SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-KSB

         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)
                                 Title of Class

    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
                                                                          -----






<PAGE>



                                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



<PAGE>



                                     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.

                                       -1-

<PAGE>



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

    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.

                                       -2-

<PAGE>




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


                                       -3-

<PAGE>



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  and
establishment  of  maximum  rates  of  production  from oil and gas  wells.  For
example, each well in the East Bayou Sorrell prospect is currently restricted to
approximately  1,400  Bbls  of oil  per  day  because  of  such  state  mandated
restriction.  A few states also prorate  production to the market demand for oil
and gas.  These  statutes  and  regulations  limit the rate at which oil and gas
could otherwise be produced or the prices obtained from Pease's 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
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

                                       -4-

<PAGE>



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.

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.


                                       -5-

<PAGE>



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.

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.



                                       -6-

<PAGE>



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.

    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:


                                       -7-

<PAGE>



    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.

    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.


                                       -8-

<PAGE>



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.

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:

                                       -9-

<PAGE>



    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:

       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

                                      -10-

<PAGE>



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.

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.



                                      -11-

<PAGE>



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:
<TABLE>
<CAPTION>
                                       OIL               GAS
                                 Gross     Net(2)   Gross    Net(2)    Developed Acreage
Fields               State       Wells(1)  Wells    Wells(1) Wells     Gross       Net(2)
------------------   ---------   -------   -----    -----    -----    ------      --------

<S>                                <C>      <C>                         <C>         <C>
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
                                  ===        ===     ===      ===     =====      =====
</TABLE>

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.  Note: The Parallel 3-D Program
    Lease Options have expired.

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.


                                      -12-

<PAGE>



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.

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.


                                      -13-

<PAGE>



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                   $  8,156,700     $  4,054,000
Present Value of Estimated Future Net Revenues  $  6,269,700     $  2,951,000
Prices used to determined 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                   320,000
           Rocky Mtns                        -                      230,000
                                       ---------------           ------------
                Total                     337,000                   550,000
                                        ==========               ============

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:
<TABLE>
<CAPTION>
                                                                     Average
 Year Ended ..................          Average Sales Price         Production
December 31 ..................       Oil (Bbls)   Gas (Mcf)   Per BOE    Cost Per BOE
------------------------------       ------       -----       ------       -----
   1999:
<S>                                  <C>          <C>         <C>          <C>
      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
</TABLE>



                                      -14-

<PAGE>



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:

                                     Year Ended December 31,
                                   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-

<PAGE>



                                     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.

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

                                      -16-

<PAGE>



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-

<PAGE>



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)
       Capital expenditure for office equipment                        (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).

<TABLE>
<CAPTION>
                                                       PROGRAM OPERATOR
                                         NEGX    Parallel       AHC        Other       Total      %
Category:
<S>                                  <C>          <C>         <C>         <C>         <C>         <C>
 Exploratory Dry Holes ..........   $     --      $163,960    $   --      $   --      $163,960    18%
 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%
</TABLE>

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.

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

                                      -18-

<PAGE>



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 in the financial statements as of December 31, 1999.

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                                       Minimum         Maximum

East Bayou Sorrel Area                    $   -           $ 400,000
Formosa, Texana, and Ganado Prospects      150,000          300,000
Maurice Prospect                            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.

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

                                      -19-

<PAGE>



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:

                                          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 -
                Rocky Mtns. Oil      $       -                 $      612,370
                Rocky Mtns. Gas              -                        321,333
                                      -------------------       -------------
                                             -                        933,703
       Costs                                 -                       (806,224)
                                      -------------------      --------------
               Operating Margin       $      -                 $      127,479
                                      ==================        =============
               Operating Margin Percent      -                            14%


                                      -20-

<PAGE>





                                                 For the Year Ended December 31,
                                                     1999               1998
                                                 ------------      ------------
  Gulf Coast:
       Revenue -
               Gulf Coast - Oil                  $ 1,316,142       $    715,699
               Gulf Coast - 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 Total Revenue:
          Production                               (832,081)
          Price                                     613,787
  Total Decrease in Revenue                   $    (218,294)
                                               ===============
Change in Revenue for Gulf Coast ONLY:
          Production                          $     223,485
          Price                                     494,370
                                               --------------
   Total Increase in Gulf Coast Revenue       $     717,855
                                                =============

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.



