095      6,514,835
     Development and workovers                    239,276           13,468        734,235
     Capitalized Interest                         278,250          852,980        323,641
                                              -----------      -----------     ----------
          Total                             $     909,435      $ 6,812,850    $13,766,527
                                              ===========      ===========     ==========

                                       45




                   PEASE OIL AND GAS COMPANY AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

    Unevaluated Oil and Gas Properties - The following table sets forth a
summary of oil and gas property costs not being amortized at December 31, 1999,
by the year in which such costs were incurred:


                                    Total           1999         1998           1997
                                    -----           ----         ----           ----
   Property acquisition costs   $  150,000     $    76,912   $   78,088   $       -
   Exploration costs             1,758,532          53,186    1,008,001        692,345
   Capitalized interest            373,200         278,250       94,950           -
                                ----------      ----------   ----------   -----------

     Total                      $2,281,732      $  408,348   $1,181,039   $    692,345
                                ==========      ==========   ==========   ============

    All of the Company's unevaluated costs at December 31, 1999 relate to
seismic, geological, geophysical and, to a lessor extent, leasehold costs and
capitalized interest incurred for the Formosa, Texana and Ganado prospect areas
located in Jackson County, Texas. The total prospect area encompasses
approximately 130,000 acres. The current status of these prospect areas is that
seismic has been acquired, processed, re-processed, and is being interpreted on
an ongoing basis. Drilling commenced on these prospects in 1999 and will
continue into the foreseeable future. Leases have been acquired in the past as
prospects were generated from the 3-D data set.

It is expected that additional leases will be acquired in the future as other
prospects are generated from additional processing of the seismic data. As a
result of the original efforts and the reprocessing, the Company believes over
12 prospects and several dozen leads in the Frio and Yegua formations have been
identified. As these prospects are drilled sometime in the future, the Company
expects that additional prospects and leads will be generated as the information
obtained from the new well bores is integrated into the 3-D data set. All
unevaluated costs were incurred during 1997, 1998 or 1999 and management expects
that planned activities will enable the evaluation of substantially all of these
costs by the end of 2001.

    Full Cost Ceiling - During 1998, Pease recognized an impairment charge of
$7,278,818 due to the full cost ceiling limitation of which $4,739,775 was
recognized in the fourth quarter. The fourth quarter impairment charge was
substantially attributed to the expiration of certain previously unevaluated
lease options, the collapse of oil prices during that period and dry holes. No
impairment charge has been recognized in 1999 since the ceiling is substantially
higher at December 31, 1999 as a result of increased oil prices and additional
discoveries and extensions of the Company's oil and gas reserves.

                                       46




                   PEASE OIL AND GAS COMPANY AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


    Full Cost Amortization Expense - Amortization expense amounted to $946,822
and $1,914,262 for the years ended December 31, 1999 and 1998, respectively.
Amortization expense per equivalent units of oil and gas produced amounted to
$7.64 and $9.52 for the years ended December 31, 1999 and 1998 respectively.
Natural gas is converted to equivalent units of oil on the basis of six Mcf of
gas to one equivalent barrel of oil.

    Results of Operations from Oil and Gas Producing Activities - Results of
operations from oil and gas producing activities (excluding well administration
fees, general and administrative expenses, and interest expense) for the years
ended December 31, 1999 and 1998 are presented below.

                                                      1999              1998
                                                      ----              ----

     Oil and gas sales                          $  2,144,057      $  2,359,905
     Production costs                              (404,897)        (1,049,563)
     Amortization expense                        (1,007,515)        (1,914,262)
     Impairment expense                               -             (7,278,818)
                                                ------------      ------------
     Results of operations from
       oil/gas producing activities             $    731,645      $(7,882,738)

    No provision for income taxes was provided in determining the Results of
Operations from Oil and Gas Producing Activities because the Company's
substantial net operating loss carry-forwards and the tax deductions, credits
and allowances relating to the Company's proved oil and gas reserves would have
eliminated any corresponding tax liability.

    Oil and Gas Reserve Quantities (Unaudited) - Proved oil and gas reserves are
the estimated quantities of crude oil, natural gas, and natural gas liquids
which geological and engineering data demonstrate with reasonable certainty to
be recoverable in future years from known reservoirs under existing economic and
operating conditions. Proved developed oil and gas reserves are those reserves
expected to be recovered through existing wells with existing equipment and
operating methods. The reserve data is based on studies prepared by Pease's
consulting petroleum engineers, Netherland, Sewell & Associates, Inc. Reserve
estimates require substantial judgment on the part of petroleum engineers
resulting in imprecise determinations, particularly with respect to new
discoveries. Accordingly, it is expected that the estimates of reserves will
change as future production and development information becomes available. All
proved oil and gas reserves are located in the United States.

