PEASE OIL AND GAS COMPANY
                             1996 STOCK OPTION PLAN

     1.  Purpose of Plan.  The purpose of this 1996  Employee  Stock Option Plan
("Plan") is to secure and retain employees  responsible for the success of Pease
Oil and Gas Company  ("Company"),  to motivate  such persons to exert their best
efforts on behalf of the Company,  to encourage  stock  ownership and to provide
such  persons  with  proprietary  interests  in, and a greater  concern for, the
welfare of, and an incentive to continue service with, the Company.

     For  purposes  of  this  Plan,  the  term  "Company"  shall  include  where
appropriate  in  the  context  used  any  "parent  corporation"  or  "subsidiary
corporation"  of the Company,  as those terms are defined in Sections 424(e) and
(f) of the Code,  whether in  existence  on the date of  adoption of the Plan or
formed after the adoption of this Plan.

     Options  issued  pursuant  to this Plan  will  constitute  incentive  stock
options  within the meaning of ss. 422 of the Internal  Revenue Code of 1986, as
amended ("Code"),  at the time of grant  ("Incentive  Stock Options"),  or other
options ("Nonstatutory Stock Options"). Incentive Stock Options and Nonstatutory
Stock Options may both be granted hereunder and any option granted which for any
reason does not qualify as an Incentive  Stock  Option  shall be a  Nonstatutory
Stock  Option;  provided,  however,  that in no event shall an  Incentive  Stock
Option and a  Nonstatutory  Stock Option  granted to any Optionee under a single
stock option agreement be subject to a "tandem"  exercise  arrangement such that
the exercise of one such Option  affects the  Optionees's  right to exercise the
other Option granted under such stock option agreement.

     Unless the  context  requires  otherwise,  the term  "Option"  in this Plan
refers to both Incentive Stock Options and Nonstatutory Stock Options.

     2. Stock Subject to the Plan.  The number of shares of the  Company's  $.10
par value common stock ("Common Stock") which may be optioned under this Plan is
350,000 shares. Such shares may consist, in whole or in part, of unissued shares
or treasury shares. The maximum number of shares issuable pursuant to this Plan,
including shares subject to outstanding options,  shall be subject to adjustment
as provided in Section 6 of this Plan.  The  aggregate  fair market value of the
shares subject to Incentive  Stock Options  granted to any Optionee which become
exercisable  in a  particular  calendar  year  shall not  exceed  $100,000.  For
purposes  of such  limitation,  the fair market  value of Common  Stock shall be
determined  as of the date of grant  and the  limitations  shall be  applied  by
taking into account  Incentive Stock Options in the order granted.  For purposes
of this Plan, market value of shares subject to an option shall be determined as
follows:

          (i) If the Common Stock is listed on the New York Stock Exchange,  the
     American Stock Exchange or such other securities exchange designated by the
     Committee, or admitted to unlisted trading privileges on any such exchange,
     or if the Common Stock is quoted on a National  Association  of  Securities
     Dealers,  Inc. system that reports  closing  prices,  the fair market value
     shall be the  closing  price of the Common  Stock as  reported  by the Wall

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     Street Journal on the day the fair market value is to be determined,  or if
     no such price is  reported  for such day,  then the  determination  of such
     closing  price shall be as of the last  immediately  preceding day on which
     the closing price is so reported; or

          (ii) If the  Common  Stock is not so listed or  admitted  to  unlisted
     trading privileges or so quoted, the fair market value shall be the average
     of the last reported  highest bid and the lowest asked prices quoted on the
     National  Association  of Securities  Dealers,  Inc.  Automated  Quotations
     System or, if not so quoted, then by the National Quotation Bureau, Inc. on
     the day the fair market value is determined; or

          (iii) If the Common  Stock is not so listed or  admitted  to  unlisted
     trading privileges or so quoted, and bid and asked prices are not reported,
     the fair market value shall be determined in such reasonable  manner as may
     be prescribed by the Committee.