                                      -21-

<PAGE>



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

Pease  capitalized  $23,804 and $236,931 of costs associated with the Gulf Coast
exploration  activities  in 1999 and 1998,  respectively,  that  would have been
expensed as G&A costs under the successful  efforts method of accounting for oil
and gas activities.

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.

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 - Gulf Coast          $  985,113           1,639,125
    Oil and Gas Properties - Rocky Mountains           -                275,137
    Gas Plant, Service and Supply Operations           -                273,345
    Furniture and Fixtures                           22,402              53,485
    Non-Compete Agreements                             -                   -
                                                --------------      -----------
      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  based on one full  cost pool
using the total estimated reserves at the end of each period presented and prior
to applying the ceiling test  discussed  below under  "Impairment  Expense." The
estimated  portion  of DD&A  for the  Rocky  Mountains  and the Gulf  Coast  are
illustrated  here for  analysis  purposes  only.  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            341,767
    Amortization of debt issuance costs              219,337            540,510
                                                 ------------      -------------
             Total interest incurred                 637,998          1,252,196
    Interest capitalized                            (278,250)          (852,978)
                                                 ------------      -------------
             Interest expense                    $   359,748       $    399,218
                                                 ============       ============

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

                                      -22-

<PAGE>



$4.0 million to $2.8 million.  At the same time, we charged to interest  expense
$396,742,  representing  30% of the unamortized  debt discount and debt issuance
costs associated with that debt.

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).

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,  in 1998 we incurred an impairment charge of
$7,278,818  which  can be  attributed  to:  a.)  $3,292,324  in dry  holes;  b.)
$2,971,309  related to the expiration of leases in the acreage  associated  with
Parallel  Petroleum's  3-D  program  in S.  Texas;  and  c.)  $1,015,185  to the
continuing  decline of oil prices (a  declining  commodity  price will in effect
lower the "ceiling" of the full cost pool). No impairment charge was incurred in
1999 since our ceiling was greater than our net accumulated costs.

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".




                                      -23-

<PAGE>



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
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.


                                      -24-

<PAGE>



ITEM 7.   FINANCIAL STATEMENTS



                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS


                                                                           Page
Independent Auditor's Report. . . . . . . . . . . . . . .                   26
Consolidated Balance Sheet - December 31, 1999  . . . . .                   27
Consolidated Statements of Operations -
  For the Years Ended December 31, 1999 and 1998. . . . . . . .             28
Consolidated Statements of Stockholders' Equity -
  For the Years Ended December 31,1999 and 1998. . . . . . . ...            29
Consolidated Statements of Cash Flows -
  For the Years Ended December 31, 1999 and 1998. . . . . . .             30-31
Notes to Consolidated Financial Statements. . . . . . . . . . . . .       32-42



                                      -25-

<PAGE>



                          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.




HEIN + ASSOCIATES LLP

Denver, Colorado
February 18, 2000

                                      -26-

<PAGE>



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

                                     ASSETS
<TABLE>
<CAPTION>

CURRENT ASSETS:
<S>                                                                                <C>
      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:
      Debt issuance costs, net of accumulated amortization of $464,846 .........        184,315
      Office equipment and vehicles, net of accumulated depreciation of $176,013         54,198
      Deposits and other .......................................................          7,493
                                                                                   ------------
                   Total other assets ..........................................        246,006
                                                                                   ------------
TOTAL ASSETS ...................................................................   $  7,141,462
                                                                                   ============

                      LIABILITIES 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 $.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
                                                                              ===================
</TABLE>

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



                                      -27-

<PAGE>



                   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)       (399,218)
      Interest income ........................         42,235         139,785
      Gain (Loss) on sale of assets ..........            968           3,555
                                                 ------------    ------------
NET LOSS .....................................   $   (465,274)   $(10,627,471)
                                                 ============    ============
NET LOSS APPLICABLE TO COMMON STOCKHOLDERS ...   $   (730,798)   $(12,694,965)
                                                 ============    ============
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.