The following table presents estimates of our net proved oil and gas reserves,
and changes therein for the years ended December 31, 1999 and 1998.

                                       47




                   PEASE OIL AND GAS COMPANY AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS





                                                              1999                           1998
                                                        -----------------             -------------------
                                                         Oil          Gas             Oil             Gas
                                                        (Bbls)       (Mcf)           (Bbls)          (Mcf)
                                                        -----         ---             ----            ---
     Proved reserves, beginning of year                275,000      1,368,000       1,085,000       4,535,000
       Purchase of minerals in place                      -              -               -               -
       Sale of minerals in place                          -              -           (725,000)     (2,848,000)
       Extensions, discoveries, and other additions    130,000        330,000         129,000         517,000
       Revisions of previous estimates                   3,000        (2,000)       (105,000)       (286,000)
       Production                                      (74,000)      (337,000)       (109,000)       (550,000)
                                                       -------      ---------        --------       ---------
     Proved reserves, end of year                      334,000      1,359,000         275,000       1,368,000
                                                       =======      =========      ==========      ==========
     Proved developed reserves, beginning of year      261,000        920,000         930,000       3,833,000
                                                       =======     ==========      ==========      ==========
     Proved developed reserves, end of year            310,000        648,000         261,000         920,000
                                                       =======     ==========      ==========     ===========

    The downward revisions of "previous estimates" in 1998 were primarily
attributable to previously recorded undeveloped reserves were removed as a
result of drilling dry holes. The upward revisions of "extensions, discoveries
and other additions" in both 1998 and 1999 were primarily attributable to
significant extensions of the estimated ultimate recoveries of oil and gas at
the East Bayou Sorrel Field.

    Standardized Measure of Discounted Future Net Cash Flows (Unaudited) -
Statement of Financial Accounting Standards No. 69 prescribes guidelines for
computing a standardized measure of future net cash flows and changes therein
relating to estimated proved reserves. We have followed these guidelines which
are briefly discussed below.

    Future cash inflows and future production and development costs are
determined by applying year-end prices and costs to the estimated quantities of
oil and gas to be produced. Estimated future income taxes are computed using
current statutory income tax rates including consideration for estimated future
statutory depletion and tax credits and the utilization of net operating loss
carryforwards. The resulting future net cash flows are reduced to present value
amounts by applying a 10% annual discount factor.

    The assumptions used to compute the standardized measure are those
prescribed by the Financial Accounting Standards Board and, as such, do not
necessarily reflect our expectations for actual revenues to be derived from
those reserves nor their present worth. The limitations inherent in the reserve
quantity estimation process, as discussed previously, are equally applicable to
the standardized measure computations since these estimates are the basis for
the valuation process.

    The following summary sets forth the Company's future net cash flows
relating to proved oil and gas reserves as of December 31, 1999 and 1998 based
on the standardized measure prescribed in Statement of Financial Accounting
Standards No. 69.

                                                                    1999           1998
                                                                    ----           ----

   Future cash inflows                                         $12,080,000    $ 6,117,000
   Future production costs                                      (3,089,100)    (1,519,000)
   Future development costs                                       (834,200)      (544,000)
   Future income tax expense                                          -             -
                                                               -----------    -----------
      Future net cash flows                                      8,156,700      4,054,000
   10% annual discount for estimated timing of cash flow        (1,887,000)    (1,103,000)
                                                               -----------    -----------
   Standardized Measure of Discounted Future Net Cash Flows    $ 6,269,700    $ 2,951,000
                                                               ===========    ===========


                                       48




                   PEASE OIL AND GAS COMPANY AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS





Average prices used to estimate the reserves:


          Oil (per bbl)         $  24.91   $  10.15
          Gas (per Mcf)         $   2.77   $   2.43

No provision for income taxes was provided in computing the Standardized Measure
of Discounted Future Net Cash Flows because the Company's substantial net
operating loss carry-forwards, coupled with the tax deductions, credits and
allowances relating to the Company's proved oil and gas reserves are expected to
eliminate any corresponding tax liability.