     If any  outstanding  Option  under this Plan for any  reason  expires or is
terminated,  the shares of Common Stock allocable to the unexercised  portion of
such Option may again be optioned  under this Plan  subject to the  limitations,
terms and  conditions  of this  Plan.  The Board of  Directors,  and the  proper
officers  of the  Company,  shall  from  time to time  take  appropriate  action
required  for  delivery of Common  Stock,  in  accordance  with any  exercise of
Options under this Plan.

     3. Administration.  Administration of the Plan shall be administered by the
Compensation  Committee of the Board of  Directors  of the Company,  hereinafter
referred to as the  "Committee."  The  Committee  shall  consist of at least two
members of the Board of  Directors  having full  authority to act in the matter,
none of whom during the one year prior to such  appointment  or while serving on
the  Committee,  is granted  an Option  under this Plan or is granted or awarded
equity  securities  pursuant  to any  other  plan of the  Company  or any of its
affiliates,  except as permitted by Rule 16b-3 under the Securities Exchange Act
of 1934, as amended (the "1934 Act").  If the Committee thus  established  shall
consist  of fewer than two  members at the time of any action by the  Committee,
then the  directors  shall  select  enough  other  shareholders  to serve on the
Committee  to have two  members and to meet any  requirements  of ss. 422 of the
Code and regulations  adopted thereunder and regulations  adopted under the 1934
Act.

     Once  appointed,  the  Committee  shall  continue to serve until  otherwise
directed by the Board. From time to time, the Board may increase the size of the
Committee  and appoint  additional  members  thereof,  remove  members  (with or
without cause) and appoint new members in substitution therefor,  fill vacancies
however caused,  or remove all members of the Committee and thereafter  directly
administer the Plan.

     With respect to persons subject to Section 16 of the 1934 Act, transactions
under this Plan are intended to comply with all  applicable  conditions  of Rule
16b-3 or its  successors  under the 1934 Act. To the extent any provision of the
Plan or action by the Committee fails to so comply,  it shall be deemed null and
void, to the extent permitted by law and deemed advisable by the Committee.


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     Subject to compliance with Section 16 of the 1934 Act, members of the Board
who are either eligible for Options or who have been granted Options may vote on
any matters affecting the administration of the Plan or the grant of any Options
pursuant to the Plan,  except that no such member shall act upon the granting of
an Option to  himself,  but any such  member may be counted in  determining  the
existence  of a quorum at any meeting of the Board  during which action is taken
with respect to the granting of Options to such member.

     The decision of a majority of those present at any meeting of the Committee
where a quorum  consisting  of a majority  of the  Committee  is  present  shall
constitute the decision of the Committee.

     The Committee is authorized and empowered to administer the Plan insofar as
it relates to Options and,  consistent with the terms of the Plan, to (a) select
the  employees to whom Options are to be granted and to fix the number of shares
and other terms and  conditions of the Options to be granted;  (b) determine the
date upon which  Options  shall be granted and the terms and  conditions  of the
granted Options in a manner  consistent  with the Plan,  which terms need not be
identical  as  between  Options or  Optionees;  (c)  interpret  the Plan and the
Options  granted  under  the  Plan;  (d)  adopt,  amend  and  rescind  rules and
regulations for the administration of the Plan insofar as it relates to Options;
and (e) direct the Company to execute  Stock Option  agreements  pursuant to the
Plan.


     All such actions of the Committee shall be binding upon all participants in
the Plan.

     4.  Eligibility.  The  employees  of the  Company  who shall be eligible to
receive  grants  of  Options  under  this  Plan  shall be those  key  employees,
including  officers or directors of the Company who are also employees,  who are
from time to time  responsible  for the  management,  growth or  success  of the
business of the Company and who shall have been selected by the  Committee.  The
Company  may  also  grant  Options  to  Consultants  and  Directors  who are not
employees of the Company; provided,  however, that Consultants and Directors who
are not employees are eligible to receive only Nonstatutory Options.