                                      -28-

<PAGE>



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



<TABLE>
<CAPTION>
                                                                                             Additional                    Total
                                                      Preferred Stock     Common Stock        Paid-In    Accumulated   Stockholders'
                                                     Shares    Amount   Shares    Amount      Capital      Deficit         Equity
                                                   ---------  ----------------------------- ------------ ------------   ------------

<S>                <C> <C>                          <C>       <C>      <C>       <C>       <C>          <C>            <C>
BALANCES, December 31, 1997 ....................... 113,333   $ 1,133  1,579,353 $ 157,936 $ 38,296,454 $(22,363,845)  $ 16,091,678
Purchase and retirement of Series B preferred stock  (4,500)      (45)      --        --       (206,205)        --         (206,250)
Issuance of common stock for:
    Exercise of warrants ..........................    --        --          125        12          926         --              938
    Conversion of Series B preferred stock ........  (1,497)      (15)    21,584     2,158       (2,143)        --             --
Series B preferred stock dividends ................    --        --         --        --       (278,026)        --         (278,026)
Net Loss ..........................................    --        --         --        --           --    (10,627,471)   (10,627,471)
                                                   ---------  ------- ---------   --------  ------------ ------------
BALANCES, December 31, 1998 ....................... 107,336     1,073  1,601,062   160,106   37,811,006  (32,991,316)     4,980,869
Purchase and retirement of Series B preferred stock    (825)       (8)      --        --        (51,305)        --          (51,313)
Issuance of common stock for:
    Services of Directors in lieu of cash .........    --        --       42,700     4,270       63,063         --           67,333
    Conversion of Series B preferred stock ........    (683)       (7)    87,636     8,764       (8,757)        --             --
Series B preferred stock dividends ................    --        --         --        --       (177,816)        --         (177,816)
Net Loss ..........................................    --        --         --        --           --       (465,274)      (465,274)
                                                                      ---------  --------  -----------  -----------   ------------
BALANCES, December 31, 1999 ....................... 105,828   $ 1,058  1,731,398   173,140 $ 37,636,191 $(33,456,590)  $  4,353,799
                                                    =======   =======  ==========  ========   ========== ============  ============
</TABLE>
The  accompanying  notes are an integral  part of these  consolidated  financial
statements.


                                      -29-

<PAGE>


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



<TABLE>
<CAPTION>
                                                                                   1999           1998
                                                                              ------------  --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S>                                                                         <C>             <C>
      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            --
                   Other ................................................           --            12,255
                                                                            ------------    ------------
                          Cash flows before working capital adjustments .        952,303        (388,166)
      Changes in operating assets and liabilities:
                   (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        (211,453)
                                                                            ------------    ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
      Capital expenditures for property, plant and equipment ............       (933,704)     (7,364,232)
      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)     (3,515,946)
                                                                            ------------    ------------
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 ..........................................   $       --      $       --
                                                                            ============    ============
</TABLE>

                                      -30-

<PAGE>


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



<TABLE>
<CAPTION>
                                                                          1999           1998
                                                                     -----------    -----------
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND
   FINANCING ACTIVITIES:
<S>                                                                  <C>            <C>
     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
</TABLE>

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



                                      -31-

<PAGE>


                   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  hyperdilutive  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, 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.


                                      -32-

<PAGE>


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

    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.  For the years ended December
    31, 1999 and 1998,  capital  expenditures  include 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.

    Acquisition  costs of unproved  properties  and costs related to exploratory
    drilling and seismic  activities are initially  excluded from  amortization.
    These costs are  periodically  evaluated for impairment  and  transferred to
    properties  being  amortized when either proved  reserves are established or
    the costs are determined to be impaired.