    Changes in Standardized Measure (Unaudited) - The following are the
principal sources of change in the standardized measure of discounted future net
cash flows for the years ended December 31, 1999 and 1998:

                                                                  1999              1998
                                                                  ----              ----

   Standardized measure, beginning of year                   $ 2,951,000     $  9,678,000
   Sale of oil and gas produced, net of production costs      (1,739,000)      (1,310,000)
   Sale of minerals in place                                        -          (5,109,000)
   Net changes in prices and production costs                  2,504,000       (1,031,000)
   Net changes in estimated development costs                   (245,000)         907,000
   Revisions of previous quantity estimates                     (267,000)      (2,874,000)
   Discoveries, extensions and other additions                 2,771,000        1,722,000
   Accretion of discount                                         295,000          968,000
                                                             -----------     ------------
   Standardized Measure, end of year                         $ 6,270,000     $  2,951,000
                                                             ===========     ============


ITEM 8.   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
          FINANCIAL DISCLOSURE

This item is not applicable to the Registrant.

                                       49






                                    PART III

ITEM 9.     DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
            COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT

Directors and Executive Officers
The following table sets forth the names and ages of the current directors and
executive officers of Pease, the principal offices and positions with Pease held
by each person and the date such person became a director or executive officer
of Pease. The executive officers of Pease are elected annually by the Board of
Directors. The Board of Directors is divided into three approximately equal
classes. The directors serve three year terms and until their successors are
elected. Each year the stockholders elect one class of directors. The executive
officers serve terms of one year or until their death, resignation or removal by
the Board of Directors. There are no family relationships between any of the
directors and executive officers. In addition, there was no arrangement or
understanding between any executive officer and any other person pursuant to
which any person was selected as an executive officer.

The directors and executive officers of Pease are as follows:

                                                                                  Served as
       Name              Age                  Position With Pease              Director Since
-----------------------  ---      -------------------------------------------  --------------
Patrick J. Duncan         37      President, Chief Financial Officer, and           1995
                                  Director (Term Expires 2000)
Steve A. Antry            44      Director (Term Expires 2001)                      1996
Stephen L. Fischer        41      Director (Term Expires 2001)                      1997
Homer C. Osborne (2)      70      Director (Term Expires 2001)                      1994
James C. Ruane (1)(2)     65      Director (Term Expires 2001)                      1980
Clemons F. Walker (2)     60      Director (Term Expires 1999)                      1996

    (1) Member of the Audit Committee of the Board of Directors.
    (2) Member of the Compensation Committee.

    Pease's Board of Directors held 7 meetings during 1999. All were actual
meetings at which all directors attended except for Steve A. Antry, William F.
Warnick and Stephen L. Fischer who missed one meeting and James C. Ruane who
missed two meetings.

    Pease has an audit committee, consisting of James C. Ruane which did not
meet in 1999. The functions of the audit committee are to review financial
statements, meet with Pease's independent auditors and address accounting
matters or questions raised by the auditors.

    Pease has a compensation committee consisting of James C. Ruane, Homer C.
Osborne, and Clemons F. Walker, which did not meet in 1999. The functions of the
compensation committee are to review compensation of officers and employees and
administer and award options under all stock option plans of Pease.

     Patrick J. Duncan has been our President since November 1998 and our Chief
Financial Officer since September 1994, our Treasurer since March 1996. In
addition to managing the day-do-day activities of Pease, Mr. Duncan is
responsible for all the financial, accounting and administrative reporting and
compliance required by his individual job titles. Mr. Duncan was an Audit
Manager with HEIN + ASSOCIATES LLP, Certified Public Accountants, from 1991
until joining Pease as our Controller in April 1994. From 1988 until 1991, Mr.
Duncan was an Audit Supervisor with Coopers & Lybrand, Certified Public
Accountants. Mr. Duncan received a B.S. degree from the University of Wyoming in
1985.

     Steve A. Antry is the founder, President and Chairman of the Board of
Directors of Beta Oil and Gas, Inc., a publicly held entity. In addition, Mr.
Antry founded Beta Capital Group, Inc., a financial consulting firm in November
1992, and was its President through June 1997. Beta Capital Group, Inc.
specializes in selecting and working with emerging oil and gas exploration
companies which have production and drilling prospects strategic for rapid
growth yet also need capital and market support to achieve that growth. Mr.
Antry remains Chairman of the Board of Directors of Beta Capital Group, Inc. but

                                       50




resigned as its President to devote his full attention to Beta Oil and Gas.
Before forming Beta Capital Group, Inc., Mr. Antry was an officer of Benton Oil
& Gas company, from 1989 through 1992, ultimately becoming President of a wholly
owned subsidiary. Before Benton, Mr. Antry was a Marketing Director for Swift
Energy from 1987 through 1989. Mr. Antry began working in the oil fields in
Oklahoma in 1974. He has served in various exploration management capacities
with different companies, including Warren Drilling Company, as Vice President
of Exploration and Nerco Oil and Gas, a division of Pacific Power and Light,
where he served as Western Regional Land Manager. Mr. Antry is a member of the
International Petroleum Association of America "IPAA", serving on the Capital
Markets Committee and has B.B.A. and M.B.A. degrees from Texas Christian
University.