     The persons to receive  Options  under the Plan shall be selected from time
to time by the  Committee,  in its  sole  discretion,  and the  Committee  shall
determine,  in its sole  discretion,  the  number of shares to be covered by the
Options granted to each person selected.  Subject to the exception under Section
5(b), no person may be granted an Option if such person,  at the time the Option
is granted,  owns shares of Common Stock  possessing  more than 10% of the total
combined  voting power of all classes of stock of the  Company.  For purposes of
calculating such stock ownership,  the attribution  rules of stock ownership set
forth in Section 424(d) of the Code shall apply. Accordingly,  an Optionee, with
respect to whom such 10% limitation is being determined,  shall be considered as
owning  Common  Stock owned  directly  or  indirectly  by or for the  Optionee's
brothers and sisters (whether by the whole or half-blood), spouse, ancestors and

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lineal descendants;  and any Common Stock owned directly or indirectly by or for
a corporation,  partnership, estate or trust, shall be considered as being owned
proportionately by or for its shareholders, partners or beneficiaries.

     5. Terms and Conditions.  The Plan shall become effective upon the approval
of a  majority  of the  holders  of  the  Company's  Common  Stock  present,  or
represented,  and  entitled  to  vote,  at  a  meeting  at  which  a  quorum  of
stockholders of the Company is present or represented.  Such approval must occur
within 12 months after the date this Plan is adopted by the Board of  Directors.
It shall  continue  in effect  for a period  of ten  years  from the date of its
effectiveness.

     All  Options  granted  under  this Plan  shall be  subject to the terms and
conditions of this Plan, including all of the following:

          (a) Option  Price.  Subject to the  provisions  of Section  5(b),  the
     Option price per share shall be  determined  by the Committee but shall not
     be less than 100% of the fair  market  value of such shares at the time the
     Option is granted.

          (b) More than 10%  Shareholder.  If an employee  owns more than 10% of
     the total  combined  voting power of all classes of stock of the Company as
     determined  under  Section  4, at the time an  Incentive  Stock  Option  is
     granted under this Plan, the Committee may issue an Incentive  Stock Option
     to such person at 110% of the fair market  value of the Common  Stock.  Any
     Incentive   Stock  Option  granted  to  any  such  employee  shall  not  be
     exercisable after the expiration of five years from the date such Incentive
     Stock Option is granted.

          (c) Limitations on Grant of Options.  Subject to the limitations under
     Section  5(b) of this  Plan,  no  Option  shall  be  granted  which  may be
     exercised more than ten years after the date it was granted.

          (d) Limitations on Exercise of Option.  No Optionee  granted an Option
     under this Plan may exercise such Option for six months  following the date
     of grant of the Option and unless at all times during the period  beginning
     on the date of the  granting  of the  Option  and  ending  on the day three
     months  before the date of such  exercise such Optionee was employed by the
     Company or a  corporation  or  subsidiary  thereof  issuing or assuming the
     Option in a transaction set forth under Section 6 of this Plan.

          (e) Payment for Shares.  Payment in full,  in cash,  shall be made for
     all shares  issued  pursuant to the exercise of an Incentive  Stock Option,
     provided that the  Committee  may permit  payment to be made with shares of
     the  Company's  Common Stock owned by the Optionee to be valued at the fair
     market value at the date of exercise.  All Options  shall be exercised  for
     100  shares,  or a multiple  thereof,  or for the full number of shares for
     which the Option is then  exercisable.  No Optionee shall have the right to

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<PAGE>


     dividends or other rights of a stockholder  with respect to shares  subject
     to an Option until the Optionee has given written notice of exercise of the
     Optionee's Incentive Stock Option and paid in full for such shares.

          (f) Manner of Exercise.  Any Option granted  pursuant to this Plan may
     be  exercised  at such  time or times as set  forth in the  Option,  by the
     delivery of written  notice to any officer of the  Company,  other than the
     Optionee,  together  with  payment in full,  for the number of shares to be
     purchased  pursuant  to such  exercise.  Such  notice  (i) shall  state the
     election to exercise  the Option,  (ii) shall state the number of shares in
     respect  of which the  Option is being  exercised,  (iii)  shall  state the
     Optionee's address, (iv) shall state the Optionee's social security number,
     (v) shall contain such representations and agreements concerning Optionee's
     investment  intent with  respect to such shares of Common Stock as shall be
     satisfactory  to  the  Company's   counsel,   (vi)  shall  state  that  the
     certificate  evidencing the shares may be stamped with a restrictive legend
     and the shares evidenced by such  certificate  will constitute  "restricted
     securities" as defined in Rule 144 promulgated  under the Securities Act of
     1933,  as  amended  (the  "Act")  (unless  the  shares to be  acquired  are
     registered under the Act) and (vii) shall be signed and dated by Optionee.