    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 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  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.


                                      -33-

<PAGE>


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

    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.

    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.

    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 - 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.

    In October  1995,  the  Financial  Accounting  Standards  Board issued a new
    statement  titled  Accounting  for Stock- Based  Compensation.  SFAS No. 123
    requires that options,  warrants,  and similar instruments which are granted
    to  non-employees  for goods and  services  be recorded at fair value on the
    grant  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.

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.


                                      -34-

<PAGE>


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

    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
                                                    =================

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

                                      -35-

<PAGE>


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

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 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.


                                      -36-

<PAGE>


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

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 in the
financial statements as of December 31, 1999.

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.

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.

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.

                                      -37-

<PAGE>


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

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 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    f 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
                                                             ========   ========

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:

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


                                      -38-

<PAGE>


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

<TABLE>
<CAPTION>
                                                    1999                   1998
                                           -----------------------  ----------------------
                                                         Weighted                Weighted
                                                          Average                Average
                                           Number        Exercise    Number      Exercise
                                           Of Shares       Price    Of Shares     Price

<S>                                         <C>       <C>            <C>        <C>
Outstanding, beginning of year .........    570,071   $   40.87      587,790    $  43.11
    Granted to former officers
      and directors for severance ......       --           --        39,850       14.88
    Expired ............................   (339,546)      57.61      (57,444)      45.81
    Exercised ..........................       --           --          (125)       7.50
                                            --------    --------      -------
Outstanding, end of year ...............    230,525   $   16.21       570,071    $ 40.87
                                            ========    ========     ========    =======
</TABLE>

    If not previously exercised,  warrants and non-qualified options will expire
as follows:

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

             2000                $  5.00    $ 71.90       $  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.

                                                      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:

                                                  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





                                      -39-

<PAGE>


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

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.

     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 $2.5 million.  The assets  acquired from
this  acquisition  account for 77% of Pease's  proved  reserves at December  31,
1999.

    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.

    Unevaluated  Oil and Gas Properties - At December 31, 1999,  unevaluated oil
and gas properties consist of the following:

    Unproved acquisition costs              $     960,810
    Geologic and geophysical costs                925,770
    Interest and other costs                      395,152
                                            -------------
                                            $   2,281,732

    All  unevaluated  costs  were  incurred  during  1997,  1998  and  1999  and
management  expects  that  planned  activities  will  enable the  evaluation  of
substantially all of these costs by the end of 2000.


                                      -40-

<PAGE>



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

    Capitalization of Interest - For the years ended December 31, 1999 and 1998,
the Company capitalized  interest costs of $278,250 and $854,483,  respectively,
related to unevaluated oil and gas properties and other exploration activities.

    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
leases,  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.

    Costs  Incurred in Oil and Gas  Producing  Activities  - The  following is a
summary of costs  incurred  in oil and gas  producing  activities  for the years
ended December 31, 1999 and 1998:
                                         1999                       1998
                                  --------------             -------------
    Lease acquisition costs       $       76,912             $      -
    Development costs                    239,276                   13,468
    Exploration costs                    593,247                6,799,382
                                  --------------             -------------
             Total                $      909,435             $  6,812,850
                                  ==============             =============

    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)
                                  ====================       -================

    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.
<TABLE>
<CAPTION>
                                                                1999                       1998
                                                        ----------------------    -----------------------
                                                         Oil           Gas           Oil           Gas
                                                        (Bbls)        (Mcf)        (Bbls)         (Mcf)

<S>                                                     <C>         <C>           <C>           <C>
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, beg. 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
                                                     ==========    ==========    ==========    ==========
</TABLE>

    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.