     Stephen L. Fischer is the Vice President of Capital Markets of Beta Oil and
Gas, Inc., a publicly held entity, and has been Vice President of Beta Capital
Group, Inc. since March 1996. From April 1996 through March 1998 he was also a
registered representative of Signal Securities, Inc., a registered
broker-dealer. Between 1991 and before joining Beta Capital Group, Inc. in 1996,
Mr. Fischer was a Registered Representative of Peacock, Hislop, Staley & Given,
an Arizona based investment banking firm. Since 1983, Mr. Fischer has held
various positions in the financial services industry in investment banking,
retail, and institutional sales, with a special emphasis on the oil and gas
exploration sector.

     Homer C. Osborne was an officer and director of Garrett Computing System,
Inc., a petroleum engineering and computing firm, from 1967 until 1976, at which
time he organized Osborne Oil Company as a wholly-owned subsidiary of Garrett
Computing Systems, Inc. Mr. Osborne operated Osborne Oil Company as a separate
entity from 1976 until 1998, when he sold the company. Mr. Osborne is currently
enjoying retirement.

     James C. Ruane formerly owned and operated Goodall's Charter Bus Service,
Inc., a bus chartering business representing Grey Line in the San Diego area,
from 1958 to 2000 when he sold the company. Mr. Ruane has been an oil and gas
investor for over 20 years and is currently enjoying retirement.

    Clemons F. Walker has been an independent financial consultant since August
of 1996. Prior to that he was employed as an investment banker and stockbroker.
Between 1978 and August 1995 Mr. Walker worked for Wilson Davis in Las Vegas,
Nevada when Presidential Brokerage purchased the Wilson Davis office in Las
Vegas and he continued to work for the surviving entity until August of 1996.
Since 1978 Mr. Walker has focused his efforts in investment banking by
supporting small-cap companies through assistance in private placements, public
offerings and other capital raising efforts. During his career, Mr. Walker has
organized, advised, facilitated, sold and participated in numerous debt and
equity transactions (both public and private) in a variety of industries,
including the oil and gas industry. Mr. Walker has a bachelor of arts degree in
Business Administration from Brigham Young University with a concentration in
Finance.

COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934

Section 16(a) of the Securities Exchange Act of 1934 requires our officers and
directors, and persons who own more than ten percent of our Common Stock, to
file reports of ownership and changes in ownership with the Securities and
Exchange Commission ("SEC"). Officers, directors and greater than ten percent
stockholders are required by SEC regulations to furnish us with copies of all
Section 16(a) forms they file.

The following disclosure is based solely upon a review of the Forms 3 and 4 and
any amendments thereto furnished to Pease during our fiscal year ended December
31, 1999, and Forms 5 and amendments thereto furnished to us with respect to
such fiscal year, or written representations that no Forms 5 were required to be
filed by such persons. Based on this review no person who was a director and
beneficial owner of more than 10% of Pease's outstanding Common Stock during
such fiscal year filed late reports on Forms 3 and 4.

ITEM 10-EXECUTIVE COMPENSATION

Summary Compensation Table
The Summary Compensation Table shows certain compensation information for
services rendered in all capacities during each of the last three fiscal years
by the Chief Executive Officer and those executive officers who received salary,
bonus or other compensation in excess of $100,000 (these individuals are
collectively referred to herein as the "Named Executive Officers"). The
following information for the Named Executive Officers includes the

                                       51





dollar value of base salaries, bonus awards, the number of stock options granted
and certain other compensation, if any, whether paid or deferred.