          (g)  Conditions  of  Issuance  of Shares.  Shares  shall not be issued
     pursuant to the  exercise of an Option  unless the  exercise of such Option
     and the issuance and delivery of such Shares pursuant  thereto shall comply
     with all relevant  provisions of law, including,  without  limitation,  the
     Act,  the 1934  Act,  the  rules and  regulations  promulgated  thereunder,
     applicable state securities law, and the requirements of any stock exchange
     or automated quotation system upon which the Share may be listed or quoted,
     and shall be subject to the approval of legal  counsel for the Company with
     respect to such compliance.

          (h)  Limitation  on  Transfer  of Shares.  Unless  shares  issued upon
     exercise are at the time of exercise  registered  under the Act, all shares
     of Common Stock  acquired by an Optionee upon exercise of an Option granted
     under this Plan shall be deemed to be "restricted securities" as defined in
     Rule 144  promulgated  under the Act and the  certificate  evidencing  such
     shares shall contain a legend as follows:

               "The securities represented by this certificate may not be
               offered for sale,  sold or  otherwise  transferred  except
               pursuant to an effective  registration statement under the
               Securities  Act of 1933  (the  `Act')  or  pursuant  to an
               exemption   from   registration   under   the   Act,   the
               availability   of  which  is  to  be  established  to  the
               satisfaction of the Company."

          (i) Other Representations or Warranties. As a further condition to the
     exercise  of any Option  granted  under this Plan,  the Company may require
     each Optionee to make any representation and warranty to the Company as may
     be required by any applicable law or regulation.


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<PAGE>


          (j) Holding Period of Shares.  No shares of Common Stock acquired upon
     exercise of an Incentive Stock Option granted under this Plan shall be sold
     or otherwise disposed of, within the meaning of Section 424(c) of the Code,
     at any time before the sooner of two years from the date of the grant of an
     Incentive  Stock  Option  under  this  Plan or one year  after  the date of
     exercise of the  Incentive  Stock  Option.  However,  an  Optionee  who has
     acquired  shares of Common Stock upon  exercise of a stock  option  granted
     under this Plan, who transfers such shares to a trustee, receiver, or other
     similar  fiduciary in any  proceeding  under Title 11 of the United  States
     Bankruptcy  Law or any other similar  insolvency  proceeding at a time when
     such  Optionee  is  insolvent  shall  not have  been  deemed to have made a
     transfer or disposition for purposes of this subsection,  nor shall one who
     acquires the shares from the Company with another  person in joint  tenancy
     be deemed to have made a transfer or  disposition.  Shares of Common  Stock
     acquired by exercise of a  Nonstatutory  Stock  Option under the Plan shall
     not be sold or  otherwise  disposed of at any time before one year from the
     date of the grant of the Nonstatutory Stock Option.

          (k) Death of  Optionee.  If an Optionee  dies,  any Option  previously
     granted to the Optionee shall be exercisable by the personal representative
     or  administrator  of the deceased  Optionee's  estate,  or by any trustee,
     heir, legatee or beneficiary  (collectively  referred to for convenience as
     the "legal  representative")  who shall have  acquired the Option  directly
     from the Optionee by will or by the laws of descent and distribution at any
     time  within one year after his  death,  but not more than ten years  [five
     years if Section  5(b) is  applicable]  after the date of  granting  of the
     Option, provided the deceased Optionee was entitled to exercise such Option
     at the time of his death.  Prior to the  exercise of any such  Option,  the
     legal  representative of the deceased Optionee shall furnish to the Company
     written notice of such exercise,  together with a certified copy of letters
     testamentary or other proof deemed sufficient by the Committee of the right
     of the legal  representative to exercise such Option in accordance with the
     provisions of this Plan.