<TABLE>
<CAPTION>
                                                                  1999                1998
                                                            ---------------      --------------
<S>                                                         <C>                  <C>
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
                                                            ==============        =============
</TABLE>
Average prices used to estimate the reserves:

<TABLE>
<S>                                                         <C>                  <C>
   Oil (per bbl)                                            $       24.91        $      10.15
   Gas (per Mcf)                                            $        2.77        $       2.43
</TABLE>

    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:

<TABLE>
<CAPTION>
                                                               1999           1998
                                                        -----------    -----------
<S>                                                     <C>            <C>
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
                                                        ===========    ===========
</TABLE>


                                      -41-

<PAGE>



                               PART II (Continued)

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

This item is not applicable to the Registrant.

                                    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,        1995
                                  and 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,  our Chief
Financial  Officer since  September 1994, and 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

                                      -42-

<PAGE>



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
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.

                                      -43-
<PAGE>


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

<TABLE>
<CAPTION>
                                        SUMMARY COMPENSATION TABLE
                                                                                         Long-Term
                                               Annual Compensation                   Compensation Awards
                                                                                    Restricted  Securities
Name and Principal ...............                                 Other Annual       Stock     Underlying
Position .........................   Year     Salary   Bonus       Compensation       Awards    Options/SARs(#)
----------------------------------   ----   --------   ---------   -------------      ------   -------------------

<S>                                  <C>    <C>
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
    Chief Executive Officer(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
</TABLE>

    (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.



                                      -44-

<PAGE>


<TABLE>

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

<CAPTION>
                                                                 Number of
                                                                 Securities        Value of
                                                                 Underlying        Unexercised
                                                                 Unexercised       In-the-Money
                                                                 Options/SARs      Options/SARs
                                                                 at FY-End (#)     at FY-End ($)
                         Shares Acquired        Value Realized   Exercisable/      Exercisable/
 Name                        on Exercise (#)         ($)         Unexercisable     Unexercisable

<S>                                                               <C>    <C>          <C> <C>
Patrick J. Duncan                None                  None       35,000/35,000       $ 0/0(1)
      President and
      Chief Financial Officer
</TABLE>

    (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
 Officer or Director       Beneficial Ownership(1)      Percent of Class(12)
---------------------      ----------------------       -----------------
Steve Allen 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
  Los Angeles, CA 90067    4,984,820 Shares (9)(10)        74.22%


                                      -45-

<PAGE>



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)
---------------------

(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  contempated
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 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.


                                      -46-

<PAGE>



(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:


<TABLE>
<CAPTION>
                                                                1998         1997         1996        Total
                                                          ----------   ----------   ----------   ----------
<S>                                                       <C>          <C>          <C>          <C>
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 from warrant exercises          --        273,855        4,506      278,361
                                                          ----------   ----------   ----------   ----------
    Total .............................................   $  247,123   $  972,024   $  424,706   $1,643,853
                                                          ==========   ==========   ==========   ==========
</TABLE>

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.

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,

                                      -47-

<PAGE>



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:

Ex. No.  Description and Method of Filing

3.1      Articles of Incorporation (5)
3.2      Certificate of Amendment to the Articles of Incorporation filed on
         June 23, 1993 (5)
3.3      Certificate of Amendment to the Articles of Incorporation filed on
         June 29, 1993 (5)
3.4      Plan of Recapitalization (5)
3.5      Certificate of Amendment to the Articles of Incorporation filed on
         July 5, 1994 (5)
3.6      Certificate of Amendment to the Articles of Incorporation filed on
         December 19, 1994 (5)
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(i) of the  Registrant's
         Form 8-K dated June 11, 1997 (6)
3.8      Certificate of Change in Number of Authorized Shares of Common Stock
         dated November 18, 1998 (5)
3.9      Bylaws as amended and restated (5)
4.1      Agreement and Plan of Merger dated August 31, 1999 (9)
4.2      First Amendment to Agreement and Plan of Merger dated December 30,
         1999 (10)
4.3      Amendment  to  the  Certificate  of  Designation  of  Series  B 5%  PIK
         Cumulative  Convertible  Preferred Stock,  incorporated by reference to
         Exhibit 3.2 of Registrant's Form 8-K dated December 31, 1997(7)
10.1     1993 Stock Option Plan (5)
10.2     1994 Employee Stock Option Plan (5)
10.3     Employment Agreement effective December 27, 1994 between Pease Oil and
         Gas Company and Patrick J. Duncan.
10.4     Agreement between Beta Capital Group, Inc., and Pease Oil and Gas
         Company dated  March 9, 1996 (2)
10.5     Form of Warrants issued to Beta Capital Group, Inc.(3)
10.6     1996 Stock Option Plan (3)
10.7     1997 Long Term Incentive Option Plan (4)
10.8     Preferred Stock Investment Agreement dated December 31, 1997 (7)
10.9     Exploration Agreement dated 1/1/97 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 (4)
10.10    Retirement, Severance and Termination of Employment Agreement from
         James N. Burkhalter dated 1/1/98 (4)
10.11    Severance and Termination of Employment Agreement effective December 7,
         1998 between Willard H. Pease, Jr. and Pease Oil and Gas Company.(5)
10.12    Confirmation of Employment Contract effective January 11, 1998 between
         Patrick J. Duncan and Pease Oil and Gas Company.(5)
10.13    Engagement Letter of San Jacinto Securities, Inc. dated September 4,
         1998 with Pease Oil and Gas Company (5)
23.1     Consent of Netherland, Sewell & Associates, Inc., Consulting Petroleum
         Engineers.
27.1     Financial Data Schedule.
---------------


                                      -48-

<PAGE>



Footnotes for Exhibits:

    (1)      Incorporated by reference to the Registrant's annual Report on Form
             10-KSB for the fiscal year ended December 31, 1994.
    (2)      Incorporated by reference to the Registrant's annual Report on Form
             10-KSB for the fiscal year ended December 31, 1995.
    (3)      Incorporated by reference to the Registrant's Annual Report on Form
             10-KSB for the fiscal year ended December 31, 1996.
    (4)      Incorporated by reference to the Registrant's Annual Report on Form
             10-KSB for the fiscal year ended December 31, 1997.
    (5)      Incorporated by reference to the Registrant's Annual Report on Form
             10-KSB for the fiscal year ended December 31, 1998.
    (6)      Incorporated by reference to Exhibit 3(i) to Registrant's  Form 8-K
             filed June 11, 1997.
    (7)      Incorporated by reference to Exhibits 3.2 or 10.1 to Registrant's
             Form 8-K filed January 13, 1998.
    (8)      Incorporated by reference to Exhibit 10.1 to Registrant's Form 8-K
             filed March 9, 1998.
    (9)      Incorporated by reference to Exhibit 10.1 to Registrant's Form 8-K
             dated September 13, 1999.
    (10)     Incorporated by reference to Exhibit 10.1 to Registrant's Form 8-K
             dated December 31, 1999.

(b) Reports on Form 8-K:  Pease filed the following  reports on Form 8-K for the
period October 1, 1999 through the date of this report:

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



                                      -49-

<PAGE>


                                   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: April 13, 2000                   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: April 13, 2000                   By: /s/ Patrick J. Duncan
                                       ----------------------------------------
                                       Patrick J. Duncan
                                       President, Chief Financial Officer

Date: April 13, 2000                   By: /s/ Steve A. Antry
                                       ----------------------------------------
                                       Steve A. Antry, Director

Date: April 13, 2000                   By: /s/ Stephen L. Fischer
                                       ----------------------------------------
                                       Stephen L. Fischer, Director

Date: April 13, 2000                   By: /s/ Homer C. Osborne
                                       ----------------------------------------
                                       Homer C. Osborne, Director

Date: April 13, 2000                   By: /s/ James C. Ruane
                                       ----------------------------------------
                                       James C. Ruane, Director

Date: April 13, 2000                   By: /s/ Clemons F. Walker
                                       ----------------------------------------
                                       Clemons F. Walker, Director



                                      -50-