                                        SUMMARY COMPENSATION TABLE

                                                                                                         Long-Term
                                                         Annual Compensation                        Compensation Awards
                                                                              Other          Restricted         Securities
      Name and Principle                                                     Annual            Stock            Underlying
           Position                Year       Salary         Bonus        Compensation         Awards         Options/SARs(#)
           --------                ----       ------         -----        ------------         ------         ---------------
Patrick J. Duncan                1999          $  97,957      None            None              None               None
 President and CFO(3)            1998           $104,370      None            None              None               None
                                 1997          $  79,791      $  5,000        None              None              24,500
Willard H. Pease, Jr.
 Former President and            1998           $108,303       $25,000    $ 150,000(1)          None               None
 CEO(1)                          1997          $  93,270      $  5,000        None              None              25,000
J.N. Burkhalter
 Former V.P. Engineering         1998          None           None            None              None               None
 and Production(2)               1997          $  84,790      None        $ 138,050(2)          None               3,500

     (1)  In December 1998 Mr. Pease's employment with us was terminated. In
          accordance with his amended employment agreement, Mr. Pease received a
          cash payment of $150,000 for severance.
     (2)  Effective January 1, 1998, Mr. Burkhalter resigned his position as our
          V.P. of Engineering and Production in light of our anticipated sale of
          the Rocky Mountain assets. In connection with his resignation, Mr.
          Burkhalter received total severance of $138,050 consisting of office
          equipment and one vehicle valued at $5,850, and a future cash
          obligation of $132,200. The cash obligation will be paid in monthly
          installments through August 2000. This severance was granted by us, in
          part, pursuant to the terms of an employment agreement dated December
          27, 1994.
     (3)  Mr. Duncan was appointed by the Board of Directors as our President to
          succeed Mr. Pease. No additional amounts have been shown as Other
          Annual Compensation because the aggregate incremental cost to us for
          personal benefits provided to Mr. Duncan did not exceed the lesser of
          $50,000 or 10% of his annual salary in any given year.

Option Grants in the Last Fiscal Year
There were no grants of stock options to the Named Executive Officers pursuant
to Pease's Stock Option Plans during the fiscal year ended December 31, 1999.

Aggregated Option Exercises in the Last Fiscal Year and the Fiscal Year-End
Option Values

Set forth below is information with respect to the unexercised options to
purchase Pease's Common Stock held by Named Executive Officers at December 31,
1999. No options were exercised during fiscal 1999.



                                       52





 Aggregated Option/SAR Exercises in Last Fiscal Year and FY-End Option/SAR Values


                                                                                      Number of
                                                                                      Securities          Value of
                                                                                      Underlying          Unexercised
                                                                                      Unexercised         In-the-Money
                                                                                      Options/SARs        Options/SARs
                                                                                      at FY-End (#)       at FY-End ($)
                                           Shares Acquired                            Exercisable/        Exercisable/
                 Name                      on Exercise (#)       Value Realized ($)   Unexercisable       Unexercisable
                 ----                      ---------------       ------------------   -------------       -------------
Patrick J. Duncan                               None                    None             35,000/35,000         $ 0/0(1)
     President and Chief Financial
     Officer

    (1) The value of the unexercised In-the-Money Options was determined by
multiplying the number of unexercised options (that were in other money on
December 31, 1999) by the closing sales of Pease's common stock on December
31,1998 (as reported by NASDAQ) and from that total, subtracting the total
exercise price. No options were in-the-money at December 31, 1999.

Employment Contract
We reaffirmed the Employment Agreement of Patrick J. Duncan as Pease's President
and Chief Financial Officer dated December 27, 1994 by a letter dated January
11, 1999 at an annual salary of $97,500. Upon termination or change of control,
we are obligated to pay Mr. Duncan one to two year's salary.

Compensation of Directors
Directors who are employees or otherwise receive compensation from us do not
receive additional compensation for service as directors. Outside directors each
receive a $2,500 annual retainer fee, $750 per meeting attended and $100 per
meeting conducted via telephone conference. Historically, all fees are paid in
the form of Pease restricted common stock but future fees may be paid in cash
and/or common stock.

ITEM 11-  SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN BENEFICIAL OWNERS

The following table sets forth certain information regarding the beneficial
ownership of Pease's common stock, its only class of outstanding voting
securities as of January 1, 2000, by (i) each of Pease's directors and officers,
and (ii) each person or entity who is known to Pease to own beneficially more
than 5% of the outstanding common stock with the address of each such person or
entity. Beneficial owners listed have sole voting and investment power with
respect to the shares unless otherwise indicated.