          (l)  Retirement.   If  an  Optionee's   employment  with  the  Company
     terminates by reason of retirement,  any Option  previously  granted to him
     shall be exercisable as determined in the sole  discretion of the Committee
     at any time within three months after the date of such termination, but not
     more than ten years [five years if Section  5(b) is  applicable]  after the
     date of granting of the Option, and then only to the extent to which it was
     exercisable  at the  time  of such  termination  by  retirement;  provided,
     however, that if the Optionee dies within three months after termination by
     retirement,  any  unexercised  Option,  to  the  extent  to  which  it  was
     exercisable at the time of his death,  shall  thereafter be exercisable for
     one year  after the date of his  death,  but not more than ten years  [five
     years if Section  5(b) is  applicable]  after the date of  granting  of the
     Option.

          (m) Disability.  If an Optionee becomes disabled within the meaning of
     Section  22(e)(3)  of the  Code,  and at the  time of such  disability  the
     Optionee is entitled to  exercise an Option,  the  Optionee  shall have the
     right to  exercise  such  Option  within  one year  after  such  disability

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<PAGE>


     provided  that the  Optionee  exercises  within ten years after the date of
     grant thereof [or five years if Section 5(b) is applicable],  and then only
     to the extent to which it was exercisable at the time of such disability.

          (n)  Optionee's  Termination.  If  an  Optionee  ceases  to  serve  an
     Employee,  Consultant or Director, as the case may be, for any reason other
     than death, retirement or disability,  any Option previously granted to the
     Optionee which was  exercisable at the time of termination  shall terminate
     three months after the date of such  termination or at such earlier time as
     provided in the terms of the Option granted to the Optionee.  To the extent
     that an Option is not  exercised  within  the time  specified  herein,  the
     Option shall terminate.

          (o) Leave of  Absence.  For the  purposes  of this Plan (i) a leave of
     absence,  duly authorized in writing by the Company for military service or
     sickness,  or for any other purpose approved by the Company,  if the period
     of such leave does not exceed 90 days and (ii) a leave of absence in excess
     of 90  days,  duly  authorized  in  writing  by the  Company  provided  the
     Optionee's  right to  re-employment  is guaranteed  either by statute or by
     contract, shall not be deemed a termination of employment.

          (p)  Nontransferability  of Options. No Option granted under this Plan
     will be  transferable  by the  Optionee  other  than by will or the laws of
     descent and distribution.  During the lifetime of the Optionee,  the Option
     will be exercisable only by Optionee.

          (q)  Exercisability  of Options.  No Optionee  granted an Option under
     this Plan shall be entitled  to exercise  such Option at any time after the
     expiration of such Option as specified in the option certificate evidencing
     such Option.

     6.  Adjustments  Upon  Recapitalization,  Merger,  Etc. If the  outstanding
shares  of $.10  par  value  Common  Stock of the  Company  shall at any time be
changed or exchanged by declaration of a stock dividend,  split-up,  subdivision
or  combination  of shares,  recapitalization,  merger,  consolidation  or other
corporate  reorganization  in which the Company  (including  a merger or similar
reorganization  which  effects a  reincorporation  of the Company in a different
county or province) is the surviving corporation,  the number and kind of shares
subject to this Plan or  subject  to any  Options  previously  granted,  and the
Option prices, shall be appropriately and equitably adjusted,  so as to maintain
the proportionate  number of shares without changing the aggregate Option price.
In the  event of a  dissolution  or  liquidation  of the  Company,  or a merger,
consolidation,  sale  of  all or  substantially  all of  its  assets,  or  other
corporate  reorganization in which the Company is not the surviving  corporation
and the holder of Common Stock receives securities of another corporation,  then
any  outstanding  Options  hereunder shall terminate as of the effective date of
such event;  provided that  immediately  prior to such event each Optionee shall
have the right to exercise any  unexpired  Option in whole or in part whether or
not the Option would  otherwise be  exercisable.  The Company  shall afford each
person who holds an Incentive Stock Option under this Plan with at least 30 days
advance  written  notice of such event.  The  existence of this Plan,  or of any

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Options  hereunder,  shall not in any way prevent any  transaction  described in
this section, nor shall anything contained in this Plan prevent the substitution
of a new Option by a surviving corporation.