                      SECURITY OWNERSHIP OF MANAGEMENT AND
                            CERTAIN BENEFICIAL OWNERS


           Name and Address of                     Amount and Nature of                         Percent of
           Officer or Director                    Beneficial Ownership(1)                       Class (12)
           -------------------                    -----------------------                       ----------
Steve A. Antry                                       60,496 Shares (2)                                3.39%
Patrick J. Duncan                                    36,564 Shares (3)                             2.07%
Stephen L. Fischer                                   30,115 Shares (4)                             1.72%
Homer C. Osborne                                     14,657 Shares (5)                             0.84%
James C. Ruane                                       31,761 Shares (6)                             1.83%
Clemons F. Walker                                    31,357 Shares (7)                             1.80%
                                                    ---------------                                -----
All Officers and Directors as a
group (six persons)                                 204,950 Shares (8)                            10.99%
Kayne Anderson, et al.
  1800 Avenue of the Stars
 Second Floor
 Loss Angeles, CA 90067                           4,984,820 Shares (9)(10)                        74.22%

State Street, et al
 Chase/Chemical Bank
 A/C State Street Bank & Trust Co.
 4 New York Plaza
 Ground Floor/Receive Window
 New York, NY 10004                               3,350,971 Shares (9)(11)                        65.93%
Howard Amster IRA
 111 East Kilbourn Ave.
 Milwaukee, WI 53202                                 83,744 Shares (9)                             4.62%
The Madav IX Foundation
 1750 Euclid Avenue
 Cleveland, OH 44115                                167,549 Shares (9)                             8.82%
Ramat Securities, Ltd.
 23811 Chagrin Blvd., Suite 200
 Beachwood, OH 44122                                 27,227 Shares (9)                             1.55%
Tamar Securities, Inc.
 23811 Chagrin Blvd., Suite 200
 Beachwood, OH 44122                                 251,323 Shares (9)                           12.68%
Security Ownership of Series B
 Preferred Stockholders
 as a Group (10 entities)                         8,865,664 Shares (9)(12)                       83.66%(13)
---------------------

                                       53




(1)  Shares are owned directly and beneficially unless stated otherwise.

(2)  Includes 8,100 shares that are owned directly by Mr. Antry, 750 shares
     underlying presently exercisable options, 6,146 shares underlying presently
     exercisable warrants, and 45,500 shares underlying presently exercisable
     warrants that are held by Mr. Antry's wife.

(3)  Includes 1,564 shares owned directly by Mr. Duncan, 35,000 shares
     underlying presently exercisable options.

(4)  Includes 8,295 shares owned directly by Mr. Fischer, 400 shares owned by
     his wife, 750 shares underlying presently exercisable options and 20,670
     shares underlying presently exercisable warrants.

(5)  Includes 10,376 shares owned directly by Mr. Osborne and 4,281 shares
     underlying presently exercisable options.

(6)  Includes 26,597 shares owned directly by Mr. Ruane, 456 shares held by Mr.
     Ruane as trustee for two trusts, over which shares Mr. Ruane may be deemed
     to have shared voting and investment power, 1,225 shares underlying
     presently exercisable warrants, 3,483 shares underlying presently
     exercisable options.

(7)  Includes 16,335 shares owned directly by Mr. Walker, 14,272 shares
     underlying presently exercisable warrants, and 750 shares underlying
     presently exercisable options.

(8)  Includes 72,123 shares owned, directly or indirectly, 45,014 shares
     underlying presently exercisable options, 87,813 shares underlying
     presently exercisable warrants.

(9)  Percentages shown for the 10 beneficial owners of the Series B preferred
     stock assume that all the outstanding preferred stock is exchanged for
     8,865,665 shares of common stock pursuant to the terms associated with the
     contemplated merger with Carpatsky. However, the conversion provisions of
     our Articles of Incorporation applicable to the Series B preferred stock
     provide for a conversion price based on a 25% discount to the reported
     sales price of the common stock immediately prior to conversion.
     Accordingly, absent the agreed upon terms associated with the

                                       54





     merger and using the reported sales price at March 30, 2000, the 105,828
     presently outstanding preferred shares would be convertible into over 16.1
     million shares of common stock. Therefore, if the merger with Carpatsky is
     abandoned, the beneficial ownership of the preferred stockholders as a
     class could be more than illustrated in this table.

(10) The preferred stock is held by four entities which are effectively
     controlled by Kayne Anderson Investment Management, Inc., a Nevada
     corporation, a registered investment advisor. The entities which directly
     own the stock are Arbco Associates, L.P., Kayne Anderson Non-Tradition
     Investments, L.P., Offense Group Associates, L.P. and Opportunity
     Associates, L.P.

(11) The preferred stock is held by two entities, Marine Crew & Co, and
     Sandpiper & Co. that are effectively controlled by State Street Research
     and Management Company, a registered investment advisor to two large
     unaffiliated institutional investors.

(12) We are presently authorized to issue up to 4.0 million shares of common
     stock, an insufficient number of authorized shares for conversion of all
     outstanding Series B preferred stock into common stock.

ITEM 12-CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

Transactions with Beta Capital Group, Inc.-
In March 1996 we entered into a three-year consulting agreement with Beta
Capital Group, Inc. ("Beta"). Beta's president, Steve Antry, has been a director
of Pease since August 1996. The consulting agreement with Beta provides for
minimum monthly cash payments of $17,500 plus reimbursement for out-of-pocket
expenses. We also agreed to pay Beta additional fees, as defined in the
agreement, that are based on a percentage of the gross proceeds generated from
any public financing, private financing or from any warrants that are exercised
during the term of the agreement. The following is a summary of amounts we paid
to Beta, or its agents, during the term of the agreement:

                                                         1998            1997            1996            Total
                                                         ----            ----            ----            -----
Monthly consulting fees                               $ 210,000      $ 210,000       $ 162,500      $   582,500
Reimbursement of out-of-pocket expenses                  37,123        167,236          94,700          299,059
Fees related to funds generated from private
      placements                                              -        320,933         163,000          483,933
Fees related to funds generated form warrant
      exercises                                          -             273,855           4,506          278,361
                                                    ------------    ----------    ------------     ------------
          Total                                       $ 247,123      $ 972,024       $ 424,706       $1,643,853
                                                      =========      =========       =========       ==========

In addition to the cash compensation, in 1996 we granted Beta warrants to
purchase 100,000 shares of Pease common stock for $7.50 per share. For financial
statement reporting purposes, these warrants were valued at $294,000. As allowed
under the terms of the agreement, Beta subsequently assigned 40,000 of those
warrants to other parties, including 10,000 to a Mr. Richard Houlihan, a former
director of Pease and 20,670 to Mr. Stephen Fischer, a current director of Pease
(Mr. Fischer is also a principal of Beta). In March 1997, we granted Beta
warrants to purchase an additional 10,000 shares of Pease common stock at $37.50
per share. For financial statement reporting purposes, these warrants were
valued at $60,000. All the warrants granted Beta expire in April 2001.

Transactions with Other Directors-
In July 1998 our Board of Directors established an Executive Committee designed
to manage the significant aspects of our business on a committee basis. Mr.
William F. Warnick, a director, was elected as Chairman of the Committee. In
exchange for his services in 1998, Mr. Warnick received cash compensation of
$44,010 plus $17,966 for reimbursement of out-of-pocket expenses. The Executive
Committee was dissolved by unanimous vote of the Board of Directors on April 26,
1999 at the request of Mr. Duncan and Mr. Antry because they did not feel the
Executive Committee was being utilized and any significant transactions were
already being addressed by the full Board. Mr. Warnick resigned as director and
Chairman of the Board on September 10, 1999.


                                       55





Transactions with Former Officers-
On December 7, 1998, Mr. Willard H. Pease, Jr.'s employment with us was
terminated. Mr. Pease was formerly the President, Chairman and CEO. In
connection with his termination and pursuant to the terms of his amended
employment agreement, Mr. Pease received a cash payment of $150,000 for
severance.

Effective January 1, 1998, Mr. J. N. Burkhalter resigned as our V.P. of
Engineering and Production in light of our anticipated sale of the Rocky
Mountain assets. In connection with this resignation, we entered into a
Retirement, Severance and Termination of Employment Agreement with Mr.
Burkhalter that provided for total severance of $138,050. The severance
consisted of office equipment and one vehicle valued at $5,850 and a cash
obligation of $132,200, which will be paid in monthly installments through
August 2000.

                                    PART IV

ITEM 13 - EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits:

Exhibit No.       Description and Method of Filing
----------        --------------------------------

3.1       Articles of Incorporation. Incorporated by reference to Exhibit 3.1 of
          the Registrant's Annual Report on Form 10-KSB for the fiscal year
          ended December 31, 1998.

3.2       Certificate of Amendment to the Articles of Incorporation filed on
          June 23, 1993.

3.3       Certificate of Amendment to the Articles of Incorporation filed on
          June 29, 1993.

3.4       Plan of Recapitalization.

3.5       Certificate of Amendment to the Articles of Incorporation filed on
          July 5, 1994.

3.6       Certificate of Amendment to the Articles of Incorporation filed on
          December 19, 1994. Incorporated by reference to Exhibit 3.4 of
          the Registrant's Annual Report on Form 10-KSB for the fiscal year
          ended December 31, 1998.