     7. Use of  Proceeds.  Proceeds  from the sale of stock  pursuant to Options
granted  under this Plan shall  constitute  general  funds of the Company may be
used for such general  corporate  purposes as the  Company's  Board of Directors
shall determine.

     8. Reservation of Issuance of Shares. The Company shall at all times during
the  duration of this Plan reserve and keep  available  such number of shares of
Common Stock as will be  sufficient to satisfy the  requirements  of all Options
granted  pursuant to this Plan,  and shall pay all  original  issue and transfer
taxes with  respect to the  issuance of shares  pursuant to the exercise of such
Options,  and shall pay all of the fees and  expenses  necessarily  incurred  in
connection with the exercise of such Options and the issuance of such shares.

     9. Amendments. The Board of Directors may amend, alter, or discontinue this
Plan, but no amendment,  alteration or discontinuation shall be made which would
impair the rights of any Optionee under any Options previously granted,  without
the  Optionee's  consent,  or which,  without the approval of the  stockholders,
would:

          (i) except as is  provided  in Section 6 of this  Plan,  increase  the
     total number of shares reserved for the purposes of this Plan;

          (ii)  decrease  the Option  price to less than 100% of the fair market
     value or 110% if Section 5(b) is  applicable on the date of the granting of
     the Option;

          (iii)  change the persons  (or class of  persons)  eligible to receive
     Options under this Plan; or

          (iv) so long as the Company has a class of equity security  registered
     under Section 12 of the 1934 Act, make any material amendment to the Plan.

     Any such  amendment  or  termination  of the Plan shall not affect  Options
already granted and such Options shall remain in full force and effect as if the
Plan had not been  amended  or  terminated,  unless  mutually  agreed  otherwise
between the Optionee and the Board in a writing signed by both parties.

     10. Indemnification. In addition to such other rights of indemnification as
they may have as  directors,  the  members  of the  Committee  and the  Board of
Directors  shall be  indemnified  by the Company  against  reasonable  expenses,
including  attorneys'  fees actually  incurred in connection with the defense of
any action, suit or proceeding,  or in connection with any appeal therefrom,  to
which  they or any of them  may be a party  by  reason  of any  action  taken or
failure  to act under or in  connection  with this  Plan or any  Option  granted
hereunder,  or shares  purchased  pursuant to the exercise of Options under this
Plan, and against all amounts paid by them in settlement  thereof (provided such

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<PAGE>

settlement is approved by independent  legal counsel selected by the Company) or
paid by them in  satisfaction  of judgment in any  action,  suit or  proceeding,
except in relation  to matters as to which it shall be adjudged in such  action,
suit or  proceeding,  that such member of the Board of  Directors  is liable for
gross  negligence,  fraud  or  willful  misconduct  in  the  performance  of the
director's  duties  so long as  within  60 days  after  institution  of any such
action, suit or proceeding,  the director shall in writing offer the Company the
opportunity,  at its own  expense,  to handle and defend  such  action,  suit or
proceeding.

     11.  Miscellaneous.  Unless the context requires otherwise,  words denoting
the singular may be  construed  as denoting the plural,  and words  denoting the
plural may be construed as denoting the singular, and words of one gender may be
construed as denoting such other gender as is  appropriate.  Paragraph  headings
are  not to be  considered  part of  this  Plan  and  are  included  solely  for
convenience  and are not  intended  to be full or accurate  descriptions  of the
contents thereof.

Adopted by Shareholders:    August __, 1996

                                             PEASE OIL AND GAS COMPANY
                                             organized under the laws of Nevada
ATTEST:

                                             By 
                                                --------------------------------
                                                Willard H. Pease, Jr., Chairman

--------------------------------------
Patrick J. Duncan, Secretary

S E A L


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