3.7       Certificate of Amendment to Article IV of the Articles of
          Incorporation as filed with the Nevada Secretary of State, increasing
          the authorized shares of common stock of Registrant to 40,000,000
          shares, $0.10 par value. Incorporated by reference to Exhibit 3 of the
          Registrant's Current Report on Form 8-K dated June 11, 1997.

3.8       Certificate of Change in Number of Authorized Shares of Common Stock
          dated November 18, 1998. Incorporated by reference to Exhibit 3.8 of
          the Registrant's Annual Report on Form 10-KSB for the fiscal year
          ended December 31, 1998.

3.9       Bylaws as amended and restated. Incorporated by reference to Exhibit
          3.9 of the Registrant's Annual Report on Form 10-KSB for the fiscal
          year ended December 31, 1998.

4.1       Amendment to the Certificate of Designation of Series B 5% PIK
          Cumulative Convertible Preferred Stock.

10.1      1993 Stock Option Plan.


                                       56



10.2      1994 Employee Stock Option Plan. Incorporated by reference to Exhibit
          10.4 of the Registrant's Annual Report on Form 10-KSB for the fiscal
          year ended December 31, 1998.

10.3      Employment Agreement effective December 27, 1994 between Pease Oil and
          Gas Company and Patrick J. Duncan. Incorporated by reference to
          Exhibit 10.5 of the Registrant's Annual Report on Form 10-KSB for the
          fiscal year ended December 31, 1998.

10.4      Agreement between Beta Capital Group, Inc., and Pease Oil and Gas
          Company dated March 9, 1996.

10.5      Form of Warrants issued to Beta Capital Group, Inc.

10.6      1996 Stock Option Plan.

10.7      1997 Long Term Incentive Option Plan.

10.8      Preferred Stock Investment Agreement dated December 31, 1997.

10.9      Exploration Agreement dated 1/11/97 between Parallel Petroleum
          Corporation, Sue-Ann Production Company, TAC Resources, Inc., Allegro
          Investments, Inc., Beta Oil and Gas Company, Pease Oil and Gas
          Company, Meyer Financial Services, Inc., Four-Way Texas, LLC regarding
          the Ganado Prospect.

10.10     Retirement, Severance and Termination of Employment Agreement from
          James N. Burkhalter dated 1/1/98.

10.11     Severance and Termination of Employment Agreement effective December
          7, 1998 between Willard H. Pease, Jr. and Pease Oil and Gas Company.
          Incorporated by reference to Exhibit 10.27 of the Registrant's Annual
          Report on Form 10-KSB for the fiscal year ended December 31, 1998.

10.12     Confirmation of Employment Contract effective January 11, 1998 between
          Patrick J. Duncan and Pease Oil and Gas Company.

10.13     Engagement Letter of San Jacinto Securities, Inc. dated September 4,
          1998 with Pease Oil and Gas Company.



                                       57





(b) Reports on Form 8-K: Pease filed the following reports on Form 8-K for the
period October 1, 1999 through March 30, 2000:

         Item Reported          Date           Financial Statements
         -------------    ----------------     --------------------
    (1)      5,7          January 13, 2000     None - Not Applicable



                                       58




                                   SIGNATURES


In accordance with Section 13 or 15 (d) of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.

                                         PEASE OIL AND GAS COMPANY


Date:      March 6, 2001                 By: /s/ Patrick J. Duncan
           -------------                    ----------------------------
                                            Patrick J. Duncan
                                            President, Chief Financial Officer
                                            And Principal Accounting Officer


In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the Registrant and in the capacities and on the
dates indicated.



Date:    March 6,  2001   By: /s/ Patrick J. Duncan
                              -------------------------------------------
                                  Patrick J. Duncan
                                  President, Chief Financial Officer

Date:    March 6,  2001   By: /s/ Steve A. Antry
                              ---------------------------------------------
                                  Steve A. Antry, Director

Date:    March 6,  2001   By: /s/ Stephen L. Fischer
                              ------------------------------------------
                                  Stephen L. Fischer, Director

Date:    March 6,  2001   By: /s/ Homer C. Osborne
                              ----------------------------------------
                                  Homer C. Osborne, Director

Date:    March 6,  2001   By: /s/ James C. Ruane
                              -----------------------------------------
                                  James C. Ruane, Director

Date:    March 6,  2001   By: /s/ Clemons F. Walker
                              ----------------------------------------
                                  Clemons F. Walker, Director


                                       